Azernews.Az

By Bloomberg

On closer inspection, Russia’s success at selling debt at home this year doesn’t look so rosy.

While the government raised 363 billion rubles ($6.5 billion) in the first half -- more than twice the amount of local bonds known as OFZs it sold in all of 2014 -- it was left with no net proceeds. In fact, Russia ended the six-month stretch with a fundraising deficit of about 224 billion rubles, after making principal and interest payments on maturing debt.

Instead of helping reduce pressure on what’s projected to be the biggest fiscal shortfall in five years, the pace of domestic borrowing has so far only increased the strain on reserves. The dearth of fresh sources of cash for the budget shows how hard it is for Russia to avoid draining its rainy-day wealth fund as the price of oil, the main export earner, remains 48 percent below last year’s peak.

“The Finance Ministry has been successful, but not sufficiently successful,” Anton Tabakh, a director of regional ratings at RusRating, a Moscow-based credit ratings company, said by e-mail on Friday. “Debt payments complicate the Finance Ministry’s life and promise more hardship in the third quarter.”

The world’s largest energy exporter has $77 billion in its Reserve Fund to bridge the borrowing gap, but the cash pile will be depleted in three years at the current pace of exhaustion, according to Bank of America Corp. The fiscal deficit is set to swell to 2.7 trillion rubles this year.

Fresh Money

To avoid accelerating the drain, the Finance Ministry will need to step up borrowing in the next six months to meet its target of achieving 180 billion rubles of net new fundraising for 2015. The introduction of inflation-linked bonds will help the ministry “create more opportunities to finance the budget deficit,” Konstantin Vyshkovsky, the head of the ministry’s debt department, said in Moscow on Friday.

Investor interest in the nation’s debt has picked up since the Bank of Russia kicked off a cycle of interest-rate cuts in January, reducing its key rate by 5.5 percentage points since then to 11.5 percent.

This enabled the government to sell the most OFZs since before the annexation of Crimea in the three months to June 30, and it plans to borrow another 275 billion rubles by Sept. 30, 10 percent more than its second-quarter target. Five-year government bonds fell for the second day, pushing the yield up 12 basis points to 11.27 percent by 3:03 p.m. in Moscow.

While redemptions on maturing debt will probably slow from 587 billion rubles in the first six months, Russia may see less demand at weekly bond auctions since “the biggest rate cuts are already over,” according to Yulia Safarbakova, a senior analyst at BCS Financial Group in Moscow.

Foreign investors, along with pension funds awash with cash since the government in May returned contributions frozen in an industry revamp in 2013, stand to be “two big sources of fresh money” that Russia can tap, she said.