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. Last Updated: 07/27/2016

Markets Cautious Ahead of Vote




Russia's financial markets rose steadily Wednesday but took a break from two days of furious gains as investors anxiously awaited the State Duma's vote on emergency legislation, designed to bring Russia's finances under control.


The Moscow Times Index of 50 leading shares ended up a respectable 1.12 percent to 136.96 on healthy trading volume of $75.94 million, with most trade centered in blue-chip stocks.


The index has grown 30 percent since Friday's close as foreign investors race back to Russia, encouraged by Monday's promise of $17.1 billion in emergency loans from the International Monetary Fund, the World Bank, and the government of Japan.


The loan package allows Russia to protect the ruble from devaluation and to meet its debt obligations, which has restored investor faith in the nation's fiscal health. But the IMF has hinted it won't issue the money unless the emergency economic legislation is signed into law.


"It was pretty difficult to expect growth today after yesterday's gains," said Kirill Maltsev, head of sales and trading at Rye Man & Gor Securities. "Much will depend on the Duma and on real steps taken by the government and on the GKO market."


Russia's plan to restructure its short-term treasury bill debt helped push yields down again Wednesday after they dropped in half Tuesday. Yields on paper maturing within three months fell to an average of 34.44 percent while yields on one-year paper settled at 57 percent, down from highs of up to 150 percent just days ago.


Russia's external debt dipped slightly, however, as investors cooled off in anticipation of the Duma's vote. Russia's dollar-denominated principal notes fell in Wednesday trading from about 51.5 to 50.5, while a Eurobond due in 2007 sneaked down less than 1 point to 77.78 bid and 79 offer.


Investors in external and domestic debt are still attempting to calculate the pros and cons of the government's debt restructuring scheme, analysts said.


In an attempt to stretch unbearable levels of short-term debt over a longer period of time, Russia is hoping to convert at least $2 billion in domestic treasury bill debt into longer-term Eurobonds. Investors wishing to participate may swap their bills through Friday, with the size and terms of the conversion to be announced Monday.


"The key thing will be Monday, when we know how many Eurobonds will be placed at what spread," said Denis Rodionov, fixed income analyst at Brunswick Warburg. "That will show how much short-term ruble debt is left in the market."


Goldman Sachs, lead manager on the debt conversion scheme, revealed a new details of the plan Wednesday, saying the seven-year and 20-year Eurobonds to be issued will carry a minimum interest rate of 8.375 percent over U.S. Treasuries.


The bank also revealed that offers to convert bills maturing before Jan. 1, 1999, will be accepted first, followed by offers to convert bills maturing by July 1, 1999.


Central Bank Chairman Sergei Dubinin said Tuesday that the debt restructuring scheme has helped spare Russian banks, many of which, according to analysts, would have been crushed had Russia defaulted on some of its treasury bill debt or made conversion into long-term debt compulsory.


But Russia's financial turmoil will still leave a mark on Russian banks, Dubinin said. Liquidity among small to mid-sized banks largely dried up in recent weeks, forcing many banks to sell their government paper at a loss to raise cash.


Yields on treasury bills have dropped to more manageable levels in recent days but banks facing cash shortages may still be forced to sell at a loss treasury bills they bought at lower yields several months ago.


"I fear many banks will have to opt for liquidity and fix losses, because the overall picture in the banking system will not be very pretty," Reuters quoted Dubinin as saying. "However, there is now no liquidity situation that would put banks on the brink of collapse."