Ruble Tsunami Cuts Rates Most Since 2010: Russia Credit

The biggest plunge in Russian interbank borrowing costs since 2010 will peter out as banks are forced to unload cash for taxes and repay government loans, according to VTB Group and Nordea Bank AB.

A flood of government money into the banking system that spurred the overnight MosPrime rate’s steepest drop in two years will abate as lenders face repayments to the Treasury of 207 billion rubles ($6.84 billion), Maxim Korovin and Anton Nikitin, analysts at VTB Capital in Moscow, said in a report last week. As much as 480 billion rubles in taxes is also owed this month, said Dmitry Savchenko, a Nordea analyst in Moscow.

“The effect won’t last long, perhaps until around the February tax period,” VTB’s Korovin said by e-mail on Jan. 10. “Rates will likely start to rise even earlier.”

The overnight MosPrime rate fell three basis points to 5.20 percent today, declining a fourth day and adding to the 87 basis point drop Jan. 10, the steepest one-day fall since Dec. 31, 2010, according to National Foreign Exchange Association data. Ruble bonds have outperformed their peers in Brazil and China amid the surge in liquidity, trailing India.

Spending Wave

The government released a “tsunami” of 1.7 trillion rubles last month as the regional and federal governments rushed to complete spending last year, according to VTB. The amount of cash held at the central bank in deposits and correspondent accounts, a measure of banking system liquidity, surged to 1.97 trillion rubles on Jan. 9, the most on record.

The government cash helped drive down bond yields as Russia prepares to broaden access for international investors to the local debt market through settlement systems including Euroclear Bank SA, according to Konstantin Nemnov, a money manager at TKB BNP Paribas Investment Partners in St. Petersburg.

Ruble bonds have returned 1.12 percent this year, compared with 0.39 percent for Brazil’s debt, 1.36 percent for India’s and minus 0.03 percent for China’s, according to JPMorgan Chase & Co. indexes. The yield on Russia’s domestic ruble bond due in June 2017 fell 31 basis points, or 0.31 percentage point, from the end of last year to 6.21 percent today.

“The effect was quite apparent,” Nemnov said by e-mail on Jan. 11.

Rates Meeting

The central bank will leave its main interest rates unchanged tomorrow, including the 5.5 percent overnight and one-week repurchase rates most used by banks to manage their liquidity, according to a survey of analysts. Bank Rossii seeks to contain short-term market rates between the overnight deposit rate, now at 4.5 percent, and the 6.5 percent for fixed repos and swap operations.

The ruble strengthened 0.2 percent to 30.2420 per dollar as of 6:18 p.m. in Moscow. Non-deliverable forwards, which provide a guide to expectations of currency movements, showed the ruble at 30.6683 per dollar in three months.

The yield on Russia’s dollar bonds due in April 2020 fell 14 basis points to 2.440 percent. The yield on Russia’s international ruble bond due in March 2018 dropped three basis points to 5.759 percent.

Russia is rated BBB by Fitch Ratings, the second-lowest investment-grade ranking. The extra yield investors demand to hold Russian government dollar bonds rather than U.S. Treasuries fell four basis points to 159, according to JPMorgan indexes. The difference compares with 158 basis points for debt of Mexico and 144 basis points for Brazil.

Cost Protection

The cost of protecting Russian debt against non-payment for five years using credit-default swaps was little changed at 125 basis points, according to data compiled by Bloomberg. The default swaps cost four basis points more than Turkey, which is rated one level lower at BBB- by Fitch. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The record funds parked in the central bank reached about 1 trillion rubles more than the required reserves, VTB’s Korovin and Nikitin said in a research note Jan. 11.

The level of liquidity will return to the December average by the end of the month after the inflow of budget money, according to Nordea’s Savchenko.

“By February the situation will return to normal, with a deficit of liquidity,” he said by phone on Jan. 11.

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