​OFZ issuance: poor start of the year

RUSSIA ECONOMICS - In Brief 29 Jan 2021 by Alexander Kudrin

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The first month of the year 2021 was not fruitful for the Finance Ministry in terms of the borrowing on the local market. Since the beginning of the year, the government has managed to place OFZ worth only R61.1 bln, which is a very poor result given the annual plan of R3.7 trln. Demand from international investors remains low due to the ruble volatility amplified by the investors’ cautious approach to EMs in general on the back of growing US Treasuries’ yields. Local investors were mainly influenced by tighter conditions on the domestic money market. The so-called structural liquidity gap reached almost R1 trln closer to the end of January. To remind, the actual budget expenditures were well below the plan in 2020, while borrowing exceeded the target. As a result, the Finance Ministry absorbed an excessive amount of money. It partially returned it via lending operations of the Federal Treasury, but the amount of these operations also contracted in January – to R2.3 trln from R3.7 trln average in December. As a result, RUONIA was traded with the premium over the key rate in January and demand for OFZ was also low.Despite the disappointing result, GKEM Analytica expects no major changes in Minfin’s tactics on the primary market. The budget revenues in 2021 are likely to be better than expected, while the existing cash residuals on the government’s accounts are more than enough to finance expenditures. The situation on the money market may improve soon and the expected deceleration of inflation in 2Q,21 may fuel demand for OFZ from international investors.Evgeny GavrilenkovAlexander Kudrin