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. Last Updated: 07/27/2016

Yaroslavl Leads The Pack on Local Financing

The governors of a number of Russian oblasts met with President Boris Yeltsin last week and presented him with a fairly strange request. Several regional administrations are planning to issue municipal bonds and they want Yeltsin to grant these bonds the status of government securities.


The evolution of this request has been fairly strange. Just three years ago, virtually every oblast in Russia was trying to declare itself a republic and to get the federal government to recognize its local constitutio. Later, officials were turning to Moscow for additional subsidies to support local industry or to help resolve social problems.


Now the governors are focusing on finding money themselves to finance their programs, and the most forward-thinking and competent among them are in fierce competition for investment from various funds and other lucrative sources. The first municipal bonds appeared in Nizhny Novgorod, followed soon thereafter by Perm, Khanty-Mansiisk, Yekaterinburg and Yaroslavl.


In my opinion, the municipal-bond project in Yaroslavl is the most interesting so far. The main reasons for this are that the entire mechanism for attracting money is based on the process of cash privatization and all the money gathered will be invested in projects connected to the oblast's social program. Last June, the local administration announced a competition for the best municipal-bond project, with the winner being granted the right to become the general dealer of local bonds.


Two companies shared top honors: Yarinterkoservis and Renova-Invest, which is a subsidiary of the Russian-American joint venture Renova which holds major industrial investments.


With Renova's help, the Yaroslavl competition drew input from Cambridge University, Columbia University and the Economics Institute of the Russian Academy of Sciences. The winners were able to convince local administrators that the goal of the bonds should be to finance the budget deficit rather than to provide subsidies for local industrial giants.


In order to make the bonds more attractive to investors, the organizers got the State Property Committee to give permission to use local bonds as a deposit during cash privatization or as means of payment when purchasing enterprise shares from the local administration.


The only measure that was not approved was the request to grant local bonds the status of government securities. This would have enabled pension funds, budgetary funds and insurance companies to buy the bonds, since the charters of such organizations only allow them to buy state securities.


However, granting this status would create several problems for the federal authorities, not the least of which is that major investors may turn their attention from federal securities to municipal bonds. That is why Yaroslavl governor Anatoly Lisitsyn and his colleagues turned to Yeltsin.


The first monies collected in Yaroslavl have already been put to work -- helping to finance the construction of a hospital. That project had long been included in the local budget but had remained frozen because of lack of financing. The second issue of bonds goes on sale this week. In all, local officials hope to pull in 30 billion rubles.


So, it would seem, Russia's local authorities are learning to deal realistically with debt, like many of their counterparts in the West. And this is an important stage in the transformation of the psychology of local leaders.