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WHAT IF OFZS COME UNDER PRESSURE AGAIN?
We should also consider a scenario in which the OFZ market faces a shock. Currently, the most likely
source of this would be a ban on US persons purchasing Russian sovereign debt. By January 28, a report
must be furnished to US lawmakers on the potential effect on US persons if sanctions are expanded to
Russian sovereign debt and a full range of derivative products. This does not automatically mean that this
will happen. The report will simply inform the further discussion by lawmakers.
In its October report the CAATSA made stateowned metals and railway companies technically
eligible for debt and equity sanctions, but so far no new sanctions have been introduced. The
agency might take the same approach for Russian sovereign debt.
The guidance with respect to Russian shipping, railway and metals and mining could have been
released any time after CAATSA was passed, and was largely expected to be released by the time
separate guidance on ties to the defense and intelligence sectors was provided, by October 1.
However, in the end it appeared only on October 31.
A ban being placed on US persons holding OFZs would spur an immediate selloff in the paper.
Market liquidity would evaporate almost instantly and rates would jump even without any trades.
The magnitude of the jump in yields would depend on the length of the adjustment period. We think
that some demand would come from Russian banks in the 1011% area.
If we assume that the share of US and nonUS asset managers who want to be in compliance with
the US sanction regime is at 75%, then the market will be flooded with R1.6 trln of supply. In that
case, any OFZ issuance, including of floaters and CPI linkers, would be postponed until the market
settles down, which we think would take about six months. The Finance Ministry might even
consider postponing FX interventions to restrain possible ruble depreciation in the midterm. The
absence of interventions and weaker ruble amid relatively high oil prices would make it possible to
refrain from OFZ placement without a significant additional tap of the NWF.
The CBR would have two options for acting. First it could buy OFZs and simultaneously intervene on the
FX market, as there would be huge pressure on the ruble if there is a quick exodus of nonresidents. But
there would be no need to raise the key rate significantly.
Second, the CBR could opt not to intervene. In this case, we doubt the CBR would step in to the debt
market, not least because this would contradict its mandate not to buy government debt. The squeeze on
the OFZ market in the absence of the CBR would reduce demand from internationals for hard currency,
scaling down the ruble depreciation, thus the ruble would not blow up but weaken rather slowly by
approximately 10%. To constrain banks’ demand for OFZs the CBR could raise the key rate to the same
1011%, thus banks would not be able to buy the paper and repo it with the regulator. This would only
exacerbate the selloff triggered by the exodus of foreigners. We think that it would delay the
normalization of monetary policy for two years.
That said international investors would be the biggest losers should such sanctions be implemented.
The US might impose a ban only on buying new debt, which would produce a less pronounced
reaction on the market. This would likely split the OFZ market into what would essentially be two
different markets: “old” and “new.” We would expect the “new” curve to trade with a 2030 bp
premium to the “old” one, as there would be fewer market participants and persistent supply. If the
Finance Ministry were to tap existing issues, they would move into the “new” category and add
some yield premium. The currently outstanding amount of nominal OFZs is R4.6 trln, R2.6 trln for
5y+ OFZ and only R0.5 trln for 10y+ OFZ. That said, the curve would be relatively liquid in the next
5y, although the overall negative sentiment and prohibition on buying new debt would repel some
foreigners. Such a scenario would not require immediate action from the Finance Ministry or CBR.