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Russia: Municipal Bonds Weather Crisis

St. Petersburg, 29 June 1998 (RFE/RL) -- Amid the background of the current financial crisis, Russia's municipal bond market, which appeared in 1994, has shown itself to be more resilient than expected

While three of the 70 regions with $1 billion in farm bonds outstanding (also known as "agro bonds") have defaulted, all of the eleven regions selling municipal bonds, known as MKOs, continue to meet their payments.

These regions have $1.7 billion in municipal bonds outstanding, a mere fraction of the approximate 25 billion federal bond market.

Nearly all of these regions are the country's leading economic centers or areas rich with natural resources--- such as Moscow, St. Petersburg, the oil-rich Omsk region, and the diamond-rich Republic of Sakha (Yakutia)--- and have the wherewithal to meet their payments.

"This municipal bond market is rather stable, despite Russia's financial crisis," said Alexander Belyaev, a private financial consultant in St. Petersburg.

This market is more reliable than the federal bond market because these regions have smaller deficits than the federal government, added Belyaev. St. Petersburg, for example, has no budget deficit.

Analysts also point out that the absence of foreign in the municipal bond market has been an unexpected blessing.

"The fact that foreigners did not have much money in regional bonds meant that they had less to take out when the panic began," said Alexander Sapronov, deputy director in charge of marketing at Alexander V. Kostyakov and Partners (AVK), the St. Petersburg investment company.

But the regional market is not independent of the federal one and negative repercussions are being felt here. This has been seen in higher bond yields and a decrease in demand. Rates for municipal bonds are averaging around 105 percent, said Vladimir Nikituk, head of the department of municipal bonds at the St. Petersburg Currency Exchange.

St. Petersburg municipal bonds were last sold on June 10 at 59,97% annual. St. Petersburg has decided to postpone its next sale of bonds until market conditions improve. So has Moscow.

Sverdlovsk region's first sale of bonds went through on July 23. Dealers only bought up 20 million rubles ($3.28 million) worth of discount bonds out of a total of 70 million. The cut-off yield was 83.01 percent, and average yield was 82.68 percent. The bonds mature on February 3, 1999,

The Sverdlovsk sale went over well considering the situation in the market, but it was certainly worse than it would have been a few months ago, said Sapronov.

"As soon as the situation for GKOs improves, so will the market for municipal bonds," he concluded.