Russia Plans Bond Buyback to Fix Pandemic-Warped Debt Market

Russia’s debt chiefs are working on a mechanism that will allow the government to retire costly ruble bonds sold to raise emergency funds during the coronavirus pandemic.

“The goal is to restore the right structure of the portfolio so that in the next crisis, government debt can be used to conduct an active economic policy again,” Deputy Finance Minister Timur Maksimov said in an interview. The ministry is considering possible funding sources for the buybacks, he said, without elaborating on the timing or the amount of money that might be earmarked.

Russia doubled its borrowing plan last year to help shield the economy from the pandemic as oil prices collapsed and the U.S. weighed sanctions on ruble debt sales. In a series of blowout auctions dominated by local banks, the Finance Ministry sold floating-rate bonds offering a coupon that climbs with the central bank’s key rate.

Russia Plans Bond Buyback to Fix Pandemic-Warped Debt Market

Now that inflationary pressures are mounting and the Bank of Russia is back on a tightening path, Maksimov wants to shift away from debt whose servicing costs are set to rise. Floating-rate bonds now account for about 35% of the ministry’s outstanding local debt, and Maksimov said he wants that level cut back to 15% or 20%.

It’s unlikely the ministry will rush to reduce the share, according to Dmitry Dolgin, chief economist at ING Bank in Moscow. He predicts such a target would cost 1 trillion to 2 trillion rubles ($13.5 billion to $27 billion) over a three-year span.

President Joe Biden’s administration imposed long-feared sanctions on Russia’s debt markets earlier this year, punishing the Kremlin for U.S. elections meddling and hacking.

But the penalties were ultimately judged to be mild because they only bar U.S. investors from buying ruble bonds, or OFZs, on the primary market. Bonds and the ruble have strengthened since the limits were announced.

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“The imposed restrictions don’t cover the secondary OFZ market, so we don’t expect the share of non-residents to move far from the current levels,” Maksimov said. “International investor interest, which can’t be satisfied on the primary market, may show up as demand on the secondary market.”

Foreigners held around 19% of Russia’s sovereign ruble debt as of April 21. The ministry sold more than 45 billion rubles of notes at debt auctions Wednesday.

‘Smooth Flow’

“If the market situation allows us to borrow more in advance, we may do so, but we’d work on making the borrowing flow more smoothly,” Maksimov said. “Our weekly needs, taking into account the amount raised, are now at 45 billion to 50 billion rubles.”

Having the Finance Ministry stick to that lower weekly volume of sales partly offsets the risks of rising global rates, said Dmitry Polevoy, an analyst at Locko-Invest. At the same time, the potential buybacks are “a definite positive” for the floating-rate notes, he said.

International flows into local bonds have been positive so far this month, VTB Capital analysts led by Maxim Korovin wrote in a note Wednesday. About 57 billion rubles left the ruble debt market in the week following U.S. sanctions in April, according to the central bank.

Still, the picture for local debt remains far from clear, and Rosbank analysts said the ruble-bond market is “in limbo.”

Stabilizing global rates and support from local banks are an argument against selling, they said. But the prospect of further rate hikes, as well as some possible rebalancing before sanctions take effect on June 14 are weighing on the bonds for now.

©2021 Bloomberg L.P.

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