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. Last Updated: 07/27/2016

Municipal Bonds: St. Pete's Bill of Choice

ST. PETERSBURG -- While state treasury bills may be the financial instrument of choice with Moscow's bankers, investors in Russia's second city prefer the higher yields and easier access offered by their home-grown municipal bonds.

"This [the municipal bond] is the base of the financial market here," said Igor Kostikov, general director of Alexander V. Kostikov and Partners, the official broker for St. Petersburg's short-term municipal bonds. "The market can't develop if the region lacks a reliable and liquid security that is accessible to professional market participants."

The bonds have helped St. Petersburg pull in more than 384 billion rubles ($87 million) through nine issues since auctions began in March, money that has been channeled into repair and public works maintenance.

"Municipal bonds offer investors a higher yield than treasury bills, so they're more attractive," says Tatyana Sorokina, commercial director of the Invoplast investment company.

For example, a May 24 auction of three-month municipal bonds offered a yield of 124 percent, comparing favorably with the 81 percent rate established at a three-month T-bill auction in Moscow on June 7.

The attraction of municipal bonds is also helped by the fact they are simply more accessible than T-bills for St. Petersburg traders. Currently, no St. Petersburg exchange trades T-bills, so all deals must go via Moscow.

But for St. Petersburg, this is not necessarily a bad thing since strong activity in municipal securities has given a major shot in the arm to the three local exchanges that handle auctions and twice-weekly secondary trading.

Dealers are frustrated, however, by their current inability to trade among the exchanges -- they are limited to working with the 10 to 15 dealers who share the same trading floor. By November, officials hope to introduce a single information system that will allow trading as well as simple information exchange.

Other developments are also under way. Trading is set to increase to four times per week in September, and officials hope to introduce 24-hour trading at the beginning of 1996. In addition, Kostikov said there are plans to include forward contracts and futures in the program. The next issue of 3-month bonds is scheduled for Aug. 23.

St. Petersburg's municipal bonds could get a run for their money, however, if plans to start T-bill trading at the St. Petersburg Currency Exchange go ahead. "We're only now beginning to think about how we are going to compete," said Janneta Krolly, head of the city's securities operations.

Municipal bonds have a long history in St. Petersburg. The city built two of its major bridges -- the Troitsky and the Liteiny -- and its original tramway system using funds raised from the sale of bonds before the Revolution.