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At the same time, the maturity structureshowed a higher proportion of shorter loans due to fewer loans with a maturityof more than a year. As it follows from Table 2, the tendency is due primarilyto the smaller proportion of loans extended by the banks in foreign currencyfor a term of more than a year. The maturity of less than three months was morefrequent in ruble loans (the proportion of loans maturing under three months inthe overall amount of ruble loans increased from 21.7 to 24.5%). However, incurrency loans too the proportion of shorter credits grew from 8.0 to 10.1%.

The faster rate of growth in loans to thenon-banking sector was supported by a relative reduction in the proportion of deposits made available to thebanking sector. The proportion of deposits in thebanking sector’sassets lowered over 11 month of the year from 35.8 to 31.8 %, (or from 43 to39%, less Sberbank). This was mostly the effect of the diminishedproportion of assets on corresponding accounts with the CBR (from 5.9% at thestart of the year to 2.9% as of 1 December). The share of deposits incommercial banks did not change significantly: from 21.4% early in the year to20.7% by December.

Table 4

Maturity structure of loans to non-bankingsector*

Structure of loans to non-banking sector, in %to total loans

01.01.00

01.01.01

01.12.01

Loans to non-banking sector maturing under 90days

17.8

16.9

20.0

Loans to non-banking sector maturingbetween 90 and180 days

10.8

15.7

15.3

Loans to non-banking sectorsmaturing between 180 days and 1 year

33.2

34.4

35.0

Loans to non-banking sector for morethan a year

38.2

33.0

29.6

Loans in foreigncurrency

Loans to non-banking sector maturingunder 90 days

9.5

8.0

10.1

Loans to non-banking sector maturingbetween 90 and 180 days

9.0

8.4

11.8

Loans to non-banking sector maturingbetween 180 days and 1 year

25.1

28.1

30.5

Loans to non-banking sector for morethan a year

56.3

55.4

47.6

Ruble loans

Loans to non-banking sector maturingunder 90 days

24.5

21.7

24.5

Loans to non-banking sector maturingbetween 90 and 180 days

12.2

19.6

17.0

Loans to non-banking sector maturingbetween 180 days and 1 year

39.8

37.7

37.1

Loans to non-banking sector for more than a year

23.5

20.9

21.5

*good loans less banks under ARCOadministration.

Estimated from data of the CBR and STIiK.

Additionally, banks reduced the proportionof securities in their portfolios. Despite the promising figures on the stockmarket (RTS grew 58.1% over 11 months) and the high yield of thecurrency-denominated government debt, the proportion of stocks and debt paperin the bank assets dropped from 17% to 15%, where the proportion of federaldebt shrank even more: from 14.7 to 12.7%.

Let us look closer at banking operationsin various segments of the Russian debt market.

Banks oncurrency-denominated federal debt market

Since 1996 the RF Government placed 9issues of Eurobonds for the overall amount of USD 13.59 billion, DM 3.25billion and ITL750 billion. The issues mature between 2001 and 2028.Additionally, pursuant to the debt-restructuring arrangements with the LondonClub, in 2000 converted into Eurobonds were the principal of the debt toforeign creditors (viz., PRINs) and outstanding interest (IANs) for the overallamount of ca. USD 20 billion, maturing in 2010 and 2030. As a result, thecapacity of this market is much higher than that of currency-denominatedfederal debt.

At the same time, Russian investors arefacing a number of important obstacles to their entry on the market mostly dueto the effective foreign exchange regulations which segregate Russian investorsin different categories. In actual fact, banks with foreign exchange licenseshave significant advantages, if they decide to enter on Eurobond market,compared to other Russian investors. The analysis suggests that some of themhave actively exploited the advantage.

While instruments offering a fixedinterest in hard currency may easily attract investors at times ofdestabilization of the ruble, with the stable exchange rate they are much lessenticing. But in 2001, the market was exceptionally good for the investors. Thegrowing prices for Russian Eurobonds and currency-denominated federal debtensured high yield in ruble terms not only in the times when ruble wasweakening to dollar but also when it grew stronger. While at the start of theyear, Eurobond pricesranged at 38 - 98% depending on the issue, by the end of 2001 Russian Eurobondscost at least 58% of the par value, and yield to maturity was from 5 to 12%p.a. in currency, respectively, depending on the issue.

Out of the five traded tranches of thefederal currency bond,with maturities from 2003 to 2011, the most fast-appreciating in 2001 was theshortest fourth tranche. While by the end of 2000 the average price for thistranche was 57.6%, by the end of 2001 it went up to 90.75%. Overall, by the endof 2001, the federal currency debt, depending on the issue, ranged in pricebetween 49 and 91% of the par value.

Investment qualities of the federalcurrency bond issues in 2001 continued to differ significantly from those ofEurobonds. Price comparisons for Russian Eurobonds and federal currency bondsfor issues with similar maturities show that Eurobonds are priced considerablyhigher. The price difference may be as high as twofold for tranches with thelongest maturities. For instance, Eurobonds and federal debt paper maturing in2003 were priced at the end of the year at 106.8% and 90.8%, respectively,while for longer issues (maturing in 2010 - 2011) the gap widens significantly(86% vs. 48.5%). The shrinking spread tendency is to be found only for issueswith shorter maturities (Fig.3 4).

Fig. 3

Average prices for Eurobonds and federalcurrency
bonds maturing in 2003.

