Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 11 Apr 2024 by Evgeny Gavrilenkov

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The FX market remains relatively stable despite rising oil prices. The Western sanctions, combined with the damage to some oil refineries from drone attacks, reduced the profitability of the oil companies. As a result, the supply of hard currency from their side remains subdued. Nevertheless, their earnings were high enough to pay decent taxes. The budget was in surplus in March as expenditures stabilized after the spike in February (the 3M24 deficit shrank as a result). If the oil prices stabilize, we may expect the exchange rate to fluctuate in the R/$ 90-95 range for a month or two. We expect authorities to extend the mandatory FX sales for the exporters introduced almost six months ago. Even though the CBR is skeptical about this mechanism, it is appreciated by the government. Therefore, it is likely to stay. The situation on the OFZ market has become increasingly complicated for the Finance Ministry. A limited demand for long-term fixed-rate bonds combined with a necessity to borrow regularly pushed prices down. The yield for synthetic 10-year paper surpassed the 13.5% level, which is a record high. We suppose that Minfin will change its approach to the FX issuance if the yield approaches 14%. This cost of funding looks too expensive for the budget, especially if we take into account that the rate remains fixed until bonds mature. The Government may start placing floaters instead. It may even temporarily take a break, especially if revenue flow increases (it may temporarily deplete some cash left on the Treasury’s ruble accounts). In both cases, it will be a positive signal for the market, which may be translated into compression of yields in the near term. In the...