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. Last Updated: 07/27/2016

T-Bill Deal Disfavors Repatriation

Credit Suisse First Boston has released a valuation of Russia's treasury bill restructuring deal showing that investors keeping their GKO proceeds in Russia instead of repatriating them will earn more money on the deal.

Under current restructuring terms offered by the government, a so-called offshore investor who immediately liquidates his GKO proceeds will recoup about 4.6 percent of the dollar value of his GKO holdings on Aug. 14. Those keeping their cash rubles and ruble bonds in Russia will recover about 12.5 percent of their Aug. 14 holdings.

The restructuring deal clearly favors those investors who are willing to keep their money in Russia, including large investment banks with local operations that can invest their ruble proceeds in securities, real estate or other investments.

CS First Boston said in its valuation that foreign banks expect the Russian government to publish the final term sheet later this week. Foreign banks, however, may not accept the terms immediately. They are still sparring over how much cash to demand up front and how generally to meet all investors' demands.

Banking sources say the group of 18 banks huddling in London is divided between large, international investment banks attempting to protect their long-term interests in Russia and smaller investors who simply want to get as much cash as possible from the settlement.

Outstanding treasury bills were worth about $40 billion before the Aug. 17 ruble devaluation, and foreigners held 25 percent to 30 percent of the bonds.

Six large banks negotiating with the Russian Federation last week agreed in principle to accept 10 percent of the sum owed them in cash rubles, 20 percent in zero-coupon ruble bonds that can be used to pay tax arrears or to buy stakes in Russian banks, and 70 percent in four to five-year ruble bonds with a variable coupon starting in the first year at about 30 percent.

Russia told foreigners last week they would be allowed to repatriate a total of $750 million of the cash rubles in auctions to be held over 13 mont hs. But smaller investors may still be pushing for a bigger chunk of cash and better repatriation terms, bankers said.

The big banks on the negotiating committee - Credit Suisse First Boston, Merrill Lynch, Deutsche Bank, Lehman Bros., Credit Lyonnais and Chase Manhattan Bank - are more willing to accept cash rubles and ruble bonds, which they can invest in their Russian operations, analysts say.

They may also be willing to accept less favorable GKO settlement terms if it means the government helps them collect on the syndicated loans Russian banks owe them, said Denis Smyslov of Global Fund Management, which has invested $100 million in treasury bills of CIS countries including Russia.

Smyslov estimated that of the money invested by big Western banks in GKOs, roughly 15 percent represents the bank's proprietary investment, while the rest belongs to clients. The maximum proprietary exposure big banks could have to GKOs, Smyslov reasoned, is about $2 billion, while their syndicated loan exposure could be much greater.

Total foreign exposure to Russian banks on Sept. 1 stood at about $11.69 billion, according to Central Bank data reported in the Bulletin of Banking Statistics. The figure includes eurobonds, syndicated and other loans, and any money of foreign banks located in correspondent accounts with Russian banks.

"The leading banks of the group were much less interested in the restructuring of GKOs as opposed to solving their problems with exposure to Russian banks in terms of syndicated loans," Smyslov said.

"Eventually the ability of some banks to repay foreign creditors depends on the position of the Central Bank and the government. Therefore, I think there is some understanding that foreign banks ease their position on GKOs, but the government in turn helps them to [retrieve] their syndicated loans."

Spokesmen for Deutsche Bank, CSFB and Merrill Lynch would not reveal the size of their proprietary stakes in GKOs or comment on negotiations.

"We would never reveal our proprietary position in Russia or anywhere else," said Rich Silverman, head of media relations for Merrill Lynch in Europe.

Philip Poole, an economist with ING Barings in London, agreed that the predicament represented a conflict of interest, but said he wouldn't give it "too much weight."

The more basic argument dividing foreign investors in GKOs, Poole said, is over investors' ability to use cash rubles or ruble bonds. Depending on the final terms of the restructuring deal, bigger banks with operations in Russia can invest the rubles in real estate or equity stakes in Russian companies.

With local presence they will more easily be able to sell or trade the ruble bonds that represent 90 percent of the proposed settlement.

Others with no presence in Russia have no use for cash rubles or ruble bonds, Poole said.

This group "wants to get paid out in dollars and exit the market completely," Poole said.