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. Last Updated: 07/27/2016

T-Bill Yields Cut to Prevent Exodus

In an attempt to prevent a mass exodus of foreign investors from government securities, Russia's Central Bank has nearly halved the guaranteed dollar yield on treasury bill forward deals that expire by the end of the year.


"We just increased the exchange rate which we quote to authorized banks for their deals related to servicing foreign investment," said Konstantin Korishenko, head of the Central Bank's open market operations department. "This will prevent foreign investors from trying to withdraw their money by the end of the year."


Forward contracts set a fixed ruble rate that predetermines yields on government T-bills and savings bonds -- known as GKOs and OFZs, respectively -- sold by foreigners.


Under Central Bank rules, foreigners investing in GKOs and OFZs are required to sign forward contracts of at least one month in duration to convert ruble-denominated bills into dollars to repatriate profits.


As of Nov. 3, the bank reduced the guaranteed dollar yield from 9 percent to 5 percent for forward contracts that expire before the end of 1997. But foreign investors wanting to sell now and retain the 9 percent rate can sign forward contracts that expire in 1998.


The requirement for foreign investors to repatriate profits using forward contracts will be dropped on Jan. 1, 1998.


Although the 5 percent yield will only apply to 25 percent of forward contracts, some Russian banks use the rate as a guideline for the overall forward contract rate. Hence, the rates could vary widely.


Korishenko said the decision was designed to discourage foreigners from selling government securities over the next two months because of recent upheavals on world markets and the traditional tendency to take profits toward the end of the year.


Foreign investors sold heavily during last week's market turmoil, pushing average GKO yields up to 28 percent from roughly 17 percent before the crisis. Average yields have since come down to around 19 percent.


Korishenko estimated the outflow from the GKO market by year's end could rise to as much as $4 billion, but said the Central Bank's reserves were large enough to prevent this from pressuring the ruble to depreciate.


Market analysts said the new rate could stem the outflow, but the overall effect would be minimal. "It will not prevent foreigners from leaving, but it may have some neutralizing effect which will diminish the outflow," said Andrei Yashchenko, a fixed income analyst at United City Bank.