Page 134 - RusRPTJul24

Following sanctions on professional services introduced in April the main ratings have all suspending their ratings for Russia which has an NR rating from all three of the big agencies. The last ratings were issued in March shortly after the war started and put Russia on “near default” across the board.
8.5 Fixed income
Russia’s budget is in robust health, considering the economy is
overheating and the war in Ukraine is consuming vast amounts of money, but investors into the Russian Finance Ministry’s OFZ treasury bills, the workhorse of the Russian budget, are getting squeamish. Despite a radical rate hike to 16% at the end of last year, the Central Bank of Russia (CBR) has not tamed inflation, which continues to creep upwards.
“Sovereign bond yields in Russia have surged to multi-year highs this year as markets have increasingly questioned the trade-off between the war effort on the one hand and policymakers’ ability to maintain fiscal stability and control inflation on the other. Further aggressive interest rate hikes from the central bank appear baked in and there is a growing risk of a hard landing in the economy further down the line, Liam Peach, the senior emerging market economist with Capital Economics, said in a note on May 29.
Russia has been cut off from the international capital markets and the share of foreign investors in the domestic debt market has shrunk significantly from around a third at its peak pre-war to only 7.2% of the total outstanding now. Yet the Ministry of Finance (MinFin) is increasingly turning to its own debt to fund the budget deficit increasing borrowing from around RUB2.5 trillion to an anticipated RUB4 trillion
this year.
“Russia’s bond market is under strain. The benchmark two-year local currency bond yield has risen by 300bp since the start of the year and now stands at 18.00%. This is the highest it has been since the peak during the market panic in late 2014. Yields have shifted up across the curve,” says Peach.
The key driver of this surge appears to be a recognition of a shift towards permanently looser fiscal policy to support the war effort. Markets were notably unsettled by the 2024 draft budget presented by Finance Minister Anton Siluanov in October, which included a "huge stimulus" with a 20% increase in spending. This marked a departure from Siluanov’s reputation for fiscal discipline and was followed by a sharp increase in the finance ministry's gross bond issuance plan to RUB4.1 trillion.
134 RUSSIA Country Report July 2024 www.intellinews.com