Key Russian banks boosting presence in OFZ bond market
An increase in bond purchases may result in less lending to the private sector
The Kremlin has significantly increased the issue of federal loan bonds (OFZ) this year to replenish the suffering national budget. Meanwhile, foreign investors have decreased their share of the OFZ market giving way to Russian banks. While Russian lenders currently have enough capital both to buy bonds and lend to the private sector, the Ministry of Finance warns of a possible substitution effect.
Russia’s Ministry of Finance sees a risk that domestic banks may cut lending to the economy because they are increasingly buying into government OFZ bonds, reports Reuters citing Deputy Minister of Finance Alexey Moiseev. Russia has more than doubled its domestic OFZ bond offering plan to as much as 5 trillion rubles ($66 billion) this year to compensate for a budget shortfall amid the coronavirus pandemic. The OFZ programme is seen as quasi-financing of the budget needs.
While some foreign investors have abandoned the bonds, Russian banks including two biggest state lenders Sberbank and VTB have stepped into OFZ purchases. Banks may also use OFZ bonds as collateral with the Central Bank for liquidity operations, capitalising on the rate difference between the two instruments.
As of 1 October, foreign investors held a 27% share of the Russian 11,3-trillion-rubles OFZ market, compared to over 30% earlier this year. At the same time, Russian banks accounted for nearly 90% of all demand at OFZ bond auctions last month, while in September, the figure stood at 83%, according to the Central Bank. “Banks are switching from lending to the private sector to lending to the Russian Federation”, considers Deputy Minister of Finance Alexey Moiseev pointing out that it may be “a crowding-out effect”. “The more OFZs [are bought], the less loans are issued to the private sector,” he says.
Moiseev is the first top-ranked Russian official publicly expressing concerns over banks’ growing exposure to state borrowing, says Reuters. However, the deputy minister admits that as of now, domestic banks have enough capital to invest in OFZ bonds and continue lending to the economy.
Russia’s public debt is relatively low at around 19% of gross domestic product this year. Given its vast gold and foreign exchange reserves of $584 billion, the state can afford to borrow more without significant risks. The Russian Central Bank expects lending to grow by 3% to 8% in 2020 with further expansion of 6-11% in the next two years.