A Can't-Lose Offer: Buy Russian T-Bills

Want me to let you in on an absolutely sure thing? Want to practically double your money over a year with absolutely no risk? Well, listen in.


I am not usually a sucker for pitches from financial salesmen, be they insurance agents, stockbrokers or retirement planners. But it seems that the Russian market is offering an incredible deal at the moment.


The market I am talking about is T-bills, Russian government-backed treasury bonds. Have a look at the table on the next page of The Moscow Times, and you will see that you can buy a T-bill that matures in December for about 79 percent of its maturity value. In other words, you will make about 26 percent in a period of less than three months. Or in yet other words, you will make the equivalent of 150 percent annually.


Of course, you will point out, we are talking about a return in rubles. The ruble could plummet and your 150 percent gain would turn into a loss. But that is the whole beauty of it. Since the advent of the ruble corridor, there is almost no exchange-rate risk. The Russian government has promised that it will maintain the ruble between 4,300 and 4,900 to the dollar until the end of the year.


Even if the ruble drops to the bottom of the corridor, that still gives you an annualized return of the equivalent of 80 or 90 percent. Not bad for a few telephone calls.


The only risks are either that the Russian government will default on its T-bills or that the currency will collapse. Both are possible, but very improbable, at least until after the elections. So why are yields on T-bills so high and apparently secure?


The economic explanation is that Russia has a huge borrowing requirement this year and also next year. The T-bill market is the standard bearer for this plan.


Russia wants to establish a good reputation among lenders, including the IMF and foreign capital markets. This will be essential if Russia is to conclude the talks now under way on restructuring Soviet-era debt.


A successful, growing T-bill market is the best way of showing that Russia can operate as a borrower. Unfortunately, the domestic sources of financing have dried up, especially since the banking crash. The net result is that, even though the ruble corridor has reduced exchange-rate risk, the interest rates on the T-bill market have stayed very high.


How can you get a piece of the action? It's not easy. Bureaucratic restrictions make it a complex process. In particular, taking the money out of Russia may be difficult, since you must do it through cumbersome investment accounts with the Central Bank. But brokers seem to know ways around these restrictions.


Strangely, the Central Bank and the Finance Ministry seem reluctant to increase access to the T-bill market. They could do this easily by removing the restrictions, for example, making it easier to repatriate funds. Increased access would probably mean a bigger supply of cash and a lower cost of borrowing.


The government has been talking about increasing access to the T-bill market for some time and indeed of introducing other borrowing instruments that would appeal to foreign capital markets. Doing so would go some way toward helping Russia solve its borrowing crisis by reducing interest payments, slightly. But handling a massive and sustained borrowing program is one of the trickiest balls that the Russian government is juggling at the moment.





Geoff Winestock is a Moscow-based correspondent for the Journal of Commerce.