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. Last Updated: 07/27/2016

Government to Unfreeze S-Accounts

The government said Thursday that it will soften its foreign exchange policies by allowing foreigners to take their funds from frozen S-accounts, thus letting some steam out of the money market.

S-accounts were set up by the government after the 1998 financial crisis to hold restructured domestic debt held by foreigners.

"There are foundations for liberalization of the foreign exchange policy," Deputy Finance Minister Bella Zlatkis said in a conference call Thursday night.

A first auction for the repatriation of funds sloshed in S-accounts is likely to take place between Nov. 20 and Nov. 29, Zlatkis said.

A total of 70 billion rubles to 80 billion rubles is parked in S-account bonds, and another 10 billion rubles will be repaid to foreign holders of state paper in interest payments next year.

The total amounts to slightly more than $2 billion, less than 10 percent of the nation’s international reserves of $25.9 billion as of Friday.

The Central Bank will release $50 million at its first auction, and it might take up to three years before foreigners are allowed to take all of their money out of Russia, Zlatkis said.

"This is a pessimistic scenario," the deputy finance minster said. "Hopefully, we will be able to finalize repatriation within two years."

The Finance Ministry will put a conversion bond program on hold in the wake of the decision to resume currency auctions.

Conversion bonds were designed to bypass other repatriation schemes that cost investors up to 15 percent of the value of their frozen funds.

The government must repay 86 billion rubles in service of its domestic debt next year and is entitled to borrow the same amount on the money market to refinance the debt.

News about the upcoming auction for S-account holders first leaked from the Central Bank this week.

The bank’s head of open market operations, Alexei Drugov, said Wednesday that rubles will be auctioned at a cutoff rate in the same manner that state bonds are usually sold, Reuters reported.

The Central Bank has sold a total of $300 million at six previous auctions.

It sold dollars at a 10 percent premium to the prevailing market rate.

Zlatkis said two auctions could take place before year-end for $150 million to $200 million.

She added that the Central Bank could not unlock all S-accounts at once, because it feared that the massive outflow would destabilize the foreign exchange market.

Foreign investors participating in the call said they did not understand why the government could not unlock S-accounts in full given it was facing an excess ruble supply and running a huge trade surplus.

The Central Bank’s reserves have grown at a pace of $100 million to $200 million a week in recent months.