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Tightening paused: Russia CDS update

14 April 2020 by jbchevrel

Russia CDS was slightly wider +5bp on the day, closing at 157bp. The whole tightening was from 300bp. The main piece of news over the long weekend was the unprecedented 9.7mbd OPEC+ cut. This is indeed the biggest cutback ever agreed. OPEC+ announced an agreement to reduce crude oil production by 10mbd starting on May 1st for two months, then by 8mbd for the following six months (July-Dec 2020), then by 6mbd in Jan 2021-April 2022. 2 years covered in total. The production base taken was October 2018, except for Russia and Saudi Arabia, for which the agreed base for their 5mbd cut, was 11mbd. It is worth remembering that before the March price war started, Saudis were ‘only’ producing 9.7mbd, and not 11mbd. Mexico’s refusal to cut by 400kbd but by 100kbd took all these numbers down by 0.3mbd. Instead of leading to a relief rally in prices, this OPEC+ deal provided producers with a short window to hedge at higher levels, benefiting from the contango. But it was more of a sell-the-fact kinda event really, with WTI well back in low20s. Beyond the technical, this also reflects that fundamentally, this output cut is about 2x to 3x less than the demand drops seen so far in March and April, respectively. According to estimates OPEC presented to G20, global demand will fall -6.8mbd on average in 2020. On the Russia-specific side of things, Russia has taken stimulus measures to combat the virus too. Russia created an emergency fund of equivalent $3.7bn (0.2% of GDP) for people and companies affected by the Covid-19 outbreak. The public spending also got a bit of a boost: +$10bn equivalent, so 0.5% of GDP, if you look at it relative to the amount originally planned and which was not taking into account the Covid-19 need. Russia also announced a $4.1bn package (0.3% of GDP) to support the economy and proceeded to a reallocation of its budget, increasing in particular the federal budget for unemployment benefits payments. Tax deferrals for all companies were also implanted, along with easier regulations on financial institutions. FX-wise, the Central bank had started a few weeks ago selling FX on a daily basis in order to support the RUB. But FX isn’t really an issue at these levels for CDS given ample reserves. Rate-wise, the CBR has not cut, but commented that it is likely to continue to keep cutting over the medium term.