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2.4. The Market for Government Debt

2.4.1. Government debt market

In 2003, the Russian Federation’s state domestic debt grew approximately by 1,4%, from 654,7to 663,7bln rubles in terms of securities (the debt was reduced from 6,0% to 5,0% in terms of GDP shares). OFZ (federal loan bonds) accounted for 97,8% of the government debt.

Table 26

Government domestic debt in the Russian Federation (bln rubles)

Type of securities

as of 01.01.2003

as of 01.01.2004



















OPVVZ 1992









The foreign national debt of the Russian Federation was reduced from $104,3to $100,6bln US dollars (according to the RF Central Bank) as of October 1, 2003. Thus, the gross amount of foreign national debt of the government accounted for 3,55%. In 2003, the government honored its financial obligation on the 4th tranche Minfin bonds (in May), as well as two Eurobond issues (in April and June). The private sector (banks and companies) increased its debt to non-residents from $47,8to $63,7bln US dollars (+33,3%) over the same period. Thus, the total foreign national debt of the Russian Federation grew from $152,1to $165,4bln US dollars within nine months in 2003.

Domestic Debt

The government ruble debt market continued to decline in yield last year. It fell approximately by 5%, from 12% to 7and 8% yearly, reaching 5% in some cases. It is noteworthy that the decline was registered as investors became more active against the previous year. Thus, the total transfer quantity in the GKO-OFZ market amounted to about 243,16bln rubles, which is approximately 1,9as much as in 2002.

Figure 22

GKO-OFZ Market Movement in 2003

Source: Finmarket Information Agency, IET’s estimates.

In addition, average weekly figures reached 4,67bln rubles in 2003against 2,53bln rubles in the previous year. In 2003, the maximum weekly transfer quantity reached about 20,43bln rubles against 7,1bln rubles in 2002, while the minimum was 754ml rubles against 193ml rubles in 2002. Thus, the ruble government bond market saw a substantial boost in trading in the past 2003.

There were several stages in yield movement in 2003that are worth mentioning. The first stage embraces a period between January and June when yield dropped to 4,54% yearly (first week in September), reaching its minimum since the beginning of the year. It is in this very period that transfer quantity in the market was registered relatively high against that of the second half of the year. The key factors of yield movement are as follows. A considerable amount of ruble liquidity at banking sector stimulated the demand at the market. In February, the market increased quotes in response to a Statement made by the RF Central Bank on leveling the yield at foreign and domestic debt markets. In April, the RF Central Bank stimulated a rise in bond quotes. All in all, the GKO–OFZ yield movement reflected a favorable situation in the Russian economy. However, the decline in yield automatically rendered this segment of the Russian stock market less attractive, which caused migration of investments to the stock market showing a better growth rate of most liquid shares. Furthermore, the arrest of the President of YUKOS in June had an adverse effect on investors considering this event as an increasing political risk, thereby market trading responded instantly by decreased quotes, particularly at the GKO–OFZ market. The foregoing factors encouraged stabilization of yield at the state domestic debt market which was increased up to 7to 8% yearly till the beginning of autumn.

The yield movement was governed mainly by liquidity at the banking sector and situation at the foreign exchange market. It should be noted that there was a short-term decline in yield in September which reached its historic minimum as the average weighted GKO–OFZ yield dropped to 4,54% yearly in the first week of September. Thereafter, the price risk was included in the ruble instruments price due to unstable dollar exchange rate, and, as a consequence, stock quotes dropped slightly again. The hottest month for investors at the ruble bonds market was October. A strong upward trend developed at the market on October the 8th in response to a new credit rating on Russia raised unexpectedly by Moody`s. In two weeks, however, a strong downward pressure was registered due to a political instability represented by the YUKOS case. The new credit rating prevailed and kept its positive effect in spite of falling quotes late in the month. The market activity declined significantly throughout the entire November due to an uncertainty associated with the upcoming parliamentary elections. The quotes of the government ruble bonds varied within a short range. In December, the market was governed mostly by economic factors (liquidity at banking sector, Ruble vs. Dollar exchange adjustments in favor of the former, stable macroeconomic figures), as well as eliminated uncertainty with the parliamentary elections.

The RF Ministry of Finance held 28auctions on GKO–OFZ placement throughout the entire 2003. The volume of borrowed funds accounted for 111,1bln rubles without regard to secondary market transactions. A decline in share of GKO–OFZ transactions in total volume of borrowed funds at the secondary market was governed by a specific policy of the RF Ministry of Finance’s in the year under review.

Foreign debt

A substantial decline in all traded instruments’ yield was registered at the Russian Eurobonds market throughout the entire year. In particular, the yield of the 5th tranche Minfin bonds accounted for 5,62%yearly, while the 6th tranche was 4,18% late in December. The yield of RUS–30and RUS–28securities dropped from about 9% to 7,3% yearly over the year, yield to maturity of RUS–07securities accounted for 4,4% yearly, and RUS–18securities were traded according to the yield of 6,97% yearly.

