Moscow Restarts Trading in Government Bonds, ‘Russian Version’ of Quantitative Easing Underway

People walk past the Central Bank headquarters in Moscow, Russia, on Feb. 11, 2019. Maxim Shemetov/Reuters

Russia restarted trading in federal government bonds (OFZ) on March 21, almost a month after the Moscow Exchange was shut down on Feb. 25 following the invasion of Ukraine.

An open auction for all OFZ issues was scheduled to be held from 10 to 11 a.m. Moscow Time on March 21, the Bank of Russia said in a March 18 press release. From 1 to 5 p.m., trading sessions were scheduled to be conducted in a normal mode. Short selling, however, was banned.

During premarket trade on March 21, the prices of some ruble-denominated OFZ bonds crashed by a third of their value, Reuters reported. However, the central bank’s OFZ bond-buying activity prevented them from declining further. In premarket trading, the yield of the country’s benchmark 10-year OFZ bonds rose to a record 19.74 percent, but this settled to about 13.9 percent during the main trading session.

“To ensure a balanced liquidity position in the securities market and prevent excessive volatility, the Bank of Russia will purchase federal government bonds in amounts needed to limit financial stability risks. The Bank of Russia will make these purchases until prices for financial instruments completely adjust to the new conditions,” the bank said in another March 18 news release.

This essentially means that the Russian central bank will be on standby to purchase government bonds, if the prices dip too low, to prevent the market from experiencing any catastrophic declines. In a bid to neutralize the impact of such bond purchases on monetary policy, the Bank of Russia intends to “subsequently sell the entire portfolio of these bonds.” The bank did not specify how much it was willing to spend on buying government bonds.

“This is the Russian version of quantitative easing (QE)—allowing liquidity to be maintained in the system and to reduce the cost of borrowing for the government,” Dmitry Polevoy, an analyst at the Loko Invest brokerage, said to The Moscow Times.

Nonresidents held 19.1 percent of OFZ bonds as of early February 2022. They are not authorized to sell their bonds between March 21 and April 1 according to the Moscow Exchange. These investors can only do repurchase agreements (also known as “repos”) and derivatives transactions.

When trading in the stock market resumes, the investors can close their short positions by buying securities. However, they won’t be able to sell the previously bought securities.

The Russian central bank has yet to declare when it will allow trading in instruments such as stocks to resume. Moscow had earlier proposed prohibiting foreigners from selling Russian stocks once trading begins. The government had previously allocated up to 1 trillion rubles ($10 billion) to buy Russian shares when stock trading resumes to counter a massive sell-off in the market.

Stock market investments by Russian citizens had increased in recent years due to relaxed government rules, mobile brokerages, and other incentives. However, many of them had to book heavy losses in the massive sell-off that happened just prior to the Ukraine invasion.