Foreign investors are selling federal loan bonds after the imposition of US sanctions, but the scale of this process is “not very significant.” This was announced in an interview with Bloomberg by the director of the financial stability department of the Bank of Russia Elizaveta Danilova.
On April 15, Washington announced a ban on American financial institutions from participating in the initial placements of the Russian ruble government debt.
Since then, non-residents have sold OFZs worth 57 billion rubles. “This does not exceed the outflows that occurred in previous periods of volatility,” Danilova said.
As of April 21, the share of foreigners in OFZs dropped to 18.8% (at least in 6 years), and compared to the March 2020 record (34.9%), it almost halved.
Investments in classic OFZ PD decreased by 383 billion rubles, and the share of non-residents in this market from March 1, 2020 to April 23, 2021 decreased from 44.2% to 28.9%.
“At the same time, the OFZ market has grown from March 1, 2020 by 5.7 trillion rubles to 14.7 trillion rubles. Thus, the placement of OFZs in the primary market was quite successful, despite the fact that foreign investors during this period were carrying out a net sale of OFZs in the secondary market, ”Danilova noted.
The Central Bank expects that against the background of the ban on primary purchases, the share of non-residents will gradually decline. “The question is whether the nominal volume will continue to decline,” said Danilova. “In the Eurobond market, where the sanctions were introduced in the summer of 2019, the volume of investments by non-residents remains almost unchanged.”
The share of American investors in the OFZ market is about 40%. At the same time, other investors, on the contrary, showed an increase in investments, the Central Bank emphasizes. “The share of Chinese investors in the fourth quarter of 2020 and the first quarter of 2021 increased by 2 pp. up to 4%. The share of investors from Singapore increased by 1 p.p. up to 7% “, – cited Danilova’s statistics. If the sanctions are extended to the secondary OFZ market, which will not only prohibit participation in new placements, but de facto force the Americans to dump the entire existing portfolio, the Central Bank, according to Danilova, is ready to use the already tested package of measures.
These are the provision of liquidity to banks, the sale of foreign currency in the market to reduce the volatility of the ruble and regulatory relaxation.
The Central Bank holds repo auctions, offering banks rubles secured by OFZ for 1 month and one year terms. “If necessary, you can give banks and other financial institutions the right to temporarily not revalue the value of securities, in March 2020 this measure played an important role when organizations were afraid to buy bonds, expecting further growth in yield. Regulatory relaxation gave them a certain amount of comfort, and the situation quickly turned around, ”said Danilova.
In addition to the Russian government debt, foreign investors are implementing carry-trade strategies with the ruble and in the money market through currency swaps, placing funds for short periods, mainly overnight.
“Now the appetite for risk is quite high, investors maintain their short position in the currency, continue to invest in rubles in this market, although they have slightly reduced their position: from 8.2 to 7 billion dollars in the last week after the sanctions. In some episodes, the short position in the currency reached $ 15 billion. But during the pandemic, non-residents took the opposite position, as in the period of volatility in April 2018, when sanctions were imposed against a number of companies, ”Danilova said.
“Now the position of non-residents on swaps suggests that, in general, they are interested in the Russian money market,” she concluded.