Foreign holders abandon Russian OFZs fearing geopolitical risks

The share of Russian government bonds’ international holders has fallen from more than a third to less than 20% since the beginning of the pandemic. However, Russia’s financial system is strong enough to compensate even for a complete sell-off among overseas holders at the expense of potential domestic buyers.

International investors’ holdings of Russian government debt fell below 20% for the first time in six years at the end of March, says The Moscow Times citing official data from Russia’s National Settlement Depository. Since the beginning of the year, foreigners have been selling their holdings in Russia’s state debt due to fears of being caught up in a possible hardening of sanctions against Russia. In March, the outflow among foreign holders of Russian government bonds, or so-called OFZs, exceeded 120 billion rubles ($1,6 billion). This largest monthly sell-off since April 2020 pushed the overall share of foreign holdings down to 19,7%, while at the start of the pandemic, international investors owned more than a third of Russia’s government debt. Nonetheless, the volume of overseas investors’ holdings in ruble terms has remained relatively flat over the last 12 months, said the Institute of International Finance (IIF). It estimated total holdings at around $43 billion.

According to Sberbank’s analyst Alisa Zakirova, the outflows are being driven by worries associated with rising benchmark yields, increasing geopolitical risks, a weakening ruble and continuing high placements. Strategist of VTB Capital Maxim Korovin believes that end-of-quarter outflows also played a role, as much of the March sell-off took place in the final days. Investors fear that US President Biden’s administration may strengthen sanctions further and impose an outright ban on US-based financial institutions holding and trading Russian government debt.

However, analysts have differences in the assessments of how harmful this step will be for the Russian economy and the government’s ability to increase debt. “The Central Bank has room to provide liquidity to banks to buy OFZs, or the national welfare fund could be used to buy government bonds directly and at a significant discount,” considers Deputy Chief Economist of the IIF Elina Ribakova. Last year, when the Russian government rapidly accelerated borrowing to fill the budget, state-backed banks began buying the government debt en masse, which also led to a decline in the share of foreign holdings.

“A total ban on transactions involving Russian foreign debt [...] will only result in serious losses for Western financial institutions following the sell-out,” believes Director of Moscow-based Centre for Research on Post-Industrial Societies Vladislav Inozemtsev. “The Russian authorities will restructure their liabilities — making considerable savings on debt servicing. Therefore, by dealing a blow against Russian sovereign debt Western politicians will not inflict much damage to Russia’s finances.”

By Anna Litvina