Page 36 - RusRPTSept22

Currently the Russian budget is in surplus of 0.5% GDP but the Ministry of Finance says it expects to finish the year with a 2% deficit. However, between the funds in the National Welfare Fund (NWF), the Ministry’s own treasury accounts and the excess liquidity in the banking sector the government has no concerns on how to fund any deficit.
The Ministry is already in talks with the Chinese government on cooperating with a Russia based yuan bond business, but talks will be lengthy and Vedomosti reports the first sovereign yuan-denominated bonds are not expected to appear for a year or two.
The main source of financing the federal budget deficit is traditionally domestic borrowing. For this year, the Ministry of Finance plans to borrow RUB2.3 trillion ($50bn), in 2023 another RUB2.7 trillion and in 2024 RUB2.9 trillion according to the current budget law.
The Ministry has in recent years issued another $3bn on the international capital markets, but again mainly as a benchmarking exercise for the sake of Russian corporates that are issuing abroad.
The issue of the Finance Ministry’s OFZ treasury bills were suspended in February due to volatility on the market and strict capital controls. In July, Vedomosti sources reported that the Ministry of Finance plans to return to the domestic loan market in the third quarter, after the budget projections are approved. According to Vedomosti sources, the Ministry of Finance may offer OFZ in the second half of September in a small amount of RUB10bn-RUB30bn.
The Ministry is planning to restart the domestic bond market trading gradually and in small steps. In 2023–2024 in order to ensure the normalisation of the bond market, an unambitious borrowing program is planned. The Ministry has regularly been borrowing RUB4 trillion on the OFZ market but in 2023 plans to attract RUB1 trillion on the domestic market. That will grow to RUB1.4 trillion in 2024, and RUB2.4 trillion in 2025.
The Ministry of Finance will need to develop access to fresh sources of capital now it is cut off from a pool of around $20bn of western investment capital that was formally invested into the OFZ. According to preliminary data, the budget for 2023-2025 implies a significant deficit, which will be financed by placing new public debt, with the help of government bonds in yuan. The Ministry of Finance could expand the investor base, reduce the volume of ruble borrowings and reduce their cost, say bankers in Moscow.
But the market will take a while to develop as there are a limited number of investors. One source of buyers of the yuan bonds will be large Russian companies with large revenues from China, but these remain limited for the moment. Most of the biggest commodity players are still being paid in euros and dollars.
The Russian yuan bond market is also unlikely to attract a lot of Chinese investors as the yields will be too low. The benchmark for borrowing rates in yuan over 7–10 years is now at the level of 2.59–2.62% per annum against 8.5–8.7% per annum for the same terms in rubles, Vedomosti reports.
36 RUSSIA Country Report September 2022 www.intellinews.com