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. Last Updated: 07/27/2016

Foreign Players See Benefit in T-Bill Tax

A new law slapping a tax on profits from Russian treasury bills to balance the federal budget could actually benefit foreign players in the market and might not raise as much revenue as lawmakers hope, traders and analysts said Tuesday.


The 1997 budget approved Sunday by the State Duma, or lower house of parliament, envisions revenues of 20 trillion rubles (about $4 billion), from a law approved in early December imposing a 15 percent tax on profits from T-bills issued after Jan. 1.


But because of treaties that prevent dual taxation, analysts say, most foreign investors in Russian T-bills, known as GKOs, are liable only for capital gains taxes in their home countries.


U.S. and British investors, for example, will not be subject to the 15 percent Russian tax and could therefore reap the benefits of rising yields as the market adjusts to compensate for the new tax.


"This is great news for foreigners," said Robert Devane, head of fixed-income investments at Troika Dialog. "Whatever tax they were paying before is what they will pay going forward, and meanwhile yields on new issues will rise."


"Current outstanding issues remain tax free, so it implies a two-tier yield curve," said Nima Tayebi, chief fixed-income researcher at investment bank Renaissance Capital.


A specialist at another investment house said yields on new bills placed at auctions immediately after Jan. 1 probably would jump a full 15 percent to cancel out the tax. But he expected the market would gradually shoulder some of the burden.


"If yields jump to 45 percent, they will drop back to 40 soon after. Investors will tolerate a 5 percent hit," he said.


Yury Zhuravel, senior fixed income specialist at MOST Bank, said about 65 percent of the GKO market is held by state-owned Sberbank and the Central Bank, with the rest split about evenly between foreign and domestic capital.


This division raises serious doubts about the viability of the new T-bill tax. If Russian commercial banks are the only real payers of the new tax, its resulting effect may be to drive them off the market rather than to raise significant revenue for the federal budget.


Moreover, higher yields effectively drive up the cost of government borrowing. Annual rates on T-bills recently have dipped to as low as 33 percent after topping 200 percent last spring. "This is going to cost the Finance Ministry a fortune in interest. The best that can happen is break-even with a lot of heartache," said one Western fund manager, who asked not to be identified.


But the new scheme at least looks good on paper because the Russian government does not include the interest which is paid on GKOs in the budget deficit.


"It is certainly an improvement in terms of the government's own accounting standards because interest on GKOs doesn't go into the deficit, but tax is always revenue," said Tayebi of Renaissance.