The Finance Ministry of Russia can Carry on with the Pause in Borrowing

5 october 2018 | Rossiyskaya Gazeta

The Finance Ministry has several times in a row now either recognized that the weekly auction of federal bonds failed or canceled it altogether, writes the Rossiyskaya Gazeta. "In Q3 2018 the Finance Ministry of Russia planned to issue 350 billion rubles worth of federal bonds, which is 31.1% less than the target for the previous quarter," Analytical Center expert Daniil Nametkin commented on the situation for a Rossiyskaya Gazeta correspondent. "The ministry either recognized the auction had failed or canceled it because investors demanded returns that were too high."

Daniil Nametkin
Daniil Nametkin
Department for Expert Analytics

According to Mr. Nametkin, given that purchases of foreign currencies have been stopped until the end of the year in accordance with the budget rule and the high oil prices, which have now exceeded 84 dollars a barrel for Brent, the Finance Ministry of Russia can afford to carry on with the current pause in borrowing.

In late August, the ministry partially issued 3-year federal bonds at a weighted average yield of 8.25%, which is a fairly attractive rate of return for both local and foreign investors, even given the risk that inflation may speed up to 5–5.5%, Mr. Nametkin believes.

"According to the data of the Bank of Russia, in the market of Russian federal bonds 26.6% are held by non-residents, while their total investments in Russian state bonds is 1.9 trillion rubles," the expert said. "As the US and the UK ratcheted up their sanctions rhetoric in April through August, the amount of foreign investments in Russian state bonds fell by 443 billion rubles." At the same time, high oil prices have prevented an even larger flight of foreign capital as foreign investors can no longer make money off the carry trade strategy because of the weakening ruble, Mr. Nametkin noted.

Coupled with the Bank of Russia's decision to raise the key interest rate to 7.5% and put on hold its purchases of foreign currency, this has allowed the Finance Ministry of Russia to stabilize the situation in the local foreign exchange and debt markets. As a result, over the past three weeks the Russian ruble has appreciated by 7.2% to 65.5 rubles per dollar while the yield of 10-year Russian federal bonds fell by 0.8 percentage points to 8.44%.

Source: Rossiyskaya Gazeta

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