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. Last Updated: 07/27/2016

Central Bank Plans Bond Issue




As the ruble dived below the psychologically important 26 to the dollar mark this week, the Central Bank on Friday approved a bond placement aimed at soaking up excess liquidity in the banking system.


The bank will next month offer 6 billion rubles' worth of Bonds of the Bank of Russia, or OBRs, in three installments of 2 billion rubles ($76.66 million) each, Prime-Tass quoted unnamed sources at the Central Bank as saying Friday.


Earlier, the Central Bank had said that the total volume of the bonds would amount to 10 billion rubles.


The bond issue is planned despite a Finance Ministry decision to tap the domestic market with its own borrowing program of 45 billion rubles next year.


However, the sum these sales could raise is still far less than the 63 billion rubles needed to service the nation's outstanding ruble-denominated debt next year.


Domestic debt currently has a face value of 243 billion rubles. That amount is almost equal to what was owed at the end of 1996, when Russia's gross domestic product was about twice as small in ruble terms.


A Central Bank official said the bank hopes to avoid unnecessary competition with the Finance Ministry by issuing the OBRs with a different maturity - three to seven months.


"The Central Bank's bonds will have shorter maturities," said Lyudmila Khrapchenko, senior economist with the Central Bank.


The government's paper will have a longer maturity and yield some 20 percent to 30 percent, the Finance Ministry said earlier this week.


The Central Bank could not say Friday what the yields on its new issues would be.


The only kink in the bond plans is that the ministry may have some trouble finding buyers, analysts said.


"Given existing expectations, the prospects of placing the bonds at such yields are bleak," said Denis Rodionov, a fixed-income analyst with Brunswick Warburg.


However, the yields on various types of instruments may differ.


"We believe that the OBR issue will not lead to a fall in prices on the OFZ [Finance Ministry bond] market, as these instruments do not compete with one another," said Andrei Ivanov, banking analyst with Troika Dialog.


Yields on OFZs hovered close to 90 percent Friday in secondary trading.


Khrapchenko from the Central Bank said that while OBRs will be aimed to regulate liquidity in the banking sector, the Finance Ministry paper is meant to finance the budget deficit.


However, with the Central Bank's history of generously issuing loans to the government under the leadership of previous bank chairman Sergei Dubinin and now Viktor Gerashchenko, analysts remain weary about the counterparty risk in both cases.


"It remains to be seen how the Central Bank will manage its debt pyramid," Rodionov said.


He added that the Central Bank would not be able to compensate an increase in demand for dollars on the foreign exchange market with bond placements if the International Monetary Fund does not resume lending to Russia in the short term.


Russian authorities this week told the IMF that they had fulfilled an economic program agreed upon in July this year, but they refused to comply with all of the additional requirements that were brought forward by the Group of Seven leading industrial nations in September.


Fearing it could fall short of resources to finance service of Russia's sovereign debts, the Central Bank started accumulating international reserves and withdrew from supporting the currency in the open market at the end of October.


As a result, its foreign-exchange reserves increased from $10.9 billion to $11.7 billion in October while the ruble dropped.


The cash balances of commercial banks in the Central Bank surged to 59 billion rubles from 45 billion rubles at the start of the month.


Increase in money supply again shifted the balance on the foreign-exchange market and the ruble took a dive of 1.1 percent to end the week at 26.05 to the dollar.


Decline in the exchange rate occurred despite the huge foreign-trade surplus that Russia is continuing to run thanks to high oil prices. In September, the trade surplus amounted to $2.9 billion and the government forecasts a surplus of $29.6 billion by year end.


Traders tend to believe that the current exchange rate is very close to the point of equilibrium in the market. At worst, they say, the ruble might take a dive to 26.5 rubles per dollar.