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. Last Updated: 07/27/2016

New GKOs Ready to Hit Trading Floor

Wednesday's relaunch of Russia's now-notorious market for treasury bills, or GKOs, is likely to be a quiet, calm return to the internal debt market, local traders said Tuesday.

The deputy head of the Finance Ministry's securities department, Valentina Pryannikova, said Tuesday that Wednesday's auction to sell 2.5 billion rubles ($86.51 million) worth of brand new short-term treasury bills for the domestic market was to go ahead as planned on the trading floor at the Moscow Interbank Currency Exchange.

Traders said Tuesday they thought demand for the bonds would be fairly high.

"The market has been waiting a long time for the short-term debt market to start up again. It's now almost two years since the financial meltdown - and now there's a real need for a short-term debt instrument to soak up some of the excess rubles sitting on accounts," said Pavel Busygin, spokesman for Probiznesbank.

"Debt market indicators today point to a growing interest in the issue," said Dmitry Ivanov, a debt trader at Alfa Bank, one of the major players on the Russian debt market.

Ivanov said trading Tuesday had seen increased sales of longer term OFZ paper - a typical sign investors were preparing to swap funds to the shorter term GKOs, which have the added advantage of being liable to only 15 percent taxation on profits as opposed to 35 percent on OFZs.

But he also suggested Wednesday's auction might see the Finance Ministry sell to several prearranged major investors to keep yields under control and ensure the auction comes off smoothly.

"The auction is likely to be a showcase for the Finance Ministry," Ivanov said. "Yields could be hovering at the lower end of the range at around 20 percent if this is the case, and the government does want to show investors it has the market under control."

Ivanov said a pre-auction deal may have been struck with state savings bank Sberbank, which, because of its state participation, would shoulder lower yields.

"There has been a long tradition of this type of thing," he said.

Officials at Sberbank were unable to comment Tuesday on the debt issue.

Bella Zlatkis, head of the securities department, said last week she expected demand for the debt issue to be high following the government's earlier announcement it would issue the short-term three-month paper for any investors on the domestic market. The GKOs are expected to yield around 22 percent to 25 percent, she said.

The GKO issue for the internal market is the first since the government defaulted Aug. 17, 1998, on $40 billion worth of the short-term paper.

This week's auction will be accompanied by an issue of 2.5 billion rubles worth of six-month bonds for foreign holders of rubles from those now-restructured GKOs, rubles that are trapped in so-called S accounts to stop their holders from hurting the exchange rate by repatriating them all at once.

Economists said the low volume of the issue meant there was little danger for now of a return to the government debt pyramid that collapsed in 1998.

"As long as the government does not once again make the bonds a source of financing the budget deficit then this step seems a sensible policy to stabilize the exchange rate and soak up excess rubles," said Alexei Zabotkin, a fixed income analyst at United Financial Group.

"But that all depends on what happens later. If the government continues to issue GKOs while confidence in the ruble is not great enough to allow it to issue longer term bonds as well, then Russia is once again treading on dangerous ground," he said.

"But there are no clear signs yet about what line the government will take," he said.

So far the Finance Ministry has said it has no intention of issuing longer term bonds because of the likely demand for unsustainably high yields due to fears of inflation.

But Zlatkis said Thursday the government would issue more GKO bonds this year. Under a decree signed Thursday by acting President Vladimir Putin, the Finance Ministry can issue up to 30 billion rubles worth of the bond this year.

Zlatkis said the February issue was aimed at soaking up an influx of funds onto accounts sparked by government payments of 9 billion rubles on OFZs coming due on exactly the same day.

"The volume of the paper is so small that it is useless as a way of filling up the budget deficit. The reason for the issue is to mop up the surge in ruble liquidity when the government pays out on 9 billion rubles of OFZs that mature on the very same day," she said.

Former First Deputy Finance Minister and current vice president of Troika Dialog brokerage Oleg Vyugin said combining both bond issues was a good way of rolling over half that payment.

"If these ruble funds were not sterilized by the debt issue, then they would pile on to the forex markets and crank up pressure on the ruble," Vyugin said.