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Nevertheless, from the mid-March, the growthof the GKOs quotations was replaced by the opposite trend of a sharp growth ofprofitability, due, firstly, to the decrease of the Budget incomes in the firsttwo months of the year and, secondly, to the necessity to make, in March andApril, large redemptions of the preceding issues (see Fig.1.4). Both thesefactors induced a new turn of expansion of the GKOs offer. The amounts of thenecessary redemptions in May turned out much lower than in the previous months;nevertheless, a significant growth of the social expenditures necessary for theelectoral struggle took place. This predetermined the high cost of loans in thedomestic market.

Table 1.5


Averageweighted rate of profitability for the GKOs-OFZs in the secondary market (%annual)

Volume of theGKOs-OFZs in circulation as of the end of the month (Rbl.bn)

Growth of thevolume of the GKOs-OFZs in circulation

Duration asof the end of the month (days)

Dec.1994


10443.80


58.03

Jan.1995

256.00%

13564.25

29.88%

59.72

Feb.1995

220.56%

17095.73

26.04%

61.28

Mar.1995

187.23%

21477.99

25.63%

73.19

Apr.1995

145.59%

25329.77

17.93%

70.06

May1995

111.54%

31973.66

26.23%

77.75

Jun.1995

84.15%

36609.86

14.50%

74.15

Jul.1995

124.88%

39271.58

7.27%

73.77

Aug.1995

156.67%

43468.97

10.69%

70.92

Sep.1995

103.68%

50186.04

15.45%

87.08

Oct.1995

93.45%

58525.87

16.62%

88.13

Nov.1995

86.73%

67343.46

15.07%

94.88

Dec.1995

93.92%

76496.28

13.59%

107.36

Jan.1996

82.72%

81140.97

6.07%

97.30

Feb.1996

56.24%

89961.78

10.87%

147.65

Mar.1996

87.11%

106731.84

18.64%

156.44

Apr.1996

130.02%

121243.04

13.60%

151.64

May1996

161.74%

141172.78

16.44%

133.64

Jun.1996

230.16%

155715.10

10.30%

128.17

Jul.1996

94.29%

170984.42

9.81%

135.76

Aug.1996

86.58%

184947.12

8.17%

138.25

Sep.1996

72.44%

197719.26

6.91%

140.87

Oct.1996

67.80%

212169.96

7.31%

145.57

Nov.1996

45.62%

224698.42

5.90%

148.32

Dec.1996

43.70%

233986.29

4.13%

150.16

The significant volume of the GKOsredemption in April and the need for the money to finance the Budget made theMinistry of finance energetically place the new issues with the maturity dateafter the Presidential elections. The price of servicing of such issues grewsharply. Thus, in the mid-April, the auction rate grew up to 188.9% for thethree-month and up to 235.1% for the six-month GKOs, i.e., to the level ofDecember 1995. At the same time, the ministry of finance had to reject up to90% of the applications in order to avoid even lower quotations. The secondhalf of April showed the growth of the profitability up to 245% and 271% (forthe three-month and for the six-month GKOs, respectively).

Fig. 1.4

Fig. 1.5

Already in April, the profitabilities of thedifferent maturities GKOs issues well reflected the degrees of the politicalrisks. The average weighted profitability for the bonds to be redeemed before16June was 40.6% annual. The profitabilities for the GKOs with the maturityterms between the first and second rounds were at the level 58.4% annual. Theprofitability for the securities with the maturity date after 10July was 89.6%annual (see Fig.1.5).

Analyzing the dynamic of profitability ofthe GKOs-OFZs at the end of May - beginning of June, three periods may beseparated: 16 to 31May; 1 to 14June; and after the first round of thePresidential elections. The first period was characterized by the growth of theaverage profitability rate for all the issues from 160% up to 230%annual.

During the following fortnight the growth ofthe GKOs profitability in the secondary market continued, though at much lowerrates. We believe, this slow down was due to the growth of B.Yeltsin rating ascandidate for Presidency (see Fig.1.3).

Nevertheless, the average rates for the GKOscontinued growing due to the growth of the share with the maturity in thepost-elections period. As of 12June, the average rate of this market reached240% annual. The peak of profitability was reached at the auction for placementof the six-month GKOs of the 36th series, on 13June (327.4%). This was due tothe lack of the Ruble assets conditioned by the dollarization of assets before16June (date of elections).

After the first round, the process of growthof the turnover and quotations of the State securities began. Already on17June, the average profitability of the circulating GKOs-OFZs reducedcompared with the last business day before elections (14June) by 30% to 50%annual for various series. The results of the secondary tenders in thefollowing days reflected the trend of further growth of prices for thesesecurities. Thus, to the end of June, the profitability at maturity reduced to70% to 110% annual for the three-month and 110% to 150% annual for thesix-month GKOs, with the simultaneous reduction of the slope of the temporalprofitability structure curve. The above situation is illustrated by thedynamic of the GKOs temporal profitability structure in June 1996 (seeFig.1.6).

Fig. 1.6

During the period after the second round ofthe Presidential elections, the tendency to the growth of the State securitiesquotations increased. To the mid-July, the profitability for different serieswas at the level 60% to 100% annual.

All the above confirms our assumption thatit is the securities (both State and corporate) market that became the mostsensitive indicator of the political conjuncture before the elections. Alreadyin the end of May, these markets signalized the probable victory of B.Yeltsin,though the rating of the two main runners had just become equal at the time. Asfor the June’s approachof the profitabilities of the State securities with different maturities, inemphasized again the role of the political factors in the functioning of thismarket.

Situation of the currencies market beforethe elections

A significant moment from the viewpoint ofimplementation of the monetary program for 1996 was the Joint Declaration ofthe Russian Federation Government and Central Bank of 16May On the Policy ofthe Ruble Exchange Rate, fixing the new principles of control of the exchangerate. The second half-year 1995 saw the inclined corridor with the limits from5,000-5,600 Rbl./US$ as of 1June to 5,500-6,100 Rbl./US$ as of 31December.The rate of the nominal fall in value of the Ruble was, hence, fixed within thelimits 1.3% to 3% per month. Hence, for the whole 166, the growth of theofficial USDollar exchange rate was fixed within the limits 18.5% to 31.5%;the actual rate was 19.8%.

The eve of the Presidential elections showedthe process of redollarization of the economy. In such conditions, the value ofthe Ruble was to fall quicker than in the second half of 1996. But the RF CBpursued the currency policy intended to hold down the rates of the Rublenominal exchange rate decrease. The main reasons for this were the following:firstly, the danger of growth of the inflation expectations; secondly, thepossibility of use by the opposition of the swift inflation of the nationalcurrency for the political purposes; and, thirdly, the necessity to sterilizethe growth of the monetary mass due to the significant purchase of the Statesecurities by the Central Bank. Due to this purchase, the growth of the netdomestic assets was 41.7% in the first half-year. As a result, in the firsthalf of 1996, the net international reserves decreased from Rbl.27.3trln. toRbl.21trln. The fall of the NIA reached 23% during this period (seeTable1.16).

Table 1.6.

1995

Expenditureson purchase of hard currency (%)

Increase ofsavings in deposits and securities (%)

1996

Expenditureson purchase of hard currency (%)

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