Page 18 - bne_July 2024_20240709

18 I Companies & Markets bne July 2024
bne:Funds
Russian bond investors increasingly unwilling to buy OFZ treasury bills as macroeconomic concerns rise
Ben Aris in Berlin
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
Russia non-residents' OFZ market share
Source: CBR
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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.
As bne IntelliNews reported, there has been a big change in
the Putinomics model since the war started with a shift from hoarding cash and paying down debt, to spending freely and modestly increasing the economic leverage by borrowing more on the domestic market. The result has been unexpectedly strong economic growth, but that is accompanied with tenacious inflation.
In its last macroeconomic survey in April, the CBR predicted that inflation will fall from the current 7.8% to 5.4% by the end of the year, but with inflationary pressures rising, analysts say that inflation is more likely to rise to over 8% by the end of this year. Compounding the issue, Russian banks, the only buyer of OFZ after the foreigners left, are showing increasing reluctance to hold more sovereign debt. There is still plenty of liquidity in the banking system to buy more OFZ that taps a pool of around RUB19 trillion of banking liquidity, but enthusiasm for the bonds is fading, says Capital Economics.
Russia inflation y/y
Source: CBR