Page 52 - BNE_magazine_07_2020

52 I Eastern Europe bne July 2020
buying gold since 2007 (and in parallel selling down its dollar-denominated assets like US federal T-bills) as it tries to unhook itself from dependence on the dollar. Today monetary gold accounts for 22% of Russia’s total reserves of $566.1bn as of June 1, up from $554.4 as of January 1 this year.
Gold prices always do well in a crisis, which is part of the reason the CBR has bought so much, but since oil prices bounced back, Russia could go back
to accumulating reserve cash by more traditional means. Oil prices are up since the OPEC+ production cut deal, which will reduce output of oil by 9.7mn bpd, that Russia signed off on April 13, which was then extended to the end of July.
Rising oil prices put Russia Inc.
back in profit
Oil prices have recovered remarkably fast after the OPEC+ deal was agreed, breaking above $40 to the barrel again, back into the Kremlin’s “comfort zone,” according to the Finance Ministry.
Russia Inc. is back in profit with $40
oil, which is the price a barrel needs
to cost for the budget to break even. In addition, at $42 per barrel Russia will start accumulating money in its reserve fund, the National Welfare Fund (NWF), as under the so-called budget rule, any oil tax revenues earned from oil prices over $42.4 have to siphoned off into the NWF.
The NWF is there to cover any budget deficit in a crisis and the Finance Ministry was intending to tap the fund, which held RUB12 trillion ($174bn)
as of the start of March, to cover an anticipated deficit of RUB3 trillion this year. The reserves fell to RUB9 trillion in May after the Ministry of Finance used part of the funds to buy a stake in Sberbank, the biggest bank in Russia, from the CBR – a backdoor route to give the CBR a war chest of cash it could
use to defend the ruble if needed – but still leaving at least three years worth of cash in the fund to cover a budget deficit.
Still a crisis price to pay
That is not to say this crisis is not going to be painful, and the government
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is going to have to spend heavily to
get Russia Inc. back to work. Rosstat reported that the basic sectors – a good proxy for GDP – were down by 10% year on year in April and that the consumer orientated sectors are all down by at least a third or more.
Prime Minister Mikhail Mishustin unveiled the latest version of the National Plan for Economic Recovery (NPER) that calls for some RUB5 trillion ($72.8bn) of spending, or 7.8% of GDP. However, much of this money is simply funds that were already committed under the current budget to pay for the 12 national projects and which are now going to be re-tasked to stimulate the economy or support the social sector.
Bottom line is, the 2% of GDP budget surplus will disappear and the government will run a 0.5% of GDP deficit, plus the Ministry of Finance
treasury bills, which are increasingly seen as a safe haven by international investors thanks to Russia’s rock solid finances. Indeed, over a third of the foreign investors in the OFZ are from the US, where the bonds have proved to be
a popular investment with institutional investors such as insurance companies and pension funds.
As a sign of how popular these bonds are, the yields on the OFZ have dropped 300 basis points in just four months to 5.4% as of the start of June after briefly spiking to 8.4% in March. A third of the outstanding OFZs are currently owned by foreign investors.
Doom and gloom overdone
In previous crises there has always been an army of doomsayers predicting Russia will run out of money, but not only have they been proved wrong, the opposite has always happened. In 2014 Russia did spend down its then Reserve
“Russia Inc. is back in profit with $40 oil, which is the price a barrel needs to cost for the budget to break even”
intends to borrow an extra RUB2
trillion ($29bn) from the domestic
bond market on top of the RUB2 trillion already pencilled into the current budget, to help pay for the NPER. Again, that means the reserves will remain
a last line of defence and if Russia Inc. continues its rebound there is a good chance that the Kremlin will end this year with even more cash in reserve than it has now.
Russian rebound under way, safe haven for investors
As reported by bne IntelliNews, the economic rebound in Russia is already visible after the ruble has clawed back much of the ground it lost in the last two months against the dollar. At the same time, if there is a deficit this year the ministry also now has the option of financing it by issuing Russian Ministry of Finance ruble-denominated OFZ
Fund completely, but the NWF, which was originally intended to cover future pension payments, was simply re-tasked as a general economic support fund to replace the Reserve Fund.
Given the RUB12 trillion in the NWF
at the start of April, Finance Minister Anton Siluanov said there was enough in the state’s coffers to cover the budget for ten years, even if oil prices remained as low as $25 per barrel. However, within a few weeks as the scale of the coronacrisis became more apparent, Siluanov walked those statements back and said the fund would cover some three years of deficits, without the need to cut budget spending or raise taxes. Now that oil prices are back in the Kremlin’s comfort zone it could well
be that the Ministry of Finance doesn't need to tap the fund at all.