Q. How would you assess the macroeconomic situation in Russia over the past few months? What have been the more prominent developments in the country’s debt markets?
In our view, the last quarter of the past year and the beginning of 2017 have been quite positive for Russian debt capital markets and financial markets, and in particular for the Russian sovereign. We have seen improvements in macroeconomic conditions, such as the strengthening of the Russian currency and an improvement in oil price among other factors. All of these developments have increased demand for Russian debt from local and international investors. From the point of view of the Ministry of Finance as an issuer, we have been able to increase supply in regular bond auctions. In 2017 we are setting ourselves ambitious issuance targets, with overall volume expected to increase threefold year-on-year, driven by the latest fiscal budget proposal. So far the market outlook is supportive of these targets, both in terms of cost of borrowing and demand. There is a strong international presence in the debt market, with increasing capital flows into Russian floating-rate coupon notes, which we haven’t seen for a while. This makes us optimistic about reaching our borrowing targets this year.
Q. If we consider the corporate sector now, how would you assess the current level of indebtedness of the Russian corporates and do you expect to see any significant deals in this space in coming months? What is the MinFin’s role in helping to encourage these issuances?
The “problem of Russian corporate debt”, as it has been referred to over the past few years by observers – in the sense that while government debt has been relatively low, the corporate sector has been overleveraged – has certainly been aided by geopolitical factors, namely the Western sanctions. Major Russian corporates have been able to pay-off outstanding maturities, significantly reducing their levels of foreign debt. After a large chunk of big Russian companies were effectively cut off from international markets, they were able to pivot towards the domestic market, with corporate debt levels declining over the past two years. This is particularly relevant for economic sectors with a strong state presence – restrictions to foreign capital markets actually had a positive impact in that sense, as Russian companies were able to reduce their hard-currency commitments. The Ministry of Finance and the CBR have been integral in monitoring this situation and it is evident that risks for many of these sectors are now significantly reduced. We are now seeing a spike in Russian corporate interest in international markets, there have been a number of issuances in 2017 and we expect that trend to continue, with risks remaining relatively low.
In terms of the government’s and monetary policymakers’ roles, sovereign non-rouble denominated issuances have traditionally been intended for setting a fair benchmark for the Russian corporate sector looking to tap the international markets. That was the main driver, rather than the need to fulfil the sovereign borrowing targets or finance the budget deficit. In recent years international borrowing has been largely under control, but we continue to maintain our presence in those markets so as to provide those pricing benchmarks for corporates, whether private or state-linked. So, our main motivation continues to be to support businesses.
Q. This year, for the first time in several years, capital outflows from Russia dropped, and investors are once again circling the Russian market. What are the next steps the authorities need to take to encourage further participation?
In the debt markets, one of our priorities is developing the domestic market and providing a comfortable environment for different types of investors, including foreign investors. Recently we have seen a strong tendency towards growing the share of foreign capital in Russia’s credit markets, and it is clear that the instruments and structures that we are developing are attracting a lot of interest from abroad. One example, as mentioned earlier, are Russian floating-rate coupon bonds – something that in the past drew no interest from those groups. As we were developing this instrument, sceptics questioned its potential, but we are now at a point where we have to limit the supply of these notes due to overwhelming demand from Russian and foreign investors, and limit the interest rate risks such instruments entail. This is a reversal of fortunes compared to what we saw two to three years ago, and we hope to continue along this path.
Q. One of the most interesting discussion points from today’s conference was the relatively novel state-guaranteed OFZ bond. Can you tell us more about this particular instrument and what you hope to achieve with it? In particular, what steps would the government take to ensure that people put their trust in these bonds and increase their participation in this market?
The launch of these OFZ bonds that will be sold directly to the public is one of the cornerstone elements of our monetary policy this year. We expect to start issuing these notes in April. Our key goal here is to recover people’s trust in the state as borrower, it is as much a political challenge as economic, considering the past history of Soviet and Russian governments undermining that trust. Issuances will largely target citizens who do not have extensive knowledge or understanding of debt and capital markets, which is why these notes will not be tradeable on the secondary capital market. That means the holder of the notes will be shielded from the risks associated with price volatility caused by shifts in the market. This bond will offer attractive yields, and if the buyer chooses to hold the note until maturity, he or she will receive a premium over the benchmark bank deposit yields and the standard sovereign bond yield, a spread of about 50bp. These notes can be purchased, either physically or via online banking, from our two agent-banks, VTB24 and Sberbank, which both have a wide network of branches across the country. The client will also be able to resell the notes back to the bank at any point during the three-year tenor, although terms will vary: the closer to maturity, the better the pricing, with the highest profit to be made at maturity. We do not see this instrument as our main source of debt financing, so the volume of issuance will be relatively limited, around RUB20-30bn per year. But we hope that this instrument will draw those segments of the public that have little expertise in the capital markets, that do not have time to explore the nuances of bond trading, who are perhaps even outside the banking system, but are interested in making relatively risk-free and profitable short-to-medium term investments into the bond market. They will not be able to find such attractive yields with relatively low risk anywhere else on the market.
