Page 79 - RusRPTJul19

The ministry has now already exceeded its quarterly borrowing programme plan by almost one and a half times: the plan called for the placement of a total of RUB600bn in the second quarter, but the ministry has been taking advantage of the positive market sentiment to build up reserves. Foreign investors bought just over half of all the OFZ issued in the first quarter of this year. By June 1, non-residents' share in the OFZs was close to RUB2.5 trillion – another historic high, according to Central Bank of Russia (CBR).
A similar enthusiasm for Russian fixed income obligations has been seen on the international markets where the ministry successfully tapped the market a second time this year in June with dual tranche maturing in 2029 and 2035 with 4% and 4.45% yields, respectively. Prior to that the Ministry had a highly successful twin issues of $3bn and €750mn in the first quarter.
As bne IntelliNews reported in its June “CEE monthly bond wrap,” bond issues in CEE were sharply down in May, but sharply up in Russia, partly due to a low base effect from the sanctions-ridden 2018. And the Ministry of Finance recently suggested that it may tap the capital markets again later in this year.
With over $500bn in gross international reserves (GIR) and a triple surplus of trade, federal budget and current account, the ministry doesn't actually need the money, however, commentators have suggested the flurry of bond issues are designed to make it more difficult to sanction Russia’s sovereign debt as the more widely the bonds are held by foreign investors the more pain will boomerang back on the US if bans investors from owning or trading in Russian fixed income.
The enthusiasm for Russian bonds is also seen in the yields, which have fall from over 9% in 2018 to under 8% now – still a hansom return in a world of near-zero yields for most developed market bonds.
Replete with funds the ministry has recently started to slow bonds sales. In the most recent auction the ministry met 92% of binds and has been forcing down the yield bid. A placement of 11-year OFZs worth RUB20bn was offer generating a demand of RUB46.6bn with a weighted average yield of just 7.46% per annum.
One of the side effects of the bond rally is OFZ are now for the first time ever yielding less than equity dividend yields, which have risen to a record 7.9% after Gazprom decided to double its dividend payout in May.
And more buying is expected as the CBR is expect to cut rates at least one more time this year as inflation pressures have turned out to be lower than expected. On June 14, for the first time in a year, the central bank lowered the key rate by 25bp to 7.5% and is expect to cut again in the autumn.
In the second half of this year the Ministry of Finance plans to attract another RUB700bn–RUB900bn, depending on market conditions and how the budget is performing. After returning a 2.3% budget surplus in 2018 – the first positive result for several years – the budget plan for this year is 1.9% surplus, which currently looks easy to achieve.
To achieve the goals in the borrowing plan for the second half of the year also looks easy to achieve as the ministry can cut the amount of bonds offered at
79 RUSSIA Country Report July 2019 www.intellinews.com