We are talking about the draft law entitled “Act on the protection of U.S. security from the aggression of the Kremlin”, which was prepared by a group of senators led by Republican Lindsey Graham. Among other measures, the document proposes to impose restrictions on dollar transactions with Russian state-owned banks and prohibit us investors to buy new issues of OFZ. After the bill was published, with new initiatives for the extension of sanctions by the administration of President Donald trump, this time in connection with the case of the poisoning of Skrobala in the UK. Its version of the sanctions law, which appeared on the state Department website on August 8, included, among other things, a ban on exports to Russia of technologies and equipment.
Against this background, began mass sales in the Russian market of public debt and the concomitant weakening of the ruble. According to the Bank, if as at 1 August foreign investors held OFZ bonds on 2,006 trillion rubles, a month later this figure fell to 1,935 trillion rubles, which was the lowest value since August of 2017. As noted at the press-conference on 14 September, the head of the Central Bank Elvira Nabiullina, the share of non-government debt market in August decreased from 28% to 26.6% — the lowest since December of 2016. From April to the beginning of September, foreigners sold OFZ in the amount of approximately 480 billion rubles. Yields on 10-year issues of public debt close to 9% per annum. The ruble weakened by almost 7.4% for August (as the dollar and the Euro) and 18% for the period from April to September.
The struggle between fear and greed
If last year sale by foreigners of the national debt of Russia in the framework of the strategy of carry trade (playing on the difference in foreign and domestic interest rates) has led to the strengthening of the ruble by about 40%, now the influence of this factor has gone, says analyst “Discovery Broker” Timur Nigmatullin. “Not that non-residents sold their OFZ — they just stopped buying new releases,” — says the expert. Last month, the Ministry of Finance due to “adverse market conditions” had several times to refuse the placement of OFZ. First, an auction was held on 22 Aug, then 5 Sept. In the latter case, investors asked for too high a premium, resulting in the Ministry of Finance was forced to declare the placement invalid. On 11 September, the Ministry also announced the cancellation of the auction scheduled on 12 th and 18 September canceled the deployment, scheduled for 19 th.
The strategy of carry trade with BFL is no longer of interest to investors for the reason that the Russian market has disappeared necessary for its implementation conditions: the relative exchange rate stability, low inflation and a gradual easing of monetary policy by the Central Bank, said Nigmatullin. Following the meeting on 14 September the Bank of Russia for the first time in 2014, raised its key interest rate by 0.25 percentage points to 7.5%. “Perhaps, when the Central Bank will resume the easing cycle rates and volatility in the foreign exchange market will decline, investors will again pay attention to the BFL. But the probability is not very high,” — says the analyst.
The presence of foreigners on the OFZ market will continue to decline, said Deputy General Director for National investment management company Andrew Vallejo-Roman. “Among Western institutional investors holding larger positions in the Russian state debt, a lot of hedge funds, including those owned by Blackrock. These players are usually very quick to react to changing situations and shifting their capital”, — said the financier. Current sanctions risks and the increase in the key rate of the Central Bank will facilitate the withdrawal of foreign investors, despite the fact that fundamental indicators of the Russian market is still better than other developing countries. “Now there is a struggle between fear and greed,” he described the mood of Western investors, Vallejo-Roman.
Timur Nigmatullin, however, believes that the extension until the end of the year of the moratorium of the Central Bank to purchase foreign currency for the Ministry of Finance in the framework of fiscal rules can contribute to the stabilization of the ruble and to improve the situation on the debt market. With this measure, even with the geopolitical risks, the ruble may strengthen to the end of the year to the level of 61 rubles to the dollar, he said. Andrew Vallejo-Roman more pessimistic in his opinion, the effect of sanctions is too great. “The announced measures will be enough to stabilize the ruble, but no more” — sums up the financier.