T-Bills Sold Despite Tax Uncertainty

Nervous treasury bill dealers ended trading Wednesday still concerned about how the new Russian tax on profits will affect the government securities market.

Depending on clarifications of the law, T-bills could either face a relatively liberal 15 percent profits tax or a tough 35 to 43 percent levy.

Vitaly Sotnikov, a fixed income trader at the investment company Rinaco Plus, said some 6.76 million bonds were sold out of the tranche of 7 million at Wednesday's auction, while annual yields jumped to 33.98 percent from 33.01 percent at a secondary market auction Tuesday.

The Finance Ministry apparently tried to avoid market confusion over the new tax law by extending the earlier 66th issue of short-term GKOs, or government bonds, at Wednesday's primary auction rather than issuing a new one, which could have faced the new tax.

However, the changes were announced only Tuesday night despite the traditional practice of a one-week notice, Sotnikov said.

The short notice apparently upset the "appetites of the traders who had already lined up with big money to do some profit-taking amid confusion over the tax issue," he said.

"The market was generally nervous Tuesday with many dealers selling the papers and planning to push yields higher at Wednesday's auction," said Vladimir Motov, a fixed-income analyst at Gambit Securities.

He said T-bill yields at Wednesday's auction were 1.2 percent to 1.5 percent above the recent market average of some 30 percent a year, "which is quite high by present standards."

Lyudmila Anisimova, an expert at the Ministry of Finance's tax department, said in an interview Wednesday that the ministry was working with the Central Bank and the State Tax Service to find a common interpretation of how the law will be applied and enforced.

The confusion about the new tax revolves around a missing word, "discount," in the text of the new law on profits, which came into effect Tuesday.

"The absence of this word in the present law does not mean that previously announced rules no longer apply," she said, adding that government securities, commonly known as T-bills, were likely to be taxed 15 percent.

Lyudmila Chepaikina, a spokeswoman for the State Tax Service, said tax experts are studying a draft letter from the Ministry of Finance to decide "how the tax will be levied." She said the tax agency and finance ministry would need to find a common approach on "who pays the tax, the buyer or the seller, and when."