As warnings of an impending crisis grow ever louder, Russia is taking steps to cushion the impact by implementing major reforms to its debt and equity markets.

file photoLast week, Finance Minister Anton Siluanov said the country would allow two of Europe's biggest clearing houses, Euroclear Bank and Clearstream International, direct access to domestic corporate debt when a central depositary begins working in the fall.

The move will make it easier for foreigners to buy sovereign ruble bonds, or OFZs, which are used by the state to plug holes in the budget.

"We're expecting positive implications," Siluanov said. "It's important for us that there are greater access and greater possibilities for foreign investors to buy our state bonds without all of the associated obstacles."

Banks will be allowed to settle deals in sovereign and corporate bonds first, and in shares "in a year or so," Siluanov added.

The move follows a proposal from the Finance Ministry last year to liberalize the country's $50 billion debt market, but the plan was stalled by legal hurdles and opposition from local competitors worried about losing business to global platforms.

Conservative investors

Under the liberalized market, the government will be able to attract conservative investors, interested in investing in long-term projects like pension and insurance funds. This will make the economy more resilient against economic downturns, analysts say.

Currently returns on Russian ruble bonds are lower than those of other emerging markets, bringing in 6.4 percent so far this year, compared with a 16.3 percent for local Brazilian debt, Bloomberg reported, citing JP Morgan Chase.

As a further incentive, the government is dropping the 15 percent withholding tax that used to be charged on foreign OFZ holders.

Currently, foreigners hold around 5.5 percent of the OFZ market, according to Central Bank data. Analysts at VTB Capital investment bank estimated in a recent note to investors that this figure could jump to 15 percent within the first few months of liberalization, and 20 to 30 percent within 18 months.

While foreign investors shy away from putting their money into other areas of the Russian economy due to high perceived risk, they are likely to be attracted to the OFZ market because of the country's low debt levels and high growth perspectives.

"Everyone expects large inflows because the economy is growing and the government's debt burden is very low," a fixed income trader from the Moscow office of a large Western investment bank told The Moscow News. "There is more credit risk in the debt of developed countries than in Russia's."

Low debt

The Finance Ministry forecasts Russia's debt to gross domestic product ratio at 10 to 14 percent for 2012-2015, compared to nearly 80 percent in Britain and Germany.

The project is one of a string of technical changes being implemented to turn Moscow into an international financial center. Another major project has been to transfer the ruble to a floating exchange rate, something that was implemented in mid-July when the exchange-trading band against the dollar was widened in preparation for deepening financial problems in Europe.

Analysts at Renaissance Capital investment bank said in a note to investors last month that market liberalization was an essential step in Russia's road to becoming a financial center.

"Not opening up markets would have undermined the financial center project as there is no point in having an international standard capital market if you don't connect it up to the global settlement system," said analysts from the bank.

Keywords: Russia, Economy, Business, Investment - Russian News - Russia - Johnson's Russia List

As warnings of an impending crisis grow ever louder, Russia is taking steps to cushion the impact by implementing major reforms to its debt and equity markets.

file photoLast week, Finance Minister Anton Siluanov said the country would allow two of Europe's biggest clearing houses, Euroclear Bank and Clearstream International, direct access to domestic corporate debt when a central depositary begins working in the fall.

The move will make it easier for foreigners to buy sovereign ruble bonds, or OFZs, which are used by the state to plug holes in the budget.

"We're expecting positive implications," Siluanov said. "It's important for us that there are greater access and greater possibilities for foreign investors to buy our state bonds without all of the associated obstacles."

Banks will be allowed to settle deals in sovereign and corporate bonds first, and in shares "in a year or so," Siluanov added.

The move follows a proposal from the Finance Ministry last year to liberalize the country's $50 billion debt market, but the plan was stalled by legal hurdles and opposition from local competitors worried about losing business to global platforms.

Conservative investors

Under the liberalized market, the government will be able to attract conservative investors, interested in investing in long-term projects like pension and insurance funds. This will make the economy more resilient against economic downturns, analysts say.

Currently returns on Russian ruble bonds are lower than those of other emerging markets, bringing in 6.4 percent so far this year, compared with a 16.3 percent for local Brazilian debt, Bloomberg reported, citing JP Morgan Chase.

As a further incentive, the government is dropping the 15 percent withholding tax that used to be charged on foreign OFZ holders.

Currently, foreigners hold around 5.5 percent of the OFZ market, according to Central Bank data. Analysts at VTB Capital investment bank estimated in a recent note to investors that this figure could jump to 15 percent within the first few months of liberalization, and 20 to 30 percent within 18 months.

While foreign investors shy away from putting their money into other areas of the Russian economy due to high perceived risk, they are likely to be attracted to the OFZ market because of the country's low debt levels and high growth perspectives.

"Everyone expects large inflows because the economy is growing and the government's debt burden is very low," a fixed income trader from the Moscow office of a large Western investment bank told The Moscow News. "There is more credit risk in the debt of developed countries than in Russia's."

Low debt

The Finance Ministry forecasts Russia's debt to gross domestic product ratio at 10 to 14 percent for 2012-2015, compared to nearly 80 percent in Britain and Germany.

The project is one of a string of technical changes being implemented to turn Moscow into an international financial center. Another major project has been to transfer the ruble to a floating exchange rate, something that was implemented in mid-July when the exchange-trading band against the dollar was widened in preparation for deepening financial problems in Europe.

Analysts at Renaissance Capital investment bank said in a note to investors last month that market liberalization was an essential step in Russia's road to becoming a financial center.

"Not opening up markets would have undermined the financial center project as there is no point in having an international standard capital market if you don't connect it up to the global settlement system," said analysts from the bank.