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. Last Updated: 07/27/2016

Central Bank Holds First Securities Auction

The Central Bank held its first short-term securities auction Tuesday, finding a market for 885 million rubles ($948, 000) worth of government bonds.


The commercial banks participating in the sale bid down the face value of the three-month securities to 83 points, meaning a 100, 000-ruble bond which will mature in three months was purchased for 83, 000 rubles.


The discount represents an effective interest rate of about 103 percent annually. This is considerably less than the 150 to 170 percent interest rate for interbank loans, indicating that banks have greater confidence in the government's bonds than they do in other commercial banks.


The Central Bank has been authorized by the Supreme Soviet to issue almost 650 billion rubles ($696 million) worth of short-term securities this year in an effort to fund the budget deficit. The deficit is expected to exceed 7 trillion rubles ($8 billion) by the end of June, the target set for all of 1993.


The deficit is now funded through printing rubles and issuing credits, which fuel inflation. The Central Bank hopes the securities will soak up rubles from the economy and help reduce inflation, which was about 2, 600 percent last year and is currently running at about 20 percent a month.


Trading on a secondary market will begin next Tuesday and new bond issues are scheduled to take place monthly. Twenty-four banks plus the Central Bank are authorized to participate in bond trading.


Tim Frost, with the Russian-American Bankers Forum, which played a key role in setting up the trading system, said the bank's first bond issue had been a success. He said the rate set "provided the first benchmark for interest rates generally and for capital markets".


Russian interest rates vary widely throughout the country and it is hoped the bond market can set a floor above which other rates can be set uniformly.


Frost said that banks are attracted to the bonds because they offer instant liquidity. The bonds can be traded on the secondary market and can also be cashed in through a separate settlement system, partially accounting for their disparity between the inflation rate and the interest rate set at the auction.


"You know you can get in and out of the instrument", Frost said. "Given the environment in Russia where payments can take weeks or months, it provides a ready way through the settlement system".