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. Last Updated: 07/27/2016

GKOs May Rise From Financial Grave




The Finance Ministry said Tuesday it was pursuing plans to rapidly issue new treasury bills for the domestic market - plans that, if carried out, would see the first GKO bond issue since the spectacular August 1998 financial meltdown.


"The plan will be examined by the government Feb. 17. However, we cannot wait that long. I can't rule out that a decision confirming the volume and conditions of the debt issue for 2000 could be taken this Thursday," said Bella Zlatkis, the head of the Finance Ministry's securities department, in remarks reported Tuesday by Interfax.


In a telephone interview on Tuesday, Zlatkis confirmed those details and added that the bonds would be traded on MICEX, the Moscow Interbank Currency Exchange.


First Deputy Finance Minister Alexei Kudrin said Monday that the government could issue the bonds as early as this month, though a final decision still had to be taken. He warned, however, that the government was having a hard time convincing investors Russia could be trusted in the wake of August 1998.


"Trust in the government has still not been restored, so we can only issue new paper with short maturities and with very high yields," Kudrin said in an interview broadcast on Ekho Moskvy radio.


"Once the government used to rake in tens of billions of rubles per month from debt issues, but that was the good old days."


Zlatkis provided few details Tuesday about the terms of the planned issue, but said the bonds were aimed at the domestic market, not at foreign investors.


"The bonds will not be hedged against the dollar but yields will be tied to inflation. The volume of the issue will have to be small, otherwise we will create a time bomb for the government out of bonds with a floating coupon rate," she said.


She said the bonds would probably still be called GKOs - gosudarstveniye kratkosrochniye obligatsia, or short-term state obligations, even though that might seem a less-than-sexy label in the post-GKO default world.


Whatever the bonds are called, the market will probably attract a shadow of the volumes traded in Russia's domestic debt market heyday.


"The maximum volume of paper issued is probably going to be around $3.5 billion [or about 112 billion rubles], based on evaluations of how much Russia is allowed to issue in budget law this year and how much the market can accept and the government can finance," said Denis Rodionov, a fixed-income analyst at Brunswick Warburg.


"It's going to be a very different market compared to 1996, when the government was issuing bonds at any price in an attempt to gather funds to finance the presidential elections," Rodionov said. "The government still cannot afford to finance large volumes of bonds that at today's market rate would probably have a semiannual yield of around 40 percent."


Some analysts questioned whether the Finance Ministry was now going full tilt for a new bond issue after months of delays in a bid to scoop up extra funding for the presidential election machine of acting President Vladimir Putin.


"It would seem strange to issue now, when yields are still very unstable," Rodionov said. "It would seem better to wait until after the elections and confidence is greater. The government does not seem to be in any immediate need of additional funding, as it's continuing to collect revenue over plan."


The Finance Ministry has been posting a slew of rosy economic data in recent days, reporting over-collection of federal revenues by 16 percent in January's plan, for example, as tax and customs payments continue to pile in.


But economists say that the government has kept quiet about how expenditures have also risen, particularly for the war in Chechnya.


The International Monetary Fund mission that left Moscow Saturday has also recommended Russia seek internal sources of funds to top up its budget deficit instead of resorting to borrowing from the Central Bank and putting a strain on its hard currency reserves.


That said, however, all discussions of bond issues in post-August 1998 Russia remain confusing. The Finance Ministry, for example, has for many months now been selling GKOs, but as Zlatkis told Interfax on Tuesday, these have all been "old series" bonds being "re-issued" - in other words, that they had been provided for in the 1999 budget, but not bought.


The Finance Ministry also sought to attract trapped rubles funds from the proceeds of GKO restructuring when it issued 10 billion rubles worth of very low-yielding short-term treasury bills at the end of last year. The government has said it plans further such bond issues this year.


In January alone, the government re-issued $80 million worth of "old" state treasury bills, Rodionov said.


"Now the government needs to strengthen this market by issuing new bonds. Current market optimism make an issue more realistic than six months ago, when nobody would have taken up the government's offer," he said.


Russia's budget for 2000 foresees the government issuing a maximum of just 39.9 billion rubles in domestic bonds to fund its spending plans.