Rating agencies describe scenarios for Russia in response to US

sanctions New US sanctionsagainst the primary market of ruble government securities are not so terrible, according to the rating services. But the fact that Washington left on the agenda the possibility of expanding them can have an impact on the strategy of the Russian Ministry of Finance

New US sanctions that limit the purchase of Russian federal loan bonds (OFZ) at initial placement, and the risk of their further expansion may affect the long-term strategy of the Russian Ministry of Finance, but Moscow will be able to cope with the negative effect of the already introduced restrictions. Analysts of the Moody's rating agency came to this conclusion, follows from a review prepared by them (RBC has it).

Washington's sanctions will further limit the Russian government's funding flexibility and fiscal policy options, Moody's said. However, despite the negative effect of the new restrictions, they do not yet create serious problems for Moscow. “The government's accumulated financial reserves, low borrowing requirements, and improved policy tools will make it possible to cope with emerging negative effects,” the review says.

Since the announced measures affect only the OFZ primary market, they will not lead to forced sales by American organizations, the Fitch rating agency added (its comment was also received by RBC). Ruble deposits of the Treasury in the Central Bank and commercial banks in the equivalent of more than 5% of GDP allow the Ministry of Finance to theoretically not borrow at all on the market for at least the next 12 months, according to a comment by the third leading rating agency, S&P Global Ratings (RBC has it).

Test of strength

Nevertheless, the sanctions will “test the strength of contingency planning” by the government and the Bank of RUSSIA, according to Moody's:

The Russian Ministry of Finance may switch to issuing OFZs with shorter maturities, as well as make more active use of budgetary balances accumulated in previous years as a result of budget underexpenditure; The Central Bank, in turn, can, if necessary, provide additional liquidity to the banking system to mitigate the shock from sanctions.

Currently, the average maturity for the entire portfolio of tradable OFZs (weighted by the volume of issues) is about 6.8 years, Dmitry Kulikov, DIRECTOR of ACRA's group of sovereign ratings and macroeconomic analysis, calculated at the request of RBC. At the end of 2016, this figure was about four years, the Ministry of Finance reported. At the same time, the weighted average maturity of new OFZs issued in 2021 is 9.4 years, follows from the data of the Ministry of Finance.

Finance Minister Anton Siluanov told reporters on April 15 that "temporarily free funds in the single treasury account" amounted to more than 4 trillion rubles. RBC sent a request to the Ministry of Finance.

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For its part, the Bank of Russia is ready to provide banks with additional liquidity, regardless of what they use it for (for example, for the purchase of OFZ) in the event of the introduction of US sanctions, Central Bank Chairman Elvira Nabiullina said last month. The regulator traditionally does not comment on monetary policy issues during the "week of silence" before the meeting on the key rate.

“Despite the relatively small share of non-residents in the OFZ market (less than 20% - RBC), foreign investors make up an important group of marginal (marginal) buyers and sellers, which ultimately have a disproportionate effect on the cost of borrowing the Russian sovereign,” says Moody's , expecting an increase in the cost of borrowing as a result of the withdrawal of some foreigners from the primary OFZ market.

An important role in curbing the negative effects of new sanctions, in particular, will be provided by Russia's savings in the form of the National Wealth Fund (NWF), in which, as of March 2021, an amount of 12% of the country's GDP was collected (according to the Ministry of Finance, as of April 1, $182.3 billion, or 11.9% of GDP), notes Moody's. Including liquid funds of the NWF (which can be quickly directed to finance the budget deficit) amount to $114.7 billion, or 7.5% of GDP.

Morgan Stanley predicted a sharper increase in the Central Bank rate due to sanctions

Risk of tougher sanctions

A big danger for Russia is the possible further expansion of restrictions on public debt, according to Moody's. The directive, issued by the US Treasury on April 15, allows the White House to impose new restrictions on Russian sovereign debt if necessary. For example, a ban on the participation of American institutional investors in operations and in the OFZ secondary market is possible. Fitch agrees with this, where they still consider the sanctions risk to be one of the main ones for Russia's rating.

Possible risks may force the Ministry of Finance to refuse to further increase borrowing, according to Moody's. After the new sanctions, the Ministry of Finance has already announced a reduction in the plan for gross domestic borrowing in 2021 by 875 billion rubles. (up to about 2.8 trillion rubles) - this reduction will be offset by the use of budget balances. The gross amount of OFZ placements this year has already reached 1.2 trillion rubles. (that is, about 43% of the revised plan was financed). The agency also said that it may refrain from holding OFZ auctions in the near future.

“With sanctions limiting the ability to expand funding, activity from both domestic and foreign investors is likely to remain significantly lower than it would be without sanctions, making it more difficult to realize the government’s ambitions to improve the country’s long-term growth and living standards,” — according to a Moody's review.

Video for this news The share of foreigners in Russia's public debt fell to the level of six years ago

While the ruble has rebounded from an initial fall due to new OFZ sanctions, "higher market volatility could weigh on the growth outlook, for example if it causes the central bank to accelerate its key rate tightening," adds Fitch Ratings. The next meeting of the Central Bank on the rate is scheduled for April 23, in March the Bank of Russia raised it for the first time since the end of 2018, by 0.25 percentage points, to 4.5%.

The full effect of new sanctions against Russia will manifest itself over time, sanctions have a cumulative negative effect on foreign investment in the country, according to the German rating agency Scope Ratings. The wording of U.S. President Joe Biden's executive order on sanctions against Russia suggests that the expansion of sanctions, for example, on the secondary market for Russian government securities, can happen quite quickly - and this is in addition to the very high risk of tightening restrictions under the Chemical and Biological Weapons Control Act ( CBW Act), which is possible as early as June 2021, is indicated in S&P. Under some sanctions scenarios (extension of restrictions on the secondary market for government debt, tougher sanctions against systemically important financial institutions or energy companies), S&P may downgrade Russia's sovereign credit rating, follows from its review.

The media learned about the risk of US sanctions on the secondary market of Russian debt securities Economics

The imposition of new US sanctions was announced on April 15. The White House explained them by saying that Russia is responsible for attempts to undermine democratic elections in the United States and allied countries and for transnational corruption, and is also involved in hacker attacks. US financial institutions were prohibited from participating in initial placements of Treasury and Central Bank bonds, regardless of the issue currency. This applies to securities that will be issued after June 14, 2021.

BLOOMBERG, citing sources on April 17, reported that the administration of US President Joe Biden is assessing the effect of the measures taken and admits the possibility of their expansion. In particular, Washington may close access to US financial institutions to the secondary market for ruble bonds of Russian state-owned banks (despite the fact that since 2014, sectoral sanctions have already prohibited American and European residents from long-term investments in securities of five Russian financial institutions).

Finance Minister Anton Siluanov, after the imposition of sanctions, pointed out that the share of foreigners in the OFZ market is slightly less than 20%, and if this share continues to decline, he does not see "significant risks for the required volume of attraction" of resources to the budget.