Trading resumed, coupon for eurobonds paid, gas to be sold for roubles

The Moscow Exchange resumed trading for domestic investors

On March 21, the government bonds (OFZ) trading restarted on the Moscow Exchange. Taking into account the difference between the levels of OFZ-IN (inflation indexed government bond) and ordinary OFZ, it seems that the market expects an annual inflation to be around 13.3% by August 2023 and then slow to 10% afterwards. According to our assessment, this is an optimistic scenario in the current situation.

On March 24, the Moscow Exchange restarted trading on the equity market. The shares of 33 companies, including Gazprom, Rosneft and Sberbank, were available for trading. However, short sales were prohibited, as well as sales by non-residents. The state supported the stock market using the National Welfare Fund (NWF). As expected, the main outperformers were non-sanctioned exporters with earning in hard currency. In roubles terms the market rose by 4.4% vs 25 February. In USD terms it declined by 9% as the rouble depreciation was higher than the stock price rise in rouble terms.

In our view, the results of these trades are not indicative of the real market condition as the markets were supported by purchases from the CBR, only OFZs were traded in the bond segment, and short sales and sales by non-residents were prohibited. Thus it cannot  be a reliable source for for macroeconomic forecasing.

Russia continued to serve its hard currency debt

The Russian Ministry of Finance paid coupon payments amounted to USD 117.2 million and USD 65 million on March 16 and 21 respectively. Thus, there was no default on external obligations and the forecasts of international rating agencies did not come true. The next payment is due April 4th 2022.

Payments were made in hard currency, despite the frozen reserves of the CBR in the US and the EU. This was facilitated by a license from the US Department of the Treasury, issued on March 3, 2022. It allowed usage of the assets of the CBR for the payments to non-residents on bonds and equities.

As for corporate debt, the successful coupon payments to non-residents have already been announced by TCS Group (USD 2.8mln), Gazprom (USD 1.3bn), Rosneft (USD 2bn), Nornickel (USD 6.4mln), MKB (USD 9.7mln), Evraz (USD 18.9mln) and Russian Railways (EUR 23mln). Severstal announced that it had made a test payment on March 16 at 1% of its coupon obligations, which was unsuccessful. The payment was frozen by Citibank’s correspondent bank.

Vladimir Putin proposed to sell gas to “unfriendly countries” for roubles

The list of unfriendly countries includes 4 of the largest importers of Russian gas – Germany, Italy, Austria and France. In 2021 Russia revenues from exported gas to these countries was about USD 43 billion. Russian government plans to continue to supply gas in accordance with the volumes and prices fixed in the contracts earlier. President Putin ordered the government and the Central Bank to organize the transparent mechanism for foreign producers to purchase roubles on the domestic market within a week. The market took the president’s proposal as a way to support the rouble.

In our opinion, the new mechanism does not change much for the rouble and the Russian economy as a whole, and, therefore, the reaction of the markets to this news is rather emotional and will not last for long. The fact that gas will be paid in roubles does not change the balance of payments. The balance of supply and demand in the foreign exchange market over the long term will also not change fundamentally. The potential advantage of this step is that with rouble payments, one does not have to be afraid that the payment for the shipped goods will get frozen somewhere. Also, the upside of this decision for the Russian economy is that together with other measures it can cool down people desire to rush into hard currencies from roubles.

 

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

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