Russia’s finance ministry plans to borrow RUB1.5 trillion ($22.8bn) next year to fund the budget and the government’s expanding investment programme, according to the draft budget for 2019 that was released on September 24. But fleeing foreign investors mean estimates of the money available on the market fall short by RUB500bn.

The finance ministry plans to place a net RUB1.704 trillion on the OFZ market next year. The borrowing plan appears to be aimed at covering the redemption of maturing Eurobonds and FX loans totalling $3.2bn.

“Even if the ministry manages to replace its maturing FX obligations with new issuance, the RUB1.5 trillion target looks quite aggressive to us at first glance,” Nikolay Minko of Sberbank CIB said in a note.

Russia’s OFZ market was hot with international investors overweight in 2017 but with the threat of new US sanctions looming they have sold off some RUB500bn ($7.8bn) of bonds since April, bringing foreigners’ share down to 27% of the total bonds outstanding as of the end of August. As foreign investors have been playing an important role in the ability of the Ministry of Finance to raise money, the cooling of enthusiasm could create problems for the ministry’s borrowing plans: as a result of the sell off the yields on OFZs have already risen 200bp in just a few months to 9% as of the end of summer.

Because of the heightened political tensions that has fed through into ruble volatility the Ministry of Finance cancelled all its bond auctions in September – the first month with no OFZ bond sales since the 2014 currency crisis.

“Assuming that non-residents will finish rebalancing their portfolios to adjust to the geopolitical situation by year end, local investors will remain the main buyers on the OFZ market next year. Over 7M18, locals bought RUB663bn of OFZs, according to the CBR, and it appears that they bought another RUB211bn in August and September. We expect local banks to buy at least RUB200bn in the fourth quarter of 2018 to meet regulatory requirements, so the total amount of purchases by locals this year should come to about RUB1 trillion,” Minko says.

That means the missing RUB500bn the ministry wants to raise is exactly the amount that foreign investors have sold since April. However, if tensions ease, and if the US government balks at putting sanctions on Russian sovereign debt, then this foreign money could return — especially if the ministry is prepared to offer higher yields. But the ministry is also looking at alternatives for the missing RUB500bn.

“We believe it is more feasible to place RUB1 trillion next year, while the remaining RUB500-700bn could come from the finance ministry's accounts at the CBR, which by the end of this year should amount to about RUB2 trillion. We think the borrowing target could be reduced if the ruble weakens sharply against the dollar. For now, we are waiting for the finance ministry to provide more details on the budget,” says Minko.