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. Last Updated: 07/27/2016

Russian Investors Swapping T-Bills

A number of investors have already applied to exchange their frozen treasury bills for new securities under the government's harsh restructuring scheme, Finance Ministry officials said Tuesday.

While many foreign investors are still dissatisfied with the terms offered by the government for the repatriation of restructuring proceeds, some Russian bondholders are eager to boost their liquidity. According to Bella Zlatkis, the Finance Ministry's head of securities, all the early bidders for new securities are Russian entities.

According to analysts, most of the bidders are banks, with state-controlled Sberbank prominent among them. They badly need cash and a secondary market in government bonds.

Analysts say, however, that the Russians should soon be joined by some foreigners, for whom the restructuring deal can only get worse if they stay on the sidelines much longer.

Finance Minister Mikhail Zadornov promised late last month that up to 2 billion rubles would be paid out under the restructuring scheme by the end of 1998.

That figure would suggest that bids have been entered on behalf of investors with 60 billion in T-bills, or GKOs: In that case, the 2 billion would amount to the 3.33 percent of their investment that the government has undertaken to pay in cash immediately.

Under the scheme, investors are to get 10 percent of their T-bill holdings in cash over 6 months, 20 percent in couponless bonds that can be used to pay taxes or acquire unspecified equities, and 70 percent in four- and five-year coupon bonds.

But Zlatkis said Tuesday no cash had been paid out yet, and no bonds have been distributed. Bidders are awaiting the Finance Ministry's approval of their claims. Zlatkis declined to name the amount of the bids.

Bankers say the only good thing about the deal is that bond conversion prices were calculated on the basis of 50 percent yields, not the 200 percent ones dictated by the market before the T-bills were frozen Aug. 17. That way, the face value of new bonds amounts to 170.5 billion rubles.

Investors also stand to get about 8 billion rubles in cash.

The total face value of frozen T-bill investments is 240 billion rubles.

The new bonds have already been issued, according to the Finance Ministry. The issue was announced Dec. 15 and registered by the Justice Ministry on Dec. 28.

Once the first bonds are distributed, holders can start trading in them. According to traders, there should be a relatively active market in three-month and six-month bonds the government has issued to cover 6.66 percent of the cash part of the restructuring package. Other, longer-term securities will be far less attractive.

Even the short-term bonds, however, will have to yield more than the only state securities traded now, the Central Bank's OBR bonds.

"OBRs yield 60 percent and this the cut-off line for the new paper, which should also provide a certain risk premium," said Konstantin Demchenko, head of the ruble fixed-income desk at National Reserve Bank. In the best-case scenario, he added, yields on the short-term paper will fluctuate within the range of 70 percent to 90 percent.

"Yields on Gazprom's veksels - 130 percent now - are a benchmark for paper maturing in six months," Demchenko said. "Bonds with one-year maturity can easily reach 200 percent if foreigners do not change their attitude towards the Russian market."

Alexei Zabotkin, an economist with United Financial Group, said that 200 percent yields on the new paper are only possible if the ruble's exchange rate is predictable.

"Should the ruble be as volatile as in December, the market will be illiquid and yields will swiftly climb over 200 percent," Zabotkin said.

Regardless of the potential returns on the bonds, it may be time for foreigners to get in the market to salvage at least some of their original investment, Zabotkin suggested.

"Foreigners should hurry to enter in a formal agreement with the government," he said, pointing out that restructuring terms offered to foreign investors in September were more favorable. Under the September scheme, the government was offering dollar-denominated bonds and setting no restrictions on capital transfers abroad.

Now, foreigners are still discussing capital repatriation terms with the Russian government. The next round of talks is set for Jan. 18. But Zabotkin said if the talks drag on until May, investors may find it difficult to force the government to pay at all. Eurobond coupons will be coming due in summer and the government will also have to allocate funds to finance the spring planting.

A foreign investment banker in Moscow, who spoke on condition of anonymity, said many Western investors were close to caving in and bidding for the new securities.

"[Western] banks are inclined to accept the terms of restructuring because they are engaged here," the banker said. "My guess is that entities without interest in Russia, i.e. offshore financial institutions, may bring legal action. The problem is hearings will be conducted before Russian courts. All I can say to them is good luck."

According to the banker, GKOs are now traded at about 4 cents to the dollar among offshore entities.Still, if talks with foreign investors yield no results by mid-February, some Russian bondholders may decide the restructuring deal is not worth their while. Now, some of them are not bidding for the new bonds in the hope of getting special treatment from the Finance Ministry.

"The rules of the game might change while the ball is still in play and I don't see a reason to hurry to submit my bid," said a fixed-income trader from a large Moscow brokerage. "Within three months we can easily see different conversion terms. By signing an application form you waive from any further claims on the Russian government. I think it would be foolish to rush to apply."


New Paper

New government bonds issued Dec. 15




blns. Maturity

7.5 24.03.99

8.0 16.06.99

35.0 05.12.01

10.0 06.02.02

10.0 22.05.02

10.0 05.06.02

10.0 18.09.02

10.0 09.10.02

10.0 22.01.03

10.0 05.02.03

10.0 21.05.03

10.0 04.06.03

10.0 17.09.03

10.0 08.10.03

10.0 21.01.04

Source: Finance Ministry