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. Last Updated: 07/27/2016

City Wants to Borrow From the Middle Class

City Hall opened what it called a "new epoch" in municipal finance Wednesday with a unique bond issue targeted at the capital's burgeoning middle class.

The city hopes to raise 1 billion rubles ($32.8 million) from relatively well-off Muscovites by offering 1,000-ruble savings bonds, dubbed "Moskva," through Sberbank's branch network. The bonds, which carry a 10 percent annual tax-free coupon, paid quarterly, are in electronic form and retail at face value.

Despite failing in its two previous bids to borrow money from the masses -- in pre-crisis 1997 and 1998 -- Deputy Mayor Iosif Ordzhonikidze said City Hall is convinced that market conditions are now right to try again.

"We're starting a new epoch -- we're orienting our budget policy toward the preferences and abilities of residents," Ordzhonikidze told reporters.

Yury Roslyak, head of City Hall's economic policy department, said the bonds are meant for all Muscovites, but the "core" target for the debt will be the 4 percent of Muscovites "who are well-integrated into the economy."

Roslyak said most of the proceeds from the debt sale would be spent on transport projects and new housing for people being relocated from the drab, five-story khrushchyovki apartment buildings the city is tearing down.

With an annual budget of $10 billion and outstanding domestic and foreign debt of more than $1.5 billion, analysts said the Moskva issue is insignificant in terms of volume, but disagreed as to the importance of the move.

"The 10 percent [coupon rate] is not a big one -- it's below inflation," said Alexei Moisseyev, fixed income analyst at Renaissance Capital, adding that some banks offer higher rates on fixed deposits.

Sergei Pakhomov, chairman of City Hall's loans committee, said the rate may be below the current 12 percent rate of inflation, but said that unlike with fixed deposits, investors will be able to cash in their bonds at any time, with full interest accrued.

Yelena Okorotchenko, director of public finance ratings at international ratings agency Standard & Poor's in London, said the issue may be small, but it shows City Hall is thinking more long term.

"They know they need to develop the retail market, to keep people interested in Moscow debt," she said.

S&P rates Moscow's foreign debt on par with that of the federal government, which is the maximum it can be awarded, although it is still below investment grade. The city has not yet asked for a ruble-denominated rating, according to S&P.

Since first issuing debt in 1997, the city has never missed a payment, and has increased its transparency, Okorotchenko said.