Russian bonds would weather sanctions

Any tightening of western sanctions on an already stressed Russian domestic bond market would make borrowing more expensive for the government. A deputy finance minister stated this and also said that this can cause significant short-term volatility.

But a strong domestic investor base means the market, is where a politically driven selloff has sent benchmark. Timur Maksimov said in an interview that this yields to six-year highs, would weather tougher curbs. And also added that the ministry’s 2022 issuance plans remained on track. Russia has massed around 100,000 troops near the Ukrainian border. This is while denying it plans to invade. If it does, western countries have threatened new financial and economic sanctions. Under existing sanctions, U.S. investors are banned from buying new OFZ bonds. And also, the U.S. banks are banned from buying sovereign Eurobonds directly from Russia.

U.S. officials have floated the possibility of extending the bans to cover secondary market trading of new issues of both instruments. With 10-year yields at their highest since 2016, the finance ministry cancelled scheduled OFZ auctions. Maksimov said that the auctions will resume once the market normalises. This also adds that its current volatility was driven by politics rather than economics. A situation like this cannot stay forever. With a record-high current account surplus of $120 billion last year, enough gold and forex reserves to cover two years of imports or Russia’s entire external debt, officials say the economy is in a good shape to withstand shocks.

Maksimov said that the market would ride out disruption caused if foreign investors sold all their OFZs. This is equivalent to just under a fifth of total holdings. He said that new sanctions will cause serious short-term volatility. But it will fundamentally change nothing. Because even if they wash 19% out of the portfolio, they still have 80%. The finance ministry still plans to raise 3.3 trillion roubles in OFZ bonds this year. This is by re-introducing bonds with floating-rate coupons in addition to its main fixed-coupon OFZs.

The ministry raised a record 5.3 trillion roubles in OFZ bonds in 2020. In this, over a 3 trillion was secured by floaters. Last year, borrowing halved to 2.6 trillion roubles, with no floaters issued. When re-introduced, floating-rate bonds will not exceed 25% of the total OFZ stock in the medium term.