Russian 10-Year Yield Pulls Back

The yield on the 10-year Russian OFZ fell to 14.6% from the four-month high of 15.2% from late October as higher taxation and a rebound in oil prices softened the backdrop of increasing OFZ supply. The increasing magnitude of federal government spending in Russia's invasion of Ukraine drove the Kremlin to increase VAT for next year's budget, expected to generate RUB 1.2 trillion of additional revenue. The outlook on government revenues were also supported by the upswing in crude oil prices following pause in output hikes signaled by OPEC+ members for next year. The developments momentarily offset the deteriorating fiscal backdrop for Russia, as slow growth forced the government to signal it will grow borrowing by 46% this year. OFZs were also pressured by high interest rates by the Bank of Russia in its fight against high inflation. The benchmark rate stands at 16.5%, and the CBR pushed back against another rate cut this year due to upside inflation risks.

The yield on the 10-year Russian OFZ fell to 14.6% from the four-month high of 15.2% tested earlier in October, tracking some support for Russian assets on favorable geopolitical developments. US President Trump noted that Ukrainian President Zelensky should accept more favorable terms to end the war with Russia, while EU leaders faced barriers to using frozen Russian assets to support Ukraine. The developments added some respite to OFZ's after higher bond supply and higher interest rates triggered a plunge in Russian debt since August. The draft of next year's budget reflected RUB 13 trillion, or 40% of the federal budget, allocated for defense spending amid Russia's war with Ukraine, more than noted in preliminary documents, to extend the period of ample spending by the Russian federal government. The flat spending coincided with risks to government revenues amid Russia's slowing economy, low Russian commodity prices amid a strong ruble, and high interest rates by the central bank.

The yield on the 10-year Russian OFZ rose toward 15%, the highest in three months amid higher bond supply by the Ministry of Finance and higher interest rates by the Bank of Russia. The draft of next year's budget reflected RUB 13 trillion, or 40% of the federal budget, allocated for defense spending amid Russia's war with Ukraine, more than noted in preliminary documents, to extend the period of ample spending by the Russian federal government. The flat spending coincided with risks to government revenues amid Russia's slowing economy, low Russian commodity prices amid a strong ruble, and high interest rates by the central bank, which lifted the outlook on government bond issuance. Urals oil remained below $65 per barrel in October, while LNG prices were relatively low amid the ample availability from the US and high stocks in Europe. On the policy front, the CBR cut its rate to 17% instead of expectations of 16%, and pushed back against aggressive cuts due to inflationary risks.