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. Last Updated: 07/27/2016

Central Bank's Loans To Government Swell

The Finance Ministry is set to issue OFZs worth 361 billion rubles ($11.3 billion) and GKOs worth 12 billion rubles ($375 million) next year to securitize the government's debts to the Central Bank.

The previous upper limit of 345.5 billion rubles for OFZs was set in early December.

"The paper will be issued only to reorganize the government's relationship with the Central Bank," said Bella Zlatkis, head of the securities department with the Finance Ministry.

Zlatkis said the Central Bank had large amounts of loans issued in 1992 through 1996 on its balance sheets.

Prime Minister Vladimir Putin signed on Wednesday an order to allow the new issue.

At the beginning of November the Central Bank reported it had issued loans of 174 billion rubles ($6.7 billion) to the government so it can service its foreign debts together with government securities worth 229.5 billion rubles.

Part of these debts will be exchanged for newly issued securities, government officials said.

Zlatkis said the Central Bank has not yet swapped all of its frozen domestic debt into new paper, which required issuance of new OFZs and GKOs.

"This is a pure accounting trick, a matter of how the Central Bank's debts will be reported," said Andrei Abramov, macroeconomic analyst with NIKoil brokerage.

However, carrying such large debts on its books also raises questions about the status of the Central Bank.

"In practice it turns out to be much less independent than it claims," said Sergei Prudnik, a macroeconomic adviser with Troika Dialog brokerage.

The government's debts to the Central Bank were growing even when placements did not take place in the open market.

The value of government securities on the books of the Central Bank surged to 229.5 billion rubles from 210.9 billion rubles in September-October this year.

This represents a net increase of 18.4 billion rubles.

"Part of this amount went to securitize the debts and the other part to finance the budget deficit," Abramov said.

He said the Central Bank could be printing money to buy the securities from the Finance Ministry, which immediately purchased foreign currency to make foreign debt payments. If these rubles were returned to the Central Bank they would not fuel inflation if they stayed out of circulation, Abramov said.

Prospects of placing ruble-denominated bonds on the free market remain low.

The Central Bank failed to place bonds worth 6 billion rubles ($223 million) in three tranches on auctions held this week after it offered to pay investors less than market interest rates.

Barely discouraged, the Finance Ministry now plans to sell zero-coupon bonds worth 9.5 billion rubles ($350 million) to holders of S accounts, whose money was locked after GKO holdings were unfrozen.

The bonds will be placed in four tranches and will have maturities from May to November next year.

In other news, three tranches of Russia's MinFins surged upwards Wednesday on a large buy order by what traders said was a Russian.

MinFin 5 rose a quarter of a percentage point to 20.25, sixth tranche edged up 1.625 points to 29.5 cents to a dollar and seventh tranche rose 3 points to 26.5.

"There was a large buyer, a very aggressive buyer. ? Price did not seem to be a worry," Reuters reported one trader as saying. Activity dried up by mid-morning.