The U.S. Treasury Department defends Russian federal loan bonds

The ''report'' with a follow-up

Media coverage in connection with possible tightening of sanctions did not subside for a long time. Until the beginning of last week, it was fueled by nervousness before the publication of the so-called Kremlin Report — the list of government officials and businessmen in regard of whom the US authorities can impose personal restrictions.

It was expected that the list would include people close to President Vladimir Putin. On January 30th, ''the dossier'' was published and presented to the U.S. Congress — but, as Russian and world media noted, it turned out to be just a formality. The list includes 210 Russian citizens in total, including 96 billionaires whose surnames the authors of the report simply borrowed from the 2017 Forbes rating.

However, the topic of sanctions did not exhaust itself on it: everyone was waiting for the U.S. Treasury Department to deliver a regular report to the congressmen, in which it would assess the prospect of sanctions extention. It was known that as a basic option it was considered a ban for US companies and citizens to buy the debt obligations issued by Russia (now it is mainly federal loan bonds, OFZs, placed by the ministry of finance).

It was expected that the list would include people close to President Vladimir Putin. Photo: kremlin.ru

Some experts expressed fears that if the restrictions really applied to Russian state bonds, it would have lead to negative consequences for the country's economy, moreover — in a relatively short time. About one-third of OFZ owners, according to the results of the end of last year, are foreign investors. Therefore, some experts believe that a ban on purchase of state bonds can provoke their sale and as a consequence — weakened ruble. In total, at the beginning of October it was issued OFZs at $160 billion.

For no one's benefit

Bloomberg has recently published the report of the U.S. Treasury Department on possible consequences of expanding sanctions to new Russian sovereign debt. It says that the extension of sanctions to OFZs may have effect not only on Russia but also investors from the USA and global financial market as a whole. Besides, the ministry of finance stated that the magnitude of potential restrictions remains uncertain. On the one hand, global companies are likely to support the position of the United States, but on the other hand, the EU could not support the restrictions, which will harm the unity of the sanctions policy.

''There should be no difficulties''

The opinion of the ministry of finance cannot be considered as a refusal from the ban on OFZs — it is a recommendation. The question is still up in the air, although the likelihood of expanding sanctions on Russian debt has now decreased. However, the majority of experts interviewed by Realnoe Vremya agree that even a potentially tough U.S. decision on Russian bonds will not pose a serious threat to the ruble and the country's economy.

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  Sergey Khestanov economist, Associate Professor at Ranepa

  Even if the ban is imposed, it will not require from those who have already acquired OFZs to get rid of them. Traditionally, the restrictive laws and various acts do not involve retroactivity — therefore, the prohibition would apply to those who were going to buy our state debt. In this case, we would hardly notice it because the demand for Russian public debt is large, even on the part of domestic investor. Perhaps, we would see a weakening of the ruble by a few percent, and that's it.

  If we assume that the restrictions require to get rid of OFZs even current owners (it is extremely unlikely, but we can suppose), it certainly will be a stronger solution. But, in this case, nothing extraordinary will happen. Fortunately, we have had low inflation in recent years, which allow the Central Bank to simply buy these bonds from the market in the event of a panic sale. With current inflation, this can be done without any serious consequences. Therefore, any scenario with OFZs does not imply large shocks — weakening of the ruble by 5-10% at most. Moreover, some (for example, our exporters) will only be happy with weakening of the ruble.

  Really serious sanctions would be possible in case of a ban to buy Russian oil — Russia's budget earns well on oil, but poorly on gas, so it is very sensitive to oil restrictions. It is possible to replace Russian oil already now — reserve capacities of Saudi Arabia and Iran block the Russian export. However, Russia is protected by one circumstance that is unlikely to change in the coming years — the dependence of the European gas market on Russian supplies. As long as there is nothing to physically replace Russian gas, no serious sanctions against Russia are possible.

  European politicians are very pragmatic, they tend to think thoroughly before making any decisions. This pragmatism defends Russia from serious sanctions, at least until 2020-2022 years; in the near future, nothing bad will happen. As soon as the world's gas liquefaction capacity is at least comparable to Russian exports, the likelihood of restrictive measures increases greatly. But we can talk about this very, very abstractly so far.

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  Vladislav Kochetkov president of Finam investment company

  First, the Central Bank has already stated that if necessary, it will neutralize negative consequences and will be able to replace the falling demand for OFZs. Of course, only market and practice can verify this — but since there is a ruble surplus, most likely, this is true. Russia's resources have been sufficient lately and there should be no problems.

  Second, given the fact that a considerable share of Russian OFZs are owned by residents, I don't think there may be some tough sanctions. A more significant impact on the ruble may have a reduction in carry-trade due to the fact that the Central Bank reduces the key rate, and the fed, on the contrary, increases. But this process is long, and during the first half of 2018 it is still comfortable for Russia.

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  Pavel Samiev managing director at National Rating Agency

  Quite a large share of OFZs falls on foreign investors, so a ban by the United States could provoke an outflow. Moreover, some investors react not to actual prohibitions — when such [informational] movements occur, they can impose restrictions in advance themselves on certain instruments in accordance with risk management procedures. Such indirect reactions could put pressure on the ruble.

  On the other hand, I do not think that this will be radical pressure. Recently, we have seen the ruble strengthening, representatives of different ministries have even stated that such strengthening is not very good. Therefore, even if the ruble weakened a little, there would be nothing critical in this. In the case of a short large volatility, the state could intervene in the market and regulate the situation, although on a large scale this is not quite right, too.

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  Evsey Gurvich leader of Economic Expert Group, member of the economic council under the Russian President

  The planned volume of OFZs placement in 2018/2020 is not so large because the budget deficit has been minimized. At the same time, due to the continuing high-level key interest rate of the Central Bank, the real yield of OFZs remains large enough, which makes Russian state bonds attractive to investors. Demand for loans from the real sector is still quite sluggish, so Russian banks have no wide choice in what to invest.

  OFZs have a very good ratio of profitability to risks, given a low volume of accumulated debt and a small budget deficit (which given high oil prices in the coming years will turn into a surplus). Thus, the supply of OFZs in the market will be moderate, and the demand (even only from Russian banks) — large enough. So there will be no problems with placement. Of course, exit of some investors from primary market will slightly increase the profitability of newly placed OFZs, but not significantly.