LONDON -- As the pace of financial innovation moves to breakneck speed in Russia, regional governments look set to open up another financing route -- municipal bonds.


The government of the Yaroslavl region, 200 kilometers northeast of Moscow, will be among the first to launch a major issue, Noreena Hertz, a consultant on financial matters from Cambridge University, said Friday.


Known as "Muni bonds" in the United States and issued to the tune of nearly $300 billion last year, a "major" offering in Russian terms means Yaroslavl is looking at a more modest 30 billion ruble ($15 million) one-year bond issue.


The bonds will be priced around the Central Bank's refinancing rate, which currently stands at 155 percent.


"One of the problems they faced was how to price the bonds," Hertz said. "So they've decided to hold an auction on a bid-yield basis."


In a bid-yield auction, buyers offer to purchase bonds at a particular yield rather than at a particular price. There will be four coupon interest payments.


Hertz said several firms had been asked to tender for the contract to run the issue and the Yaroslavl authorities will decide this by the end of the month. The bonds are scheduled to be launched in October.


Leading the field is a joint venture between Yarintercom Service and Renova Invest, a Moscow-based group supported by U.S. capital, who are competing with three local firms to manage the issue.


"We think the issue will be a success because Russian commercial banks will be keen to buy," Hertz said. She explained this was because for the first time banks would be able to use municipal bonds to form part of their reserve funds which up to now have been in non-performing assets.


Bond holders will also be able to take part in forthcoming auctions of municipal property and will be able to use bonds to swap for shares in privatizations.


Yaroslavl expects to use locally levied taxes to pay back investors and will pay part of the initial proceeds of the issue into an escrow account to secure interest payments.


The rest of the proceeds will be used to pay for schools, hospitals and local infrastructure projects.