Russian finance minister warns of risks in banks' pursuit of OFZ bonds

* Russia doubled borrowing plan amid low oil prices, pandemic

* Some foreign investors ditch OFZ bonds, banks step in

* Deputy finance minister: the more OFZ are bought, the less lending is done

MOSCOW, Nov 25 (Reuters) - Russia’s finance ministry sees a risk that domestic banks may cut lending to the economy because they are increasingly buying into government OFZ bonds, a deputy finance minister said, as Moscow raises its borrowing amid the coronavirus pandemic.

Russia faces a budget shortfall as oil prices fall and it copes with the economic consequences of the coronavirus. It has more than doubled its domestic OFZ bond offering plan, to as much as 5 trillion roubles ($66 billion) this year.

Russian banks, chiefly its two biggest state lenders, Sberbank and VTB, have stepped into OFZ purchases, supporting the domestic state bond market at a time when some foreign investors have abandoned the bonds.

Banks also may use OFZ bonds as collateral with the central bank for liquidity operations, capitalising on the rate difference between the two instruments.

As of Oct. 1, the OFZ market stood at 11.3 trillion roubles, of which foreign investors held a 27% share, down from over 30% earlier this year. As some foreigners have cut their exposure, Russian banks have stepped in.

The central bank does not provide data on how much of the total OFZ bonds outstanding are held by Russian banks, but they accounted for nearly 90% of all demand at OFZ bond auctions last month, an increase from 83% in September.

“There is such a thing as a crowding-out effect,” Alexei Moiseev, a deputy finance minister, told Reuters. “Banks are switching from lending to the private sector to lending to the Russian Federation ... The more OFZs (are bought), the less loans are issued to the private sector.”

Moiseev is the first top-ranked Russian official to publicly raise concern over banks’ growing exposure to state borrowing, programme, which could be considered quasi-financing of the budget needs.

Russia has a relatively low public debt - around 19% of gross domestic product this year - and can afford to borrow more without significant risks, given its vast gold and foreign exchange reserves of $584 billion.

Despite warning of the risks, Moiseev told Reuters that as of now, domestic banks have enough capital to invest both in OFZ bonds and to continue lending to the economy.

The Russian central bank expects lending to grow by 3% to 8% this year, expanding by 6% to 11% in the next two years.

$1 = 75.5450 roubles Reporting by Darya Korsunskaya and Tatiana Voronova; additional reporting by Elena Fabrichnaya; writing by Katya Golubkova; editing by Larry King