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. Last Updated: 07/27/2016

Future Hazy for Booming Bonds

Russia's corporate bonds market is booming, but analysts said Tuesday the long-term future depended on the government to foster pension funds and encourage the issues of longer-term paper.

Since mid-1999, about 40 firms have issued bonds totaling more than 60 billion rubles ($2.04 billion) at par, according to the Moscow Interbank Currency Exchange.

Some 16.8 billion rubles of bonds have been issued so far in 2001. Daily trade at MICEX is 150 million to 200 million rubles ($5.1 million to $6.8 million), and the exchange expects volumes to rise to 400 million to 500 million rubles within a year, the same as current trade in government debt.

"The corporate debt market has been really booming since late 2000-early 2001. It is the most dynamic securities market in Russia," said Sergei Sidorov, Troika Dialog vice president.

Russian companies wishing to issue bonds need to offer more attractive yields than the most reliable issuer -- the state. But this is currently an easy task given the nose-diving yields currently offered by government GKO T-bills and OFZ bonds. "Corporate bonds yield at least 4 percentage points over government bonds of the same maturity. Some bonds yield even 10 percentage points more," said Guta Bank analyst Rostislav Kulak. "Liquidity is sometimes the same as that of GKOs and OFZ bonds, but not always."

In August, government bonds yielded 3 percent to 4 percent a month in real terms due to zero inflation and after rises in the price of bonds, the Central Bank said in recent research. The bank also expected real yields to dip further to the zero level.

For companies, bonds also cost less in terms of receiving financing than bank loans, analysts added. "Nowadays it is more profitable to issue bonds. It is not more expensive than a bank loan, and besides, there is the issue of self-promotion," said Yelena Kolchina, fixed income analyst at ING Bank Eurasia.

Sidorov said having many corporate issuers lets investors diversify risks. An offer of a buyback in three to six months' time, a usual part of the issuance terms, also cuts the risk of buying bonds maturing normally in three to four years.

Experts say the most liquid bonds with permanent quotes are those from Gazprom, oil firms Tatneft and TNK and the OMZ industrial giant -- all the most successful areas of the economy.

Analysts said the future development of the market depended on the government, which needed to promote the formation of a wider investment market by starting a new pensions system.

A new pensions law is under consideration, but the way in which investments of people's contributions will be made has not yet been decided.

"The market will grow in the next six to 12 months. Companies will issue more bonds to finance production," said Sidorov. "Investors should become more selective and pay more attention to an issuer's reliability."

Another obstacle is a 0.8 percent tax on bonds, which makes issuing paper maturing in less than 12 months too expensive. "Its main operators [issuers] are banks, but they cannot pump money into bonds eternally due to risk management, while there are no insurance and pension funds [to buy debt] on the market yet," added Kulak, talking of the future outlook.