Russian economic policy: Searching for a pass between Scylla and Charybdis
As the number of newly registered daily coronavirus cases in Russia exceeded 1,100 for a third day in a row, thus bringing the total number to 8,672 people as of April 8 (morning data), it looks increasingly likely that tighter lockdown measures are likely and they may last longer than was announced earlier (until May). A total of 5,841 cases have been registered in Moscow, and the virus is spreading across the country. It will take more time to contain the spread of the disease in such a vast country. However, there is still a chance for Russia to avoid the worst case scenario as the total registered case growth rate remains moderate, and so far, is not showing clear signs of sustainable acceleration.
Economic activity in the country is likely to be depressed until summer, albeit some relaxation is theoretically possible in May if the number of infected people moderates. In such an uncertain environment the government keeps discussing various measures to support business. The process is still unaccomplished and some proposals remain questionable. Because in terms of timing Russia was impacted later than many other countries that faced the spread of the virus, the authorities have been able to learn from foreign experience and acted relatively fast by locking down the country.
* As the budget deficit is set to widen, the Finance Ministry decided to tap the market after a one-month break. It offered to investors all available types of bonds at Wednesday auctions: a fixed-rate issue (with maturity in 2023), a new RUONIA floater (maturing in 2030) and a CPI-linker (maturing in 2028).
* The whole yield curve is now trading below 7%, which is a more or less comfortable level to borrow, if we take into account that the CBR key rate remains at 6%.
* The ruble appreciated recently in anticipation of a new oil production cut deal from almost 79 per USD in early April to 75.5. Volatility is gradually declining, which may positively impact investors’ mood.
* International investors diminished their OFZ sales and even increased their OFZ holdings by R12.5 bln since the beginning of April. Given the high level of uncertainty, their participation on the primary market is questionable, but given the fundamental credit strength of Russia, the further contraction of positions may be postponed, especially if oil prices remain stable.
* Chances to execute the existing issuance plan are not certain as the demand from international investors remains muted. The Finance Ministry prefers not to pay excessive premiums and is unlikely to borrow at 7%+. Instead of that, it may use residuals on the accounts of the Federal Treasury, which reached almost R4 trln as of January 1 (the average amount in the year 2019 was R2.6 trln). This strategy is a solution for 2020 but will have to be amended next year if the budget deficit remains high.
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