Oil prices near the highest level in over three years are driving the world’s biggest energy exporter deeper into debt. While Russia stands to reap a windfall from crude’s recent rally, with the budget now on track for its first surplus since 2011, a program of foreign-currency purchases by the Finance Ministry means that it needs more roubles to conduct the operations when the exchange rate appreciates thanks to higher oil prices. Instead of quenching the government’s financing needs, the result is that borrowing in roubles will actually rise close to last year’s record level to absorb the extra dollars in line with the so-called budget rule.
“The budget rule made sovereign-debt issuance a function of the exchange rate,” said Anatoliy Shal, analyst at JPMorgan Chase & Co in Moscow. “Budget amendments are based on a higher oil assumption and imply a stronger rouble, hence the upward revision to issuance plans.” For that reason, the Finance Ministry just expanded this year’s target for domestic borrowing by almost 28% to 1.04tn roubles ($16.9bn), according to its amended fiscal plan published on the official disclosure website. That’s about double the amount it’s sold so far in 2018. The head of the Finance Ministry’s debt department, Konstantin Vyshkovsky, has said that a stronger rouble than assumed in the budget may force the government to raise more capital at home.
A decrease of 1 rouble in the exchange rate per dollar versus the initial assumption boosts Russia’s financing needs by about 80bn roubles in 2018, according to Shal. While the original forecast used in the budget saw the rouble at 64.7 against the US currency this year, it’s so far averaged just over 58, about 11% stronger than in the projection. To insulate the rouble and the economy from oil’s ups and downs and cap spending, the government is absorbing all revenue earned when Russia’s Urals export blend is above $40 a barrel, channelling the excess income into its sovereign wealth fund. Purchases of foreign currency will more than double this year to about 2tn roubles if prices for Russian crude average $54-$55 a barrel, climbing to about 2.8tn roubles if Urals is around $60, according to Finance Minister Anton Siluanov. Oil is on the rise as US plans to renew sanctions on Iran and continuing tensions in the energy-rich Middle East stoke concern over supply disruptions. Benchmark Brent – which trades at a small premium to Urals – was over $77 a barrel in London on Friday. Russia experienced a similar paradox in 2011-2012, when the Finance Ministry kept up borrowing and funnelling the cash into a wealth fund despite running a fiscal surplus, said Olga Sterina, head of fixed-income research at UralSib Financial Co This year, budget revenue may exceed spending by 441bn roubles, or 0.4% of economic output.
The government is betting the US won’t toughen sanctions to target Russia’s sovereign securities because that would be too damaging to American investors. Foreigners owned a record 34% of Russia’s outstanding government rouble securities known as OFZs before a rout in April sent the bonds to their worst week in more than a year. Russia now pays about 7.3% to borrow in roubles for 10 years, near the same level as the start of 2018, according to the latest market bond pricing. Oil’s rally helped the rate drop below 7% in March for the first time in five years, but the latest round of US penalties and a surge in the dollar since pushed it higher.
The latest target in 2018 for OFZs means the government will need to auction off 450bn roubles this quarter and about 130bn roubles in the second half, compared to the 463bn roubles raised in the first three months of the year. That’s “feasible” and raises no risk of crowding out corporate borrowers, according to Sterina.
Sources and photo-credits: Bloomberg, Gulf Times