February 4, 2014 / 3:20 PM / in 4 years

UPDATE 1-Market conditions force cancellation of Russian domestic bond auction

By Lidia Kelly

MOSCOW, Feb 4 (Reuters) - Russia’s finance ministry cancelled its weekly domestic bond auctions for the second week in a row on Tuesday, saying in a statement the decision was “based on an analysis of current market conditions”.

Yields on so-called OFZ bonds have risen by 70-80 basis points since the start of the year. A new ministry sale could have potentially pushed the rates higher, analysts said.

Emerging markets such as Russia have been hit hard this year by outflows from investors following the U.S. Federal Reserve’s tapering of its monetary stimulus.

The rouble brushed close to its record low in early trading on Tuesday, reaching 41.17 against the dollar-euro currency basket, but reversed the loss later when it was up 1 percent against the basket to 40.69.

The finance ministry announcement to postpone foreign currency purchases on the forex market to replenish one of its sovereign wealth funds by nearly $6 billion while the rouble is weakening was a major reason behind the currency’s firming.

The central bank, which reiterated its pledge last week to launch unlimited foreign exchange interventions if the rouble’s exchange hits the edge of its target corridor, spent the most in nearly five years last month on propping up the rouble.


The finance ministry’s decision to cancel the auction was seen as a tactical move not to pay excessive yields and had virtually no impact on bond prices. The ministry has cancelled auctions before, waiting for better market conditions improve.

Russia, which envisages a budget deficit of only 0.5 percent of gross domestic product this year, is under no great pressure to borrow. Its domestic borrowing plans call for placing 808 billion roubles ($22.86 billion) this year.

“Given the fact that the (rouble) weakening will provide additional revenues to the federal budget, the finance ministry can flexibly control the amount of borrowing and completely stop placement, if it deems rates unacceptable in real terms,” said Alexei Tretyakov, head of Arikapital investment company in Moscow.

But the cancellation illustrates the current volatile market situation where there is a clear reallocation of capital from emerging markets to developed markets, said Murat Toprak, an emerging markets strategist at HSBC in London.

“If this is a lasting reversal it can raise crucial questions about the way emerging economies’ refinancing needs,” Toprak said.

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