The share of non-resident holders of Russian Finance Ministry’s OFZ treasury bills fell again in February to 7.2%, or RUB1.4 trillion, of the total outstanding bonds worth RUB20.1 trillion ($217bn), as Russia’s state-owned banks continue to take up the slack.

OFZs are the main workhorse of the Ministry of Finance (MinFin) to fund the budget. In the near-zero global interest rate world pre-war they were very popular with international traders that could buy them directly from the Russian market after it was hooked up to the Clearstream international settlement system in 2012.

Russian OFZs paid a high interest rate of around 6%-7% pre-war, giving investors a decent return with low risk thanks to Russia’s rock-solid macroeconomic fundamentals, while interest rates of other major economies were close to zero as they battled rising global inflation. The yields on OFZs have grown substantially since then, making borrowing costs much higher: bonds with a 20-year maturity carried yields of around 14% per year as of March 27.

International investors' share of the OFZ market peaked in February 2020, reaching 34.9% of bonds worth RUB3.2 trillion out of a market worth RUB9.1 trillion.

That all changed following Russia’s invasion of Ukraine just over two years ago, when international investors fled the market if they could. Now only foreign investors from friendly countries are investing into the Russian T-bill market and hold half the value of bonds compared to the previous peak three years ago.

MinFin has also halted its international borrowing programme, where it used to issue between $3bn and $6bn a year, less to raise money for the budget and more to simply set a sovereign benchmark so that leading Russian issuers could better price their own Eurobond issues. Corporates have also halted international bond issues as many were forced into default by sanctions in the first year of the war, unable to pay their coupons due to the SWIFT sanctions that were imposed only days after Russia’s invasion of Ukraine in February.

After the Russian budget went into deficit of RUB3.4 trillion in 2023 (1.9% GDP) and had also started this year with a deficit of RUB1.5 trillion (0.8% of GDP), MinFin has actively been issuing OFZ to cover the shortfall and reduced the amount of cash it has to take from the National Welfare Fund (NWF), Russia’s rainy day reserve fund where liquid cash fell from RUB6.8 trillion to RUB4.8 trillion last year.

With the full-year deficit this year slated to be RUB1.6 trillion, more than enough money remains in the NWF to comfortably cover the expected shortfall in 2024. Moreover, there is plenty of liquidity in the bank sector available to deal with any disasters: Russia’s state-owned banks have become the main buyer of OFZs and the banking sector pool of liquidity was RUB18.9 trillion at the start of this year, according to the Central Bank of Russia (CBR).

As followed by bne IntelliNews, the Finance Ministry intended to raise some RUB3.5 trillion ($43bn) on the OFZ market in 2023, with large domestic buyers, mostly state banks, replacing the share of foreign investors in OFZs. This year MinFin said earlier that it wants to halve the OFZ borrowing to RUB1.462 trillion in 2024 but expects to increase it again to as much as RUB2.385 trillion in 2025.

Those plans changed dramatically in December when Russian Finance Minister Anton Siluanov announced a dramatic scaling up of borrowing plans in 2024 to raise RUB4.1 trillion from domestic borrowing – more than last year, where the borrowing plan was also scaled up from an initial target of around RUB1.5 trillion set at the start of the year.

MinFin doesn’t intend to cover the whole deficit only through OFZ issues in 2024, but a mix of NWF money, increased tax revenues and restarting privatisation, in addition to OFZ issues. Siluanov is attempting to create a sophisticated balanced package of funding for the government, so as to keep as much power dry as possible in the face of uncertainties. How the fund story plays out in 2024 will also depend heavily on how much money Russia earns from oil and gas exports. Russia’s current account surplus fell from over $260bn in 2022 before oil sanctions were imposed to $51bn in 2023 after the sanctions forced a massive restructuring of Russia’s tax regime on oil and gas exports.

One short term change already visible is that MinFin began to issue short-term bonds again in February, for the first time in years. Renaissance Capital believes that the “planned inflow of short-term issues, an unusual step apparently, was caused by a request from some market participants to issue small additional volumes of OFZs with maturities of 2-5 years to increase trade liquidity in this part of the yield curve”.

One of the ironies of the financial pressure on MinFin is that it has been forced to push through many deep structural reforms that have been put off for years. Restarting privatisation is one of them. Privatisation has not been a significant source of budget deficit financing in recent years. Potential major sales are periodically discussed but rarely carried out.

Siluanov said in December that his ministry had submitted a proposal to the government to reduce the state's stakes in a number of major companies in which it holds more than 50%, and to do so without losing a controlling interest.

"This could be tens, hundreds of billions. The list is in the government, we still have to discuss it," he said, adding that there are about 30 major companies where "one could think about reducing the state's stake and replacing [it] with private business."

"I don't know, one wants to hope for the best, maybe our commodities situation [in 2024] will be alright. [In 2023] we refrained from RUB1 trillion in borrowing because oil and gas did well. One would like to hope," Siluanov said in December, adding that the signs for oil prices at the moment are mixed but pointing more towards low prices.

Oil and gas revenues surged in the first two months of this year thanks to high international oil prices, but state spending on defence surged even more, creating a RUB1.5 trillion budget shortfall.

Russia’s non-resident share of OFZ bonds %

Russia’s OFZ market dynamics RUB bn

Russia’s non-resident share of Eurobond holdings