​Minfin returns to the primary market

RUSSIA ECONOMICS - In Brief 02 Feb 2022 by Alexander Kudrin

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Today, the Finance Ministry placed 7-year OFZ worth R74.7 bln at 9.6%. As a reminder, the government cancelled primary auctions during the past two weeks because of the high volatility. The return to the market was successful, and total demand exceeded R100 bln. Moreover, the last time Minfin managed to raise a greater amount in one auction day was in the beginning of September. Most likely investors’ interest in OFZ is based on the assumption that the likelihood of further escalation of the geopolitical situation is not very high. The narrowing of 5-year CDS spreads from 257 bps to 220 bps as well as the strengthening the exchange rate from R/$79.5 to $76.12 over the last several days also confirm this mood. According to our understanding, international investors started to buy OFZ this week as well. In our view, uncertainty is still very high, and this spike of optimism among market participants looks premature. As for the activity of Minfin, the cost of funding is very high and issuance “at any price” doesn’t appear to be a reasonable approach, especially if we take into account that revenues of the government in 2022 will be higher than budgeted, as we discussed in one of our previous notes. There is no necessity for Russia to borrow in the current environment. But the fiscal rule forces the government to do it. The best thing the Finance Ministry can do in this situation is to switch issuance in favor of floating rate bonds, which allows not fixing high interest rates for the entire life of the paper.Evgeny GavrilenkovAlexander Kudrin