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. Last Updated: 07/27/2016

State Will Double Its Issue Of Bonds

The Finance Ministry will sell 529 billion rubles ($15.7 billion) of treasury bonds this year and issue 50 percent to 100 percent more bonds in 2011 and 2012, Finance Minister Alexei Kudrin said Wednesday, as the government looks for ways to finance a growing budget deficit and increase liquidity in its ailing financial system.

The government may also change some of its capital rules in efforts to recapitalize the banking sector, while shying away from the U.S. model of a "toxic assets" fund.

The bond issue amounts to nearly twice the amount of paper that the Finance Ministry sold last year, and the amount will increase each year to ease pressure on the Reserve Fund, which will cover this year's forecasted 8 percent budget deficit.

"This will happen every year -- it is a necessity due to the depletion of the Reserve Fund," Kudrin said in comments posted on the ministry's web site.

Russia does not need to create a toxic assets fund similar to that in the United States since the banking sector here is much less exposed to the web of problem assets, he said at a banking conference with Central Bank Deputy Chairman Alexei Ulyukayev.

"We don't think it's necessary to create a 'toxic assets' fund. We'll work with each bank individually, with the help of the Central Bank and the Deposit Insurance Agency," he said, adding that the primary risk of the U.S. model is that no one actually knows how much the assets are worth.

The Central Bank might allow banks to use subordinated loans for 50 percent of their tier one capital, Ulyukayev said.

Banks may be able to use 30-year subordinated loans for up to 15 percent of their tier-one capital, in addition to newly issued treasury bonds, a policy analysts said may amount to quantitative easing.

Because of the bad shape of the financial markets, the government will likely put the bonds directly into the banks' capital and skip the monetization process, said Mikhail Galkin, an analyst at MDM Bank.

"Banks will subsequently repo the bonds at the Central Bank," he said. "De facto is similar to quantitative easing, i.e. funding the deficit with the help of the Central Bank."

Allowing banks to use subordinated loans in this manner will give banks more time before they need to raise capital through share issues, said Mark Rubinstein, an analyst at Metropol.

Increased bond issues will also allow the Central Bank to expand its monetary policy tools beyond exchange rate targeting, he said.

"Now, monetary policy involves targeting the dollar-ruble exchange rate. Normally, it should revolve around the interest rates and around the government securities market," he said.

Kudrin acknowledged at the meeting that the percentage of nonperforming loans may rise as high as 10 percent in 2009, but he said the country has already managed to escape a "collapse of the banking sector."

Skeptics like Mayor Yury Luzhkov, however, were less sure. Speaking at an international business gathering on Wednesday, Luzhkov blamed the Finance Ministry for contributing to the country's economic woes.

"The government's measures suggested by our Western authority, Finance Minister Kudrin, will lead to the complete bankruptcy of the economic structure," he said.