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. Last Updated: 07/27/2016

T-Bills for Foreigners Promise Lower Yield

Foreign investors will be allowed greater trade in the Russian government securities market by early February, although yields will be capped and a number of restrictions will remain in place, according to a statement issued Monday by the Central Bank.

Dealers said the new rules would effectively prevent foreigners from taking full advantage of the lucrative securities trade -- with current annual yields of some 100 percent -- and that they would continue to try to bypass restrictions by going through Russian intermediaries.

Until now, restrictions on repatriating profits and a 10 percent ceiling on participation in a T-bill auction have limited foreigners' presence on the market. The bank did not say whether it would lift the 10 percent cap, but it said it would introduce a currency-swap scheme to allow foreign investors to repatriate profits through special ruble accounts at designated banks.

"The [Central] Bank of Russia will limit the guaranteed yield to foreign investors from investing in T-bills and government bonds by fixing the exchange rates for swap operations and charging commission for assuming the currency risk," the statement said, reporting the decision of a Friday meeting. Although the bank did not specify what yields would amount to, it said they "will be orientated on the yield received by foreign investors investing in similar instruments on foreign financial markets."

That could make real yields of T-bills, also known by the Russian acronym GKO, in the neighborhood of 10 to 12 percent a year for short-term bonds, Reuters reported. That is a relatively small premium over the 6 to 8 percent yields in many Western countries for bonds that are considered to have drastically lower risk.

Vitaly Sotnikov, a trader with Rinako-Plus investment company, said the Central Bank's plan was less far-reaching than expected. "Non-residents are likely to use the old ways of trading in GKOs -- buying through Russian dealers and getting 50 to 60 percent yield -- or setting up some bypass schemes to buy into the market," he said.

Dirk Damrau, managing director of research with Renaissance Capital, a Moscow-based investment bank, suggested the decision to attract foreigners to the Russian domestic securities market was coming from somewhere else than the Central Bank. "It sounds like it's a proposal from a couple of Russian banks who already have offices abroad rather than real initiative by the Central Bank or Finance Ministry," he added.

Sources at the Central Bank said foreign investors will be able to buy T-bills from a number of the former Soviet foreign trade banks, such as the Moscow Narodny Bank in London and Eurobank (Banque Commerciale pour l'Europe du Nord) in Paris.

Under the scheme, foreign investors will able to repatriate the profits from the trade in the T-bills market through special ruble accounts set up by the Central Bank. The accounts will allow free conversion of the ruble profits into foreign currency at the rate agreed in the swap operations after a commission levied by the bank.

Damrau said a more open regime could lure more foreign money.

"If there is a move to seriously allow foreigners on a non-discriminatory basis, I have no doubt the foreigners would be very interested," he said.

Andrei Kozlov, deputy bank chairman in charge of securities, said foreigners would be able to buy securities only at state auctions and not on the secondary market, Reuters reported. The agency quoted Sergei Aleksashenko, another deputy chairman, as saying many restrictions would be gradually lifted.

Average annualized yields on the popular three-month GKOs have been falling, but on average slower than inflation, and the last primary issue yielded 141 percent on Dec. 27. Eurobond yields are in the 6 to 8 percent range.

Sotnikov said the prices for the popular three-month GKO issue went up during Monday trade with yields going down. "It could be due to the Central Bank's decision [to open domestic securities market to non-residents] or it could be the sign of Central Bank's policy to bring the yield down," he added.

Central Bank officials have stressed that they want to bring down the yield of the GKOs, which experts say is one of the highest in the world.