Rating downgrade, taxes easing and other developments

Since the last update there was not much sanction news:

  • The US introduced sanctions against 22 Russian organizations in the defense field
  • The EU banned selling, delivering, transferring euro-denominated banknotes to Russia
  • Canada expanded the list of individuals under sanctions.

Based on the recent economic developments Fitch Rating agency downgraded Russia to B from BBB with a negative outlook. Moody’s downgraded Russia’s ratings to B3 from Baa3, ratings remain on review for further downgrade. Agencies note, that tougher than expected sanctions strengthened risks for macroeconomic stability. Both Fitch and Moody’s note that sanctions against the CBR may adverse Russia’s ability to pay government debt obligations.

As long as the entire financial system is flooded with roubles, we do not expect the default of the rouble denominated federal loan bonds (OFZ). However, the technical default of obligations in foreign currency is more likely to happen due to the government ban to pay foreign investors on public debt. This means, that holders of Russian debt in foreign currency will have to write it off to zero.

The Russian government announced additional supporting measures:

  • The Ministry of Finance issued an initiative to cancel VAT on physical gold purchases for the Russian citizens. Previously, individuals had to pay a 20% VAT when purchasing gold at a bank in Russia
    • Gold is being recommended by the regulator to Russian citizens as the alternative for the foreign currency during current volatile economic situation
    • Transactions with gold may give the Central Bank more control over the rouble dynamics since sanctions disabled it from interventions on the FX market. As of the latest available data (mid-summer 2021), the CBR had 22% of its reserves in gold, or USD 139 billion. If individuals shift from purchasing dollars to gold, this may provide support for the rouble
  • The Ministry of Finance suspends the budget rule on additional oil and gas revenues for 2022. Under the budget rule the tax income from oil companies generated from oil prices above USD 44.2/bbl was stored in the National Welfare Fund (NWF). Now the excess income will go straight to the Federal Budget
  • The government submitted to the State Duma a draft amendment to the Budget Code. The amendments will allow to use NWF funds to purchase Russian equities on the secondary market
  • The Central Bank of Russia ordered to charge Russian individuals a commission of at least 30% for buying USD, EUR and GBP on the stock exchange. This was made to even out the competitive conditions between banks and brokers. Previously large FX spreads offered by the banks (around 25-30%) pushed individuals to trade these currencies on the stock exchange. The CBR decision aims to remove the stock exchange FX trading advantage and push individuals towards the banking system.


Authors: Egor Kiselev, Head of International Business & Investment Marketing, Marina Tsutskiridze, Investment Specialist, Aleksandra Kuznetsova, Investment Specialist

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