Most positive trends of the year were as follows. The Government’s political and economic reforms were under support; efforts were made in resolving key problems, namely liberalization of the natural monopoly market of goods and services, stable macroeconomic performance and positive economic growth rates; and a new sovereign credit rating on Russia. Most negative trend was a conflict between the oil company YUKOS and the government, which reminded foreign investors of political risks in Russian assets.

In January 2003, the Russian market proved again its attractiveness by demonstrating a sustained growth. Though the situation in Iraq affected markets at all developing countries, the Russian market proved less exposed. In addition, the general situation in the country remained stable: Russia went on in an effort to conduct economic reforms, restructure monopolies and reduce oil export dependence.

In February, the Russian Eurobond market fully recovered from an impact caused by the Iraq problem of the previous month. A neutral behavior of the Russian market in response to the Iraq problem had a positive impact on investors which considered Russian Eurobonds as safest investment instruments to hedge military risks.

Figure 23

Minfin Bonds Yield to Maturity in 2003

Source: Finmarket Information Agency.

Figure 24

Russian Eurobonds Yield in 2003to Maturity in 2030, 2028and 2007

Source: Finmarket Information Agency.

An agreement concluded in February between one of the world’s major oil companies British Petroleum and Russian TNK was a positive signal for investors, which gave evidence of increasing interest of foreign companies in Russian assets. The growth was registered since early in March. For instance, on March 7quotes of RUS–30eurobonds reached the historical maximum 87,75% of the par value with 8,25% yield yearly. It should be noted that the trend in the Russian eurobond segment at that period was governed manly by external factors as evidenced by the demand for Russian securities in spite of economic growth retardation. Nevertheless, some investors favored to realize their profit as the warfare started in Iraq and global oil prices declined, which made Russian security quotes go down.

This segment of financial market was also influenced by growth of liquidity in April. New historical maximums were reached during the month: for instance, RUS–30grew up to 90,2% of the par value, which corresponded to a yield drop of 8,3% to 7,94% yearly during the month. The funds generated from redemption of several Eurobond issues was the main supporting factor to the market, hence quotes varied technically. In addition, gold and foreign exchange reserves of the Russian Federation and a favorable environment at the neighboring markets, primarily in Brazil and Turkey, also encouraged growth in the Russian Eurobond market.

In May, quotes were governed by redemption of the 4th tranche Minfin bonds ($3,41bln US dollars at par value) and expected RUS–03redemption. The RF Central Bank enlarged gold and foreign exchange reserves as oil prices remained high, which supported largely the Eurobond quotes. In June, the rally of the Russian Eurobond market came to its end when correlation of Russian Eurobonds and US Treasuries became a key factor – market strategy was governed by expectation of new rates at the US market. Further decline was caused by several factors. Firstly, a decrease in the market investment share of the RF Pension Fund was noted. Secondly, the YUKOS case could produce political risks in investing in Russian debt securities.

In the period between August and September, Russian Eurobonds recovered from decline. Late in September, for instance, the RUS–30redemption yield accounted for 7,46% yearly, RUS–28, 7,26%, and RUS–18, 6,85%.

As noted above, a very special event occurred in Russia early in October: Moody`s upgraded the sovereign credit rating on the Russian Federation by two points up to 3, which is considered as initial investment rating. This made the Russian Eurobond market open for foreign investors which previously had no wish to buy Russian assets due to a credit risk. However, a positive effect of the new rating was eliminated by news of unlikely settlement of the YUKOS case with the Attorney-General’s Office, and hence Eurobonds dropped to the point they were registered early in the month.

There was no any definite trend at the Eurobond market near year-end 2003. The market was slightly supported by decline in US Treasuries in mid-November due to a statement made at the US Federal Reserve System to the effect that the basic interest rate would remain stable in the nearest future. However, the uncertainty related to the upcoming parliamentary elections forced quotes down. The above uncertainly was eliminated upon the parliamentary elections, which somehow supported the market by increased sovereign foreign currency bonds.

2.4.2. Municipal and Subfederal Borrowings Market

Market movement

In 2003, the consolidated regional budget ran a deficit of 50,0bln rubles, i. e. 2,6% of its (revenues), or 0,38% of the GDP. The budgets of the constituent entities of the Russian Federation ran a deficit of almost 33,9bln rubles (2,3% of revenues), and the budgets of municipalities ran a deficit of 27,4bln rubles (3,2% of revenues).

The deficit to expenditures ratio of the consolidated budget was slightly reduced against the previous year (2,6% in 2003, while 2,7% in 2002). A share of deficit financing of the constituent entities of the Russian Federation was reduced significantly from 3,0 2,3%, while the deficit of municipal budgets increased from 2,8to 3,2% (Table 27).

Table 27

Deficit to Expenditures Ratio of Territorial Budgets (%)

Consolidated regional budget

Regional budget

Municipal budget





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