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. Last Updated: 07/27/2016

MinFin Urges Easing Eurobond Trade

The Finance Ministry has called for the Central Bank to free trading in Russian Eurobonds.

The proposal, announced Friday by the ministry's foreign debt department head, Andrei Cherepanov, at a banking conference in Sochi, would open Eurobond trade to individuals and local banks and institutional investors such as mutual and pension funds.

Currently, trade in hard currency instruments is limited to several hundred banks that hold a license from the Central Bank.

Cherepanov said in a telephone interview that liberalization would allow the market to become significantly more liquid and stable and would increase the investor base to millions of potential bondholders.

The proposal was signed by Deputy Finance Minister Sergei Kolotukhin and sent to the Central Bank's first deputy chairwoman Tatyana Paramonova in mid-August. The bank has not officially responded so far.

However, Cherepanov said he expects a response "in the next few days or weeks." He does not foresee resistance from the Central Bank, known for its conservative approach regarding hard currency flows.

Fears about capital flight as a result of the liberalization would be unjustified, Cherepanov said. Any entity or individual wishing to buy dollar-denominated instruments is already able to invest through gray schemes.

"What is called ?mattress money' is not actually in the mattresses, it has been invested," he said. The liberalization will bring Russian capital markets additional benefits, Cherepanov added.

Russian investors in Eurobonds would squeeze out some of the foreign investors, he said, and consequently, the foreign investors may start to look for other ways to invest in Russia.

"This may be direct investment in Russian companies, which will give those a boost, or investment in other Russian instruments," Cherepanov said.

As much as one-third of the Russian Eurobond market may already be in the hands of Russian investors, which are particularly keen on the shorter-dated issues, said Morgan Stanley analyst Marcin Wiszniewski.

"It's difficult to assess how great new demand for Russian Eurobonds may be," said Wiszniewski.

Corporates and individuals have been able to buy them indirectly, such as by placing a deposit with a licensed bank that would then buy the bonds, he said.

On the other hand, there will now be institutions that would prefer to directly own Eurobonds if they are allowed to do so.

Wiszniewski said owning Eurobonds directly is very popular in some European countries.

"Of course, the liberalization would be positive for the Russian Eurobond market; it would broaden the investor base and probably bring in more money to be invested in the Russian bonds, for sure it would broaden and deepen trading in Russian Eurobonds in Russia," Wiszniewski said.

However, the government "should be careful with regulations" on local Eurobond trading, especially as regards such investors as pension funds, said Merrill Lynch economist Andrew Kenningham.

"They need to be careful about the amount of foreign currency exposure that pension funds will take on," he said, adding that the country risk was another concern. "Russian bonds are still a very risky asset."