18 December 2020 by lberuti
In a relatively quiet session in EM sovereign CDS, Russia under-performed, by widening +7bp on the day. Russia 5y CDS closes at 84.5bp on the 5y tonight. For reference, the widest close was 300bp this spring. Despite being hurt quite badly by COVID-19, Russia’s fiscal policy and monetary policy remained reasonable. Russia is THE place in Europe which still offers non-negative real rates and who refrained from doing QE and monetize this crisis. The fact that nonresidents holding in local currency bonds (OFZ) was just 24% as of October adds to the argument that inflows have some room in that space. As far as Eurobonds, the debt division chief in the Ministry of Finance announced that Russia would issue not more than $3B of international debt, next year. Just $600M of intl debt is maturing next year and an average $2B/year the three following years. Of the total $38.5B international debt that Russia has contracted, about $5B is EUR, rest is USD. Despite low oil prices, the current account balance has been resilient thus far in 2020. Russian companies break even at below $20 per barrel. Russia current account surplus is expected to be in the area of 1% of GDP next year. It is significantly lower than what it was in 2019 (4% of GDP) but is exposed to a potential reflation in base commodities (not just energy but also metals) driven by lower $ and Fiscal Stimulus (partly in the form of infrastructure projects) across DMs. On the monetary side of the equation, the CBR’s [Russian central bank] international reserves are ample [close to $600B]. These have not been eroded by FX interventions this year, contrary to some other EMs. These reserves were just $350B five years ago. The CBR increased their gold reserves every month of 2017, 2018 and 2019. In 2016, Russia’s gold reserves value was below $50B. The value of these has close to tripled [Px appreciation + purchases]. Today the CBR maintained its key interest rate at a record low [at 4.25%] and refrained from cutting further because inflation was 4.7% as of Dec 14th [vs target 4%].