Russia Sets New Budget Rule, May Resume FX Interventions This Year -Finance Minister

Russia estimates the new cut-off price for its budget rule that diverts excess oil revenues into its wealth fund at $62-$63 per barrel and may resume foreign currency purchases as early as this year, Finance Minister Anton Siluanov said on Wednesday.

The rule, designed to replenish state reserves by buying foreign currency when oil prices are high, was fully suspended amid harsh Western sanctions imposed after Moscow launched what it calls a "special military operation" in Ukraine on Feb. 24.

Siluanov, whose ministry published spending plans from its National Wealth Fund (NWF) earlier on Wednesday, said domestic borrowing would be ramped up to the tune of around $43 billion next year, with extra borrowing to reduce NWF spending also possible.

"We are planning on big volumes on the borrowing market - 2.5 trillion roubles ($43 billion) next year on a gross basis," Siluanov said.

"Plus, the government will be given the right to carry out additional borrowing of up to 1 trillion roubles to replace the use of NWF funds under favourable market conditions. That's a total of 3.5 trillion roubles."

Russia's finance ministry has held just one successful OFZ treasury bond auction since sending thousands of troops into Ukraine on Feb. 24, a 10 billion rouble placement on Sept. 14.

Market volatility has forced it to cancel weekly auctions since then.

"For us it is important that the budget is not a bottomless barrel in which to take decisions on spending," Siluanov said. "We need to live within our means. We have defined these means as 8 trillion roubles in base oil and gas revenues over three years."

Siluanov said that corresponded to a cut-off price of $62-$63 per barrel. Anything above that should be sent to the NWF.

"If in foreign currency, then naturally only in a friendly currency, there are no other alternatives. In which foreign currency? Obviously, right now it is the yuan."

Russia considers those countries that have imposed sanctions on it as "unfriendly".

FX INTERVENTIONS

Siluanov also did not rule out a return to the FX market this year with currency interventions. The central bank stopped such interventions earlier this year as sanctions targeted Russia's state reserves.

"We can also save in roubles, but then there will be no impact on exchange rate ratios," Siluanov said. "We of course as exporters do not want a strong exchange rate, but we don't want sharp fluctuations either."

Siluanov said any FX purchases made this year would be based on the current budget rule and its cut-off price of $44.2 per barrel.

It would be up to the central bank to decide whether to enter the market or not and whether to make all purchases in yuan or leave some in roubles, Siluanov added.

($1 = 58.2930 roubles)