Fig. 4

Average prices for Eurobonds and federalcurrency
bonds maturing in 2010-2011.

Estimated from Finmarket data

Lower priced federal debt offered higheryield to maturity compared to Eurobonds despite the higher coupon yield of thelatter. By investing in the federal currency debt to hold till maturity, thebanks could expect to get 17 - 30% p.a. in the beginning of the year and 10.2 -13.4% at the end of the year depending on the issue, despite the seeminglylarge price spread (from 48.5 to 90.8% depending on the issue).

Still another distinguishing feature forthe federal debt market was a higher spread between the buy and sell price(from 0.7 to 1.3% depending on the issue against 0.3 - 1.2% for RussianEurobonds at the end of the year).

As a result, currency-denominated federaldebt remains an attractive financial instrument. The largest portfolios offederal currency bonds are with Sberbank and Vneshtorgbank. They account, byvalue, for approximately 74% of all Russian federal currency debt in theRussian bank holdings. The currency federal debt attracted the bulk of theassets that Vneshtorgbank received from its principal shareholder, the CentralBank of Russia, as part of the 1999 capital increase.

To appreciate the extent to which otherbanks find this instrument attractive for investment, let us study the dynamicsof the portfolio of federal currency debt in 2000 - 2001 in absolute values indollar terms and as a percentage of assets, broken down to quarters of the yeartill 1.12.01 (Fig. 5).

Fig. 5

Dynamics of federal currency debtportfolios of Russian banks
(less Sberbank,Vneshtorgbank and banks under ARCO administration)
in 2000 - 2001

1 – Federal currency debt, in bln.Rubles (left-hand axis)

2 – Proportion of federal currencydebt in assets, in % (right-hand axis)

The number of banks (less banks under ARCOadministration) with federal currency debt holdings remained virtuallyunchanged throughout the year: there were 233 banks at the start of the year,and 230 by December. With some banks foreign currency-denominated governmentdebt accounts for up to 60 - 90% of the assets. But this is not a massivetrend: there are hardly 30 banks with more than 15% holdings in federal debt,and only 4 banks with 50% federal debt holdings, including Sberbank andVneshtorgank.

Let us discuss the sample of the banksthat lead in their federal foreign currency debt holdings.

The following criteria applied to theselection process: the proportion of federal currency debt holdings at the endof September and November 2001 exceeded the average for all active banks (lessSberbank, Vneshtorgbank and banks under ARCO administration); the bank shouldhave had non-zero balances in this item at the start of the year and carriedout active transactions with hard currency-denominated government paper on themarket, i.e., demonstrated non-zero turnover32 for this item in theperiod discussed. Since, as already mentioned, both Sberbank and Vneshtorgbankwere the absolute leaders in terms of their federal currency debt holdings, andtheir inclusion in the sample would be severely distorting the results, theywere excluded. As a result, 71 banks qualified under the above selectioncriteria. The sample is characterized by a high degree of concentration. Morethan half of all federal currency debt holdings in the sample group belong onlyto 5 banks. And 20 banks account for more than 84%.

Let us consider some financial indicatorsin the sample group of banks. Average assets by December 2001 stood at Rbs 5.8billion, which is by a few times higher than the level in the peer group (Rbs1.5 billion). Federal currency debt holdings accounted for 9.6% assets at thestart of 2001, which is 2.7 times higher than in the peer group; over threequarters of the year the proportion of the holdings rose to 11.4%. However, intwo months of the fourth quarter it dropped almost to the start-of-year levelof 9.5%. For an average Russian bank, the trend towards a lower proportion offederal currency debt holdings in total assets was more pronounced through 11months of 2001: it was 3.6% at the start of the year and 2.7% at the end ofNovember 2001 (Table 3).

Over 9 months the aggregate federalcurrency debt holdings grew by 7.1% whereas assets grew by 23.7% (bothindicators are in dollar terms). However, at the end of 11 months the situationchanged considerably: the growth in the federal currency debt holding reversedto a slump (by 7.8%), while assets continued to grow almost at the same or evenhigher rate (up to 25.8%). As a result, over two months the overall federalcurrency debt holdings of Russian banks shrank in dollar terms by 3.5% (fromUSD 7.8 to USD 7.5 billion, less ARCO banks). If leaders – Sberbank and Vneshtorgbank– were to beexcluded, the slump would be even more tangible (14%). Banks in the discussedsample also show a reversal in the tendency by the end of the year: over 11months federal currency debt holdings in the assets lowered by 0.4% (althoughover 9 months there was a 19.4% growth). At the same time average assets in 11months grew 23.4%, with the growth accelerating steadily throughout theyear.

Thus, in October – November federal currency debtholdings in the portfolio of Russian banks reduced. The slump was caused notonly by the sell-off of their currency-denominated government debt holdings,but because average assets at Russian banks in absolute values grew faster thanfederal currency debt holdings and their prices. Still another explanationcould be served by the redemption late in November of the first tranche ofRussian Eurobonds for more than USD 1 billion.

A group of banks working with governmenthard-currency paper in 2001 with more than average federal currency debtholdings in the 9 months of 2001 cut their turnover with debt. While in 9months the balances grew 43.8% in dollar terms, the turnover dropped by3.3%.

However, in November the turnover grewalmost by 60% in dollar terms from USD 2.3 to 3.8 billion. This heightenedactivity over the period could be attributed to the redemption of the firsttranche of Russian Eurobonds.

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