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. Last Updated: 07/27/2016

Duma Uncertainty Unnerves Markets

Russia's financial markets ended three days of rally Thursday, closing down 5 percent, after the State Duma rejected a key section of the anti-crisis plan.

Thursday's dip was also partly due to a correction from the recent rallies, and disappointment over the details of a government debt restructuring program, traders said.

Duma's rejection of the sales tax that was expected to raise some $6.5 billion for Russia's hard-pressed regions, unnerved investors who dumped key stocks. Prime Minister Sergei Kiriyenko rushed to the State Duma, the lower house of the parliament, in an apparent bid to defend his troubled package.

The Moscow Times Index of 50 leading shares ended down 5.6 percent to close at 129.29 on total volume of $56.92 million, easing much of the gains that followed the announcement of a bailout package earlier in the week.

"If the [austerity] package had got through the Duma unscathed, it would obviously have been good for sentiment," said Gary Kinsey, a trader with Brunswick Warburg securities. "But in practice it can still be passed by presidential decree, so it doesn't really matter."

He added, however, that the rejection of the sales tax, which a top Kremlin aide characterized as "the bill that was to radically change the economic situation in the country," had caused equities to shed 2 percent of their value almost immediately.

Anatoly Polun, a senior trader at Trinfiko investment company, said operators were also starting to take profits. He said there were bullish attempts Thursday, but those who wanted to sell shares for profits far outnumbered buyers.

Polun said if the situation on the market stabilizes, primarily in the government securities sector, the probability of nonresidents' return into the Russian market will increase, Polun said.

Among the top gainers Thursday were Sakhalinmorneftegas, up 29 percent, Krasny Oktyabr 18 percent and Yukos 10 percent.

Gazprom, Mosenergo, Unified Energy System and LUKoil were among the losers, closing down 5 percent, 7 percent, 8 percent and 9 percent, respectively.

Traders said markets were also knocked back by jockeying ahead of the government's planned move to restructure short-term debt into longer-term dollar loans, a move made possible by the IMF bailout and one that has breathed fresh life into the bond market this week.

Deputy Prime Minister Viktor Khristenko said the new eurobond issue to buy out the expensive short-term debt would be worth more than $2 billion. He added that the debt restructuring had eased the pressure on the bond market and ruble this week.

But traders said that positioning ahead of the swap of the treasury bills, known by their Russian acronym as GKOs, for dollar bonds had led to almost 11 billion rubles worth ($1.78 billion worth) of bonds being sold Thursday, which drove yields higher again.

"Trading was dominated not by the Duma news but by positioning ahead of the GKO swap for dollar bonds," said a fixed income market analyst with the MFK Renaissance financial group, Eric Jayaweera.

"A lot of local banks do not want to be stuck with eurobonds so they are selling up," he added.

The result was a rise in yields across the board, short term treasury bills yielding 35 percent to 40 percent annually, while longer-term bonds yielded 60 percent to 63 percent.