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The irony of oil prices at their highest level in over three years are sending Russia so much cash that they have their first budget surpuls since 2011 but the country is deeper in debt. Their program of foreign currency purchases by the Finance Ministry means borrowing more rubles.

Russia Oil Price

The finance ministry must conduct finance operations through Russia's budget rule when the exchange rate appreciates which is due to higher oil prices. The country is borrowing in rubles close to last year’s record level to absorb the extra dollars in line with the so-called budget rule

Anatoliy Shal, analyst at JPMorgan Chase & Co. in Moscow explains the rule: “The budget rule made sovereign-debt issuance a function of the exchange rate. Budget amendments are based on a higher oil assumption and implyl a stronger ruble, hence the upward revision to issuance plans.”

This is why the Finance Ministry has expanded this year’s target for domestic borrowing by almost 28 percent to 1.04 trillion rubles ($16.9 billion), according to its amended fiscal plan published on the official disclosure website. That s double the amount it’s sold so far in 2018. The head of the Finance Ministry’s debt department, Konstantin Vyshkovsky, has said that a stronger ruble than assumed in the budget may force the government to raise more capital at home.

A decrease of 1 ruble in the exchange rate per dollar versus the initial assumption boosts Russia’s financing needs by about 80 billion rubles in 2018, according to Shal.

The original budget forecast used in the budget had the ruble at 64.7 against the U.S. dollar, near 58 has been the average at this point. They have been wrong by around 11 percent.

Russia Budget 2018

Bloomberg reports that to insulate the ruble and the economy from oil’s ups and downs and cap spending, the government is absorbing all revenue earned when Russia’s Urals export blend is above $40 a barrel, channeling the excess income into its sovereign wealth fund. Purchases of foreign currency will more than double this year to about 2 trillion rubles if prices for Russian crude average $54-$55 a barrel, climbing to about 2.8 trillion rubles if Urals is around $60, according to Finance Minister Anton Siluanov.

Russia Wealth Fund

In 2011-2012  the Finance Ministry also continued borrowing and placing the cash into a wealth fund despite running a fiscal surplus. The budget is projected to xceed spending by 441 billion rubles, or 0.4 percent of economic output.

There is another element here, foreigners owned a record 34 percent of Russia’s outstanding government ruble securities, OFZs before the rout in April after the Rusal sanctions saw bonds have to their worst week in over a year. Russia pays about 7.3 percent to borrow in rubles for 10 years Bloomberg reports. The rate drop below 7 percent in March for the first time in five years, but the risk premia rose with the latest round of U.S. penalties and a surge in the U.S. dollar.

The latest Finance ministry in 2018 for OFZs needs to auction off 450 billion rubles this quarter and about 130 billion rubles in the second half of the year, compared to the 463 billion rubles raised in the first three months of the year. Just a another sidebar to the whole Russia, Syria, U.S. and Russian Probe to consider.

Source: Bloomberg

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