In anticipation of sanctions. How Americans can bring down the ruble

If investments in OFZ are under US sanctions, the Bank of Russia itself will start buying up Russia's national debt, analysts of Raiffeisenbank forecast. Why this measure and what other anti-crisis scenarios will the financial departments need?
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By February next year, the US Treasury should work out the possibility of imposing a ban on investments in Russian federal loan bonds (OFZs) for US residents. This measure is provided by the law "On Countering America's Enemies through Sanctions," which US President Donald Trump signed on August 2.

Interviewed Forbes analysts agree that the ban on the purchase of Russian government debt for US investors can become a serious factor in the pressure on the ruble. Indeed, the strengthening of the Russian currency against the US dollar in 2016-2017 was largely due to the high popularity of the speculative carry trade strategy among foreign market participants: non-resident investors borrowed dollars at low rates, converted them into rubles and bought Russian OFZs to earn on the difference between real rates in the US and Russia.

According to the Central Bank of the Russian Federation, the share of foreign holders of Russian government bonds is now at a historical maximum - as of October 1, it was 33.2% (2.2 trillion rubles, or $ 37.6 billion). Last months, the presence of non-residents in the OFZ market only expanded: if on August 1, their share among holders of the Russian national debt was at the level of 30.2%, then by September 1 it increased to 31.6%.

Analysts of Raiffeisenbank in their daily review of November 17 (for example, Forbes) noted that state representatives began to comment more often on the possibility of imposing a ban on investments in Russian debt.

In their opinion, the most likely reaction of the Bank of Russia to new sanctions and the subsequent sale of OFZ would be a mass purchase of government bonds by the regulator.

"In order to ensure that sales do not have a significant impact on the OFZ market, a" hard "local buyer should appear ... In the case of a mass sale of OFZs, we believe that interventions could be a regulator in the government debt market," the authors of the review write.

At the same time, analysts admit that Russian state banks can join the "rescue" of the OFZ market, but for them it will be fraught with an increase in the debt burden to the Central Bank and the Finance Ministry and an increase in interest rate risk while maintaining a negative carry.

What do sanctions threaten?

Last week, November 16, the head of the Central Bank Elvira Nabiullina said that the regulator does not see any serious negative consequences for the financial markets in the event of expansion of US sanctions on Russia's sovereign debt, the report says. She stressed that the destructive effect of the ban could be offset by the high demand for OFZ from the banking sector, which is interested in highly liquid assets.

"Yield (OFZ) may jump for a short time, but most likely, then the increase will not be very large, maybe 30-40 bp," Nabiullina said.

Financial analysts are far less optimistic. "When foreigners sell OFZ, there is a threat of devaluation of the ruble by at least 10%, but if the Central Bank buys securities and for this reason, it must be understood that in this way it will support foreigners by providing a larger capital outflow," comments Natalia Alfa-Bank Chief Economist Orlova.

Sergey Suverov, the head of the analytical department of the UK BK-Savings, in his turn believes that the expansion of sanctions on the OFZ market is capable of ruining the ruble / dollar rate to the level of 64-65 rubles, which is approximately 7.7% lower than current levels.

The most gloomy forecast was voiced by the head of the directorate for analysis of debt instruments of Uralsib Bank Olga Suterina. According to her, even if the sanctions will apply only to new issues of OFZ - this will reduce the positions of foreigners in sovereign debt by 10%, which is equivalent to an outflow of capital of 200 billion rubles. This is a fairly serious amount for the ruble debt market.

As a result, the ruble will weaken by 15% (to the level of 68.3 rubles per dollar), which may force the Central Bank to raise the key rate, predicts Suterina.

"According to our estimates, in the peak of sales, OFZ yields could grow by 200 bpts. up to 9.5-9.7% per annum, "the expert underlines.

In a review of Raiffeisenbank, however, it is noted that among non-residents who are prohibited from investing in OFZ, there may be Russians buying securities through offshore jurisdictions. This category of investors in case of sanctions, most likely, will not sell government bonds. In addition, the inflow of foreign capital into the Russian national debt continues to grow - for 9 months of 2017 it amounted to $ 12.6 billion against $ 8.2 billion over the same period last year.

"Against this background, the effect of imposing sanctions on the yield curve will not be so significant: if we proceed from the comparison of the OFZ market before its liberalization and after (in the period of 2012-2013), the final effect, assuming no interventions by the CBR, may be +2 p. P. from levels in the absence of sanctions, "the survey authors summarize.

Options for rescue

In addition to possible purchases from the Central Bank, the interviewed financiers call several strategies that financial and economic agencies can resort to to offset the negative consequences of sanctions against Russia's sovereign debt.

First, the Central Bank and the Ministry of Finance can bet on the placement of government bonds nominated in RMB to attract funds from Chinese investors, analyst of the Finam Group Sergei Drozdov points out. Initially, the Ministry of Finance intended to place OFZ in RMBs of up to $ 1 billion in 2016, but later these plans were redeployed for 2017.

In October, Finance Minister Anton Siluanov said that this year it is possible not to wait for the release of yuan bonds, but on November 10, his deputy Sergei Storchak reported about the planned meetings of the Ministry of Finance with Chinese investors on the future placement of government bonds nominated in yuan on the Moscow Stock Exchange.

At the recent meeting with journalists, Storchak exposed that the Ministry of Finance had stepped up its activities in the Chinese direction in connection with the possible expansion of US sanctions that could scare off foreign investors from investing in Russian securities.

Secondly, in the case of the outcome of foreign investors from OFZ, the state will more actively attract financing in the domestic market, said Sergey Suverov from the UK BK-Savings. So, the Ministry of Finance has already announced plans to attract 1.4 trillion rubles on the domestic market in 2018, and -1.5 and 1.8 trillion rubles in 2019 and 2020, respectively.

As previously reported by Reuters, now the Ministry of Finance is considering the possibility of easing the terms for so-called folk bonds (OFZ-n) in order to expand the range of investors in them. Among the proposed measures - permission for the secondary circulation of OFZ-n and the cancellation of the "ceiling" of ownership of these bonds, which now amounts to 15 million rubles.

This year, the Ministry of Finance has already placed three issues of national bonds worth 15 billion rubles. The declared yield of these securities reaches 8.5% per annum (the key rate of the Central Bank is now 8.25% per annum). OFZ-ON is sold only to Sberbank and VTB24. Further reduction of deposit rates may contribute to the inflow of Russians' funds into bonds, Suverov believes.

Thirdly, the state will be more active in placing sovereign Eurobonds abroad, the head of the department for work with wealthy clients of Zerich Capital Management, Andrei Khokhrin, predicts. "We have an excellent practice of placing sovereign Eurobonds after the financial restrictions come into effect," he said.

In 2016, Russia for the first time in three years, borrowed funds in the foreign debt market, double-placing securities with a single organizer - VTB Capital - by $ 1.75 billion and $ 1.25 billion (both issues with redemption in 2026).

According to the bill on Russia's budget for 2018 and the planned period 2019-2020, the Ministry of Finance intends to attract annually through issuance of sovereign Eurobonds of $ 7 billion. During this period, the agency can also exchange old eurobond issues for up to $ 4 billion to reduce the volume of external debt. In 2017, the Finance Ministry plans to attract the same $ 7 bn ($ 3 bn by placing new bonds and $ 4 bn due to the exchange of previously issued bonds) through the issue of Eurobonds.