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. Last Updated: 07/27/2016

Poor Bond Sales Fuel Fears of Devaluation




Russia edged closer to a ruble devaluation Wednesday as investors balked at buying new government bonds and hopes faded for a quick bailout from the International Monetary Fund.


Stock prices fell for the third straight day and a Finance Ministry bond auction flopped amid reports that the IMF is likely to give Russia less money than Anatoly Chubais, Russia's top negotiator, has been seeking, and that a final decision on the multibillion-dollar bailout will come no sooner than late July.


"The movement of the market will depend exclusively on news of the success of Chubais' mission," said Mikhail Vasilyev, deputy head of the securities department at Alba Alliance bank.


The Moscow Times Index of 50 leading shares fell 2.9 percent Wednesday on light trading to close at 96.73, while the ruble held steady on heavy Central Bank intervention at 6.24 per dollar on the Moscow Interbank Currency Exchange.


Chubais, who has said Russia will need up to $15 billion from the IMF, announced Tuesday thata deal was close. It could come by Friday, he said.


But The New York Times, quoting unidentified Russian officials, reported Wednesday that the IMF might only put up $5.6 billion in emergency aid.


Also Wednesday, Deputy Finance Minister Oleg Vyugin further discounted Chubais' upbeat assessment, saying the IMF's board of directors would decide on a bailout only in late July or early August, after the Russian parliament finishes considering government measures designed to ease the crisis and restructure the country's finances.


IMF and World Bank officials have repeatedly said Russia will have to institute difficult reforms before receiving any more financial aid.


The opposition-dominated State Duma, or lower house of parliament, has passed laws to implement some of the anti-crisis measures, and is scheduled to reconvene July 15 and 16. Vyugin was quoted by Reuters as saying that the Federation Council, the upper house, would consider the measures "around the 20th," Alternately, President Boris Yeltsin could resort to implementing the measures by decree.


In the meantime, Russia will be hard pressed for funds to prop up its currency. This week, the Central Bank has spent an estimated $500 million every day to support the currency as Russian and foreign investors flee into dollars. The bank's gross reserves now stand at less than $14 billion, of which an estimated $9 billion is liquid.According to a report from the MFK Renaissance investment bank, $14 billion "has long been suspected as the [Central Bank's] danger limit, below which devaluation would have to be considered as a serious option."


If the Russian government can reach a preliminary IMF agreement soon, it could solicit bridge loans to last until a final bailout package is approved. "I see that as the only way out now," said Andrei Yashchenko, head of research at the Montes Auri investment fund. Chubais was scheduled to resume loan negotiations with the IMF on Thursday.


The government failed again Wednesday to borrow enough new money to pay off maturing debt. Spooked by bond yields that reached 120 percent Tuesday, the Finance Ministry canceled auctions of long-term bonds, opting instead to sell two short-term tranches of 35- and 42-day paper, respectively.


But even at yields of more than 113 percent -- well above the Central Bank's refinancing rate of 80 percent -- the government raised only 1.5 billion rubles ($242 million) to pay off 6.2 billion rubles in maturing issues.


The Finance Ministry used a reserve fund, put at $1.5 billion by Vyugin on Wednesday, to pay off the remaining 4.7 billion rubles, leaving a very small security net ahead of next week's 8.7 billion rubles in maturing issues.


"The coming two auctions -- next Wednesday and the week after -- will be critical," Yashchenko said. "Russia does not have enough money to finance the redemptions, and at the same time it has no other funding other than the domestic market."