CBR: Government purchase of Sberbank to effectively amend the fiscal rule, affect markets

RUSSIA ECONOMICS - Report 12 Feb 2020 by Evgeny Gavrilenkov and Alexander Kudrin

Yesterday Russian authorities announced that the controlling stake in Sberbank, the nation’s largest commercial bank, currently held by the Central Bank of Russia, would be sold to the Finance Ministry. The deal will be financed by the National Wealth Fund (NWF). The deal is structured in such a way that it will lead to a decrease of hard currency purchases on the open market due to the budget rule. Besides that, the government will receive an additional R1.6 trln in 2020-2021 which can be used either to cut the borrowing program or to finance additional expenditures. In other words, the deal effectively leads to the softening of budgetary policy.

Overall, going forward it appears that in case of higher oil prices and a wider current account surplus, less significant net purchases of FX by the regulators will cause the ruble to be stronger. And vice versa, if the oil price goes lower and the current account shrinks, the ruble is set to depreciate. Hence ruble volatility is set to increase.

* The total amount of the deal is R2.8 trln ($44 bln). It will be split in two or three stages, because the NWF currently has only $26 bln for immediate expenditures. The first part of the deal is scheduled for April, and the timing of further steps will depend on the pace the NWF accumulates more money to spend.

* We estimate the “liquid” part of the NWF as of the end of the year 2020 at 7% of GDP (excluding approved expenditures) after the completion of the deal.

* Effectively, the authorities are softening the budget rule. If so, the ruble exchange rate may become less affected by the budget rule (in other words, it can be treated as a softening of the rule itself), which may increase its sensitivity to the fluctuation of the oil market.

* The deal may affect not only the FX market but other segments of the financial markets as well. For instance, if the net result of the regulators’ interventions on the FX market is reduced, it will have an immediate impact on interbank money market rates, which will in turn affect the OFZ market.

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