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. Last Updated: 07/27/2016

Russia to Double Ruble Bond Issuance

Russia plans to nearly double ruble bond issuance in the next three years and freeze eurobond offerings, a Finance Ministry official said Monday.

Analysts said while the move would starve international markets of supply, it might not lure new investors to its domestic debt market.

Under a three-year Finance Ministry debt strategy submitted to the Cabinet, ruble bond issuance would nearly double to 230 billion rubles ($8.2 billion) in 2008 from an earlier planned 167 billion rubles. Domestic issuance is set at a net 125.5 billion rubles this year, and would rise under the plan to 170 billion in 2006 and 200 billion in 2007, the ministry official said.

Finance Minister Alexei Kudrin has ruled out issuing eurobonds during that period, as he seeks to rebalance a debt portfolio which is heavily skewed towards foreign borrowing.

"Our debt is denominated in foreign currencies, but we cannot control exchange rate fluctuations, and we cannot influence foreign interest rates," Alexei Savatyugin, a senior Finance Ministry official, told Vedomosti. "We need to insure ourselves against these risks."

Of Russia's national debt of nearly $140 billion, nearly 80 percent is owed to foreign lenders -- a legacy of the 1998 crash when Russia defaulted on $40 billion in domestic debts.

Under the mid-term plan, the share of domestic debt would double by end-2008 to 43 percent, while foreign borrowing would fall to 57 percent.

Overall debt would fall to $131.7 billion, to just 12.4 percent of gross domestic product -- and down from 42.1 percent in 2002 -- reflecting just how much high petroleum prices have boosted Russia's public finances.

The strategy does not factor in Kudrin's drive to retire the $43 billion Russia owes to the Paris Club. Kudrin hopes to strike a $10 billion repayment deal with the lender club in May.

Analysts said boosting domestic debt issuance might help soak up some of the liquidity flooding into Russia on the back of its oil export boom.

"They do have a problem of sterilizing inflows, so domestic issuance is a good idea," said Tim Ash, an emerging markets economist at Bear Stearns in London.

But they also note the local market is dominated by state-owned banks and the Pension Fund, with foreign investors on the sidelines, and the authorities may want to keep things that way.

"It doesn't mean they are ready to offer more attractive conditions," said Natalya Orlova at Alfa Bank. "In terms of market liquidity, this doesn't change anything."

The 10-year Russian OFZ treasury bond now yields 8.4 percent -- making it over two percentage points more expensive to Russia than eurobonds of a similar maturity. But domestic bond yields are still below inflation forecast by analysts at 11 percent this year, meaning they lack appeal to a broad domestic audience.

Foreign buyers, meanwhile, would look to turn a profit on the back of gains in the ruble. That is a situation policy- makers would rather avoid as they seek to defend Russia's economic competitiveness.

"I don't think they are going to issue enormously," Ash said. "They just don't need the money."