Last week, Russian financial markets were strongly hit by further global selloff and rising fears about the government’s financial position as the oil price fell dramatically. To remind, on Wednesday, March 18, Brent tested $25/bbl (the lowest level since 2003), twice lower than early this month. This certainly posed a challenge for investors, oil producers and authorities. The situation was aggravated by the Urals discount to Brent reaching $4/bbl as Saudis offered huge discounts to European customers thus crowding out Russian suppliers. The ruble weakened due to low oil price but it was not enough to offset the fall of the dollar-denominated price.
Market participants started to price in apocalyptical scenarios, trying to understand how oil-dependent countries can survive in the current environment. If economic contraction is to be deep this year in major economies, then the oil price is unlikely to rebound any time soon. Russia’s situation looks relatively safe (at least in the short-term) first of all due to the fact that the government and banks accumulated some cushion in recent years. Hence most recent statement of the Russian Finance minister that sequestration of the budget in out of consideration is not surprising.
--- The CBR’s response to the events can be treated as moderate and its message to the market was mixed. On the one hand, it decided to keep the key interest rate unchanged, announced a package of some easing in regulatory environment for financial institutions and certain steps to support population and SMEs. It was also important that the CBR allowed commercial banks not to mark-to-market their positions in bonds and equities until January 1, 2021. Instead, they should apply valuation either as of March 1 (for papers purchased before this date) or as of the day of acquisition for other papers. The latter allows banks not to print “paper” losses from securities portfolios and limits pressure on capital. On top of that, this step supports the ability of commercial banks to operate on the open market.
--- The CBR, in contrast to the ECB or Fed, did not announce any extraordinary measures on financial markets or change the reserve requirement ratio.
--- The OFZ market is likely to remain nervous and will largely depend on the behavior of international investors. They already started to cut exposure to ruble bonds and sold R132 bln Mar 10 through 17. In case of further turbulence, this figure may increase dramatically as the total amount of their holding is close to R3 trln.
--- If the oil price in rubles stays around the current R2,000–2,200/bbl until year-end then the government can add around R3.0 trln of oil-and-gas revenues to the amount already collected in January – February even in the theoretical extreme case of the Urals price near $16/bbl until year-end. The federal budget deficit may vary in these cases from over 2% to slightly over 4% of GDP and can be financed without major problems.
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