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32 I Special focus bne October 2018
Russia bonds OFZ pain.
Russian OFZ treasury bond pain
investors owned a third (34%) of all the OFZs outstanding or some $30bn.
But the mere threat of sanctions has panicked the market, which has been dumping OFZs. By July the share of foreign ownership was down to a quarter (27%) and will continue to
fall. And the yield curve has risen dramatically, up 40-105bp (depending on maturity) in August alone, rising another 30-50bp in just the first week of September as tensions between Moscow and Washington rose further.
The volatility on the market has become so bad that the Ministry of Finance cancelled its regular OFZ auction in the first week of September, and where it used to pay 7.1% on short term OFZs
at the start of this year, investors are demanding 9% for the same bond now.
The outflow of money from the OFZ bond market is already hurting the currency, as investors convert their rubles to hard currencies on the way out of the door. The ruble broke through the psychologically important RUB70 to the dollar and RUB81 to the euro marks on September 10, dropping to its lowest level in two years. All in all the ruble has lost at least 17% to the US dollar since the start of this year and could lose more, despite the much higher than expected oil prices, which should push the value of the ruble up.
bne IntelliNews
The markets have been spooked by the threat of “crushing” new US sanctions on Russia this autumn that could include Russian debt. If the US goes through with a ban on owning or trading Russian debt the effects will be dramatic and widespread.
It is not clear what debt the sanctions will target. Both Russia’s primary sovereign Eurobonds and its ruble denominated treasury domestic bonds, the so-called OFZs, are in the crosshairs.
The ban on Russia’s circa $70bn worth of Eurobonds would be unpleasant but not that damaging. By international standards Russia has tiny external debt of some 15% of GDP and doesn't rely
on external markets to fund the budget. There are some $7bn worth of Eurobond issues in the budget each year, but these bonds are more of a benchmarking exercise to determine a sovereign yield curve so Russia’s corporate bonds can be priced properly. Russia issues sovereign Eurobonds more as a public service than to raise cash.
But sanctions on the OFZs would be a lot more damaging as these are the Ministry of Finance’s workhorse debt instrument and a key source of funding for the budget.
www.bne.eu
President Vladimir Putin’s May Decrees have called for approximately RUB2 tril- lion of new spending on top of the circa RUB16 trillion of spending each year in the federal budget to “transform” Russia’s economy. In next year’s budget the Min- istry of Finance has raised its issue target of OFZ issues by about half to RUB1.4 tril- lion each year for the next three years.
And foreign investors, including Americans, make up a big part of the holders of OFZs; until April foreign
OFZ curve dynamics