Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 07 Nov 2024 by Evgeny Gavrilenkov

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Interest rates keep rising, and it happens not only due to rising inflation and the key rate hikes but also due to some regulatory measures. One problem is associated with banks’ need to comply with liquidity coverage ratio (LCR), as earlier this year, the CBR started to remove “reliefs” for the banks in terms of LCR, introduced back in 2022. As a result, banks faced the need to increase the share of long-term liabilities (mainly deposits) in their portfolio to catch up with growing corporate lending. As banks had to raise deposit rates, margins between deposit and lending rates narrowed. This effect was partially offset by attracting REPO loans from the CBR secured by non-market assets (about R5 trln rubles at the end of October). However, the regulator decided to limit new volumes of such overnight loans (which doesn’t fit LCR purposes). As a result, the upward pressure on interest rates remains high and may even increase. Minfin keeps placing a limited volume of OFZs on the primary market. To catch up with the annual plan, the government would need to place bonds worth R326 bln per week. The combination of significant potential supply and expectations of potentially even higher money market interest rates limits the demand for long-term bonds to zero. Moreover, even prices on floating-rate papers started to move down. On the one hand, this reflects investor fears concerning the potentially forthcoming massive placement of similar-type papers. On the other hand, it indirectly points to rising credit risks in the economy. We suppose that in the next several weeks, these factors will stay and keep placing pressure on the OFZ market. Due to the national holiday in early...