The change of timing comes as a surprise, since MinFin had previously planned to start operations in the FX market “before 2015” (i.e. when the CBR would be closer to a fully-fledged inflation targeting regime). We had therefore interpreted this as meaning 2H14, but we now believe that MinFin is likely to be ready to enter the FX market in 4Q13 rather than 3Q13. The CBR would be acting as an agent for MinFin, which eliminates ‘agent risk’, as the CBR currently conducts its own interventions. However, so far, not enough details have been revealed to draw conclusions regarding the potential impact on FX and rates. Nevertheless, we believe that this news is negative for the rouble in the near term, positive for the money market and mixed for bonds.
It is negative for the rouble because at current crude prices, MinFin would be buying FX. According to the Budget Rule, MinFin is only to accumulate funds in the Reserve Fund when the oil price exceeds the long-term average (USD 91/bbl in 2013 and USD 93/bbl in 2014). However, in the longer term, MinFin’s market operations are broadly neutral for the rouble. According to MinFin’s projections, the Reserve Fund is to be replenished with RUB 373bn (USD 11.8bn) this year. However, this is also subject to Russia's borrowings on the international markets and the execution of the privatisation programme.
MinFin’s goal is to have zero effect on liquidity, which is positive for money market rates. MinFin’s operations in the FX market (either buying or selling) are compensation for previously accumulating/releasing the Reserve Fund. Currently, the budget is a drag on liquidity as, according to the CBR’s estimates, the consolidated budget has removed nearly RUB 650bn of banking liquidity YTD.