15.01.2015, 15:38
Oil Dragging Putin Back to Bond Sales as 20% Yields Seen
OREANDA-NEWS. The days when Russia could comfortably cancel weekly bond auctions are coming to an end as crude oil tumbles toward \$40 a barrel.
While the Finance Ministry scrapped the first sale of the year yesterday, citing “unfavorable market conditions,” the government will eventually need to start selling short-dated debt at yields as high as 20 percent if crude prices stay depressed, according to Raiffeisen Capital. The rate on five-year ruble notes jumped 2.19 percentage points this month, the most inemerging markets, as oil slumped to the lowest since 2009.
The surge in Russian borrowing costs -- the result of the plunging ruble, sanctions over Ukraine and plummeting oil -- prompted the ministry to pull four auctions in December alone. With the economy verging on a recession amid a stand-off over President Vladimir Putin’s actions in Crimea and east Ukraine, the budget deficit will increase to 3 percent of gross domestic product this year, Finance Ministry data show.
“Russia’s key source of income is shrinking,” Oleg Popov, a money manager at Allianz Investments in Moscow, said by phone yesterday. “The government will be forced to borrow.”
Brent Slump
Russia derives about 50 percent of its budget revenue from oil and natural gas industries. To balance the budget with crude at \$46-\$48 a barrel the ruble would need to weaken further, averaging about 65-67.5 versus the dollar, according to an e-mailed note from Sberbank CIB analysts sent yesterday.
The ruble, the worst-performing currency in the world last year after Ukraine’s hryvnia, fell for a fourth day, weakening 1.4 percent to 66.15 a dollar by 6:34 p.m. in Moscow. Brent crude declined 0.4 percent to \$46.40 a barrel. The value of a barrel of Brent in rubles fell to 2,994 on Jan. 12, a 2 1/2-year low.
“If the current situation is extended until the end of the year, the Finance Ministry will find it difficult to balance the budget,” Konstantin Artemov, money manager at Raiffeisen Capital in Moscow said by e-mail. “It will be difficult to borrow on the market like this. Hence, they will try to place short-term OFZs at 15 percent to 20 percent and continue weakening the ruble.”
After selling just 18 percent of the bonds it planned to offer last year, Russia will try to re-establish a consistent presence in the local market in 2015, offering mostly securities due in 1 to three years, Konstantin Vyshkovsky, the head of the finance ministry’s debt department, said in a December interview.
Boosting Confidence
“OFZs not only fill up the budget but also give confidence to the entire bond market,” Allianz’s Popov said. The debt “will likely be very short, under one year,” he said.
At the same time, the Finance Ministry has some freedom with its borrowing plan because it can fall back on the \$88 billion Reserve Fund, formed from surplus oil and gas revenue to help cover state spending when times are hard.
“Russia may need to primarily use the fund, but with some sales of OFZ, even at these higher rates,”Ivan Tchakarov, Citigroup Inc.’s Moscow-based economist, said by e-mail yesterday. About 40 percent of the fund would be depleted if the government decided to cover all of this year’s budget deficit by spending its rainy-day cash pile, he said.
The two-year ruble bond yield rose 113 basis points to 17.88 percent yesterday, the highest since a record on Dec. 16. It fell 67 basis points to 17.21 percent today.
If oil falls further “only ruble weakening will help,” Anton Tabakh, a director at RusRating, an independent Russian credit-ratings firm, said by e-mail yesterday. “The ability to borrow domestically is limited, external borrowing is possible only at very poor terms, while spending cuts amid the recession will only make the matters worse.”
While the Finance Ministry scrapped the first sale of the year yesterday, citing “unfavorable market conditions,” the government will eventually need to start selling short-dated debt at yields as high as 20 percent if crude prices stay depressed, according to Raiffeisen Capital. The rate on five-year ruble notes jumped 2.19 percentage points this month, the most inemerging markets, as oil slumped to the lowest since 2009.
The surge in Russian borrowing costs -- the result of the plunging ruble, sanctions over Ukraine and plummeting oil -- prompted the ministry to pull four auctions in December alone. With the economy verging on a recession amid a stand-off over President Vladimir Putin’s actions in Crimea and east Ukraine, the budget deficit will increase to 3 percent of gross domestic product this year, Finance Ministry data show.
“Russia’s key source of income is shrinking,” Oleg Popov, a money manager at Allianz Investments in Moscow, said by phone yesterday. “The government will be forced to borrow.”
Brent Slump
Russia derives about 50 percent of its budget revenue from oil and natural gas industries. To balance the budget with crude at \$46-\$48 a barrel the ruble would need to weaken further, averaging about 65-67.5 versus the dollar, according to an e-mailed note from Sberbank CIB analysts sent yesterday.
The ruble, the worst-performing currency in the world last year after Ukraine’s hryvnia, fell for a fourth day, weakening 1.4 percent to 66.15 a dollar by 6:34 p.m. in Moscow. Brent crude declined 0.4 percent to \$46.40 a barrel. The value of a barrel of Brent in rubles fell to 2,994 on Jan. 12, a 2 1/2-year low.
“If the current situation is extended until the end of the year, the Finance Ministry will find it difficult to balance the budget,” Konstantin Artemov, money manager at Raiffeisen Capital in Moscow said by e-mail. “It will be difficult to borrow on the market like this. Hence, they will try to place short-term OFZs at 15 percent to 20 percent and continue weakening the ruble.”
After selling just 18 percent of the bonds it planned to offer last year, Russia will try to re-establish a consistent presence in the local market in 2015, offering mostly securities due in 1 to three years, Konstantin Vyshkovsky, the head of the finance ministry’s debt department, said in a December interview.
Boosting Confidence
“OFZs not only fill up the budget but also give confidence to the entire bond market,” Allianz’s Popov said. The debt “will likely be very short, under one year,” he said.
At the same time, the Finance Ministry has some freedom with its borrowing plan because it can fall back on the \$88 billion Reserve Fund, formed from surplus oil and gas revenue to help cover state spending when times are hard.
“Russia may need to primarily use the fund, but with some sales of OFZ, even at these higher rates,”Ivan Tchakarov, Citigroup Inc.’s Moscow-based economist, said by e-mail yesterday. About 40 percent of the fund would be depleted if the government decided to cover all of this year’s budget deficit by spending its rainy-day cash pile, he said.
The two-year ruble bond yield rose 113 basis points to 17.88 percent yesterday, the highest since a record on Dec. 16. It fell 67 basis points to 17.21 percent today.
If oil falls further “only ruble weakening will help,” Anton Tabakh, a director at RusRating, an independent Russian credit-ratings firm, said by e-mail yesterday. “The ability to borrow domestically is limited, external borrowing is possible only at very poor terms, while spending cuts amid the recession will only make the matters worse.”
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