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Finance and Statistics - Ковалева А.М.

Bonds of the State Savings Loan

In September 1995, a new financial instrument appeared in the Russian financial market - bonds of the State Savings Loan (OGSZ). If GKOs, OFZs and other government securities are addressed to sufficiently large financial structures, then OGSZ is available to legal entities and individuals. The main objective of this loan is to attract free cash resources of the population to cover the budget deficit. The bonds had a low denomination of 100 and 500 thousand rubles, as they were intended for a mass consumer.

Maturity of bonds is 1 year. Issued OGSZ in paper form, are state securities to the bearer.

Each bond has four coupons. The coupon period is three calendar months. The holders of OGSZ receive quarterly coupon income in the form of a percentage of the bond's nominal value. Interest income is determined by the Ministry of Finance for each coupon period and is equal to the last officially announced coupon rate on federal loan bonds.

When the bonds are redeemed, the owners are paid the face value of the bonds and the interest income on the last coupon. Repayment of bonds is carried out by authorized banks with the issuance of an original bond. The issuer does not redeem the loan bonds until maturity.

In December 1997, the OGSZ of the twenty-fourth series was issued for a period of 2 years - from February 18, 1998 to February 17, 2000. The volume of the issue was 1 billion rubles. At a nominal value of 500 rub. The total number of bonds - 2 million pcs.

Each bond had four coupons. The coupon period was six months and was determined from the release date. As of January 1, 2000, 29 series of OGSZ were issued.

Treasury obligations

In 1994, another type of securities appeared: treasury bonds (KO). The purpose of their issue is the emission-free financing of the federal budget deficit, the repayment of government debt to supplier enterprises under state orders, the reduction of nonpayments to the budget, and between enterprises, etc.

The issuer of KO was the Ministry of Finance, which issued them in series, setting the volume and dates of issues. The series had unified dates of issue, redemption, nominal value, interest rate and maturity.

Treasury obligations were issued in uncertificated form in the form of entries on the depo accounts in authorized depositories. They acted, in agreement with the first holders of KO, banks-agents of the Ministry of Finance, having depositaries as their units. Authorized banks made cash settlements with the ultimate holders of KO at the time of their repayment on the basis of extracts from the accounts of the "depot", confirming the ownership of the KO.

Treasury obligations could without any restrictions carry out a role of payment means for the realized goods and the rendered services, and also to be a subject of pledge. KO could be exchanged for tax exemptions issued by the Ministry of Finance.

The peculiarity of KO is that it is a hybrid security that simultaneously possesses the properties of a bill, a government security, tax exemption and a means of settlement. By 1997, the issue of this security was discontinued.

Domestic government foreign currency loan

In order to provide the conditions necessary for the settlement of the domestic foreign exchange debt to legal entities and individuals, on May 14, 1993, an internal state currency foreign currency loan (OVVZ) was issued for a total amount of 7 billion 885 million dollars.

The issuer of bonds was the Ministry of Finance, the currency of the loan is US dollars. The interest on these bonds was 3% per annum. Nominal bonds - 1 thousand, 10 thousand and 100 thousand dollars. They were issued in five series with maturities of 1 year, 3 years, 6, 10 and 15 years.

An integral part of the bond is a set of coupons, the number of which is determined by the maturity of the bond. The bonds were redeemed for series in the following terms:

Series I - one year from the date of issue, May 14, 1994;

Series II - 3 years from the date of release, May 14, 1996;

Series III - 6 years from the date of issue, May 14, 1999;

Series IV - 10 years from the date of issue, May 14, 2003;

Series V - 15 years from the date of issue, May 14, 2008.

The last coupon is presented together with the bond subject to redemption.

The main payment agent for the payment of principal debt on bonds and interest on coupons is the Central Bank of the Russian Federation, which relies on its currency and gold reserves. The CBR may appoint additional payment agents (commercial banks).

Domestic foreign currency loan bonds became the first on the developing market of Russian currency bonds. They proved to be very attractive for a foreign investor, as their yields were much higher than the yields on foreign stock markets.

The bonds of the first, second and third tranches were successfully repaid. In circulation remained the bonds of the fourth tranche - the volume of 2,627 billion dollars - on May 14, 2003, the fifth tranche - the volume of 2,167 billion dollars - May 14, 2008.

Gold certificates

The main type of debt in Russia, as in the whole world, is a bond. However, the Government of Russia also issues other kinds of debt obligations. So, in 1993 the Ministry of Finance of the Russian Federation issued Gold certificates.

The first issue of the Gold Certificates was in circulation from September 1993 to September 1994. The certificate was nominal, did not belong to currency values, could be paid only in rubles and was issued in face value of 10 kg of gold 0.9999. The Ministry of Finance guaranteed the yield on certificates at the LIBOR rate (the rate of interbank loans of the seven largest London banks) in the US dollar plus 3%. The volume of the issue was 10 thousand, of securities, i.e. 100 tons of gold deposited by the Ministry of Finance in the State Russian Committee of the Russian Federation on precious metals and precious stones.

The primary placement of Gold Certificates was carried out by the Ministry of Finance through authorized commercial banks. To purchase the Gold Certificates, the commercial bank was required to submit the relevant Application to the Ministry of Finance, to transfer the necessary funds. In the first two weeks after the placement began, the certificates were sold at par, and then with a premium determined by the Ministry of Finance.

In the secondary market, authorized commercial banks had the right to resell the Gold Certificates to legal entities and individuals, as well as non-residents on a contractual basis. Banks had the right to split certificates and sell them in parts. The crushing of the certificate could not be less than one hundredth of its nominal value, i.е. 100 g of gold.

Accrual and payment of interest income on the Gold Certificates was made quarterly by the Ministry of Finance in rubles on the basis of the price of gold in the London market on the first day of the first month of the next quarter at the rate of 3/12 LIBOR on the specified date plus 0.75%.

In general, the first issue of Gold Certificates turned out to be not very popular due to its large nominal value, which is inaccessible to a number of legal entities. The low profitability of these securities was combined with their low liquidity. It was almost impossible to implement certificates on hand. Banks were allowed to sell fractional shares of the certificate in the stock market only by issuing their own bonds, which, unlike the Gold certificate, were not government securities and, therefore, did not have tax benefits.

The Gold certificate was redeemed by the Ministry of Finance in rubles at the rate of the Central Bank of the Russian Federation or gold. At the request of the owner, certificates could be redeemed by exchange for other state securities of the Government of the Russian Federation. To redeem the bond with gold, the owner was required to have a special license from the Central Bank of the Russian Federation to conduct transactions with precious metals. Therefore, only a small part of the issue was placed (from the beginning of October only 10% of the total amount of emission was sold). The main buyers were banks "Menatep", "Russian credit", Promstroybank, etc.

The secondary market of the Gold certificates practically was absent. It was the slowest sector of the government securities market.

Control questions

• What is the definition of a state loan?
• What is the difference between a state loan and a bank loan?
• What do you understand by public debt?
• What is the external and internal debt of the Russian Federation?
• Name the main instruments of public debt management.
• What is the main form of public credit?
• What is the classification of government securities?
• What is the term "market value of a bond"?
• What is the current yield of a security and how is it determined7
• What is the total yield of a security and how is it determined?
• What are the main conditions for the issue of Russia's short-term zero-coupon bonds (GKO)?
• What is the difference between OFZ and GKO?
• When did the issue of OGSZ start and for what purpose?
• For what purposes and when were the Treasury bonds issued?
• What is the peculiarity of KO as a security?
• In what currency have OVVZs been issued and for how long?