Municipal entities

Volgograd

*

*

*

Ekaterinburg

*

*

Novocheboksarsk

*

*

Kostroma

*

*

Cheboksary

*

Arkhangelsk

*

Dzerzhinski

*

Data source: the RF Ministry ofFinance

Externalloans

In the October of 2001, Moscow became thefirst territorial subject of the Russian Federation to enter the Eurobondmarket after the financial crisis of 1998. Three-year Eurobonds worth of 300mln. Euro were floated at a 10.25% APR. The loan was formalized as a creditissued by the German BHF-BANK AG to the Moscow authorities and funded through the issue ofparticipation certificates. ING Barings and UBS Warburg jointly acted as the lead-managers of the bond issue. The demandfor the Eurobonds exceeded the supply by almost 90 mln. Euro.

Following the successful Eurobond issue,the Moscow authorities decided in November same year to raise a new five-yearloan worth of 400 mln. Euro. That loan was also formalized as a credit from apool of Western banks and funded through the issue of participationcertificates. Investor applications were collected by BNP-Paribas and J.P. Morgan, the co-sponsors- Merrill Lynch and Dresdner Kleinwort Wasserstein,a member of the Dresdner Bank Group. As a result,within one month the Moscow authorities issued bonds worth of 700 mln. Euros.

In December 2001, the Standard & Poor's agency raised theratings of Moscow and St.-Petersburg, almost concurrently with the rating ofthe Russian Federation, to the В+ level. Thus, the two municipal ratingsremained in line with the country rating (Table 34).

Table 34

International credit ratings ofStandard&Poor’s

Russia: ratings by theinternational rating scale

Data source: Standard&Poor’s

The settlement ofoutstanding debts

The revival of operations in the externalbonds market is possible, first and foremost, for the most stable and reliableof borrowers, including Moscow and St.-Petersburg which continued to servicetheir debts even during the crisis of 1998. At the same time, the domesticmarket may be generally characterized by a relatively weak position of thecreditors of territorial authorities, with the former often proving unable toget the territorial authorities to repay the debts despite the supporting courtdecisions.

One of the major barriers to thedevelopment of the market of subfederal and municipal debt instruments is theexisting procedure for the recovery of funds from territorial authorities inthe event of default. This problem is further aggravated by the fact that, evenwith the economic growth and favorable market conditions, a lot of theterritorial subjects of the Russian Federation and municipal authorities havevery few effective stimuli for the timely servicing of debts.

The problems relating to the issue ofsubfederal securities floated prior to the default period still remainunresolved. According to the Rosbank depositary, as at 1 of November 2001, 11territorial subjects of the Russian Federation did not even start to repay thefirst tranche of the "rural" bonds issued pursuant to Resolution # 224 of theGovernment of the Russian Federation "On the economic conditions of operationsof the agricultural complex of the Russian Federation in 1997", dated 26.02.97,which matured in 1998-1999.

The economically successful Saratov oblasthas satisfied less than 3% of its liabilities. The Arkhangelsk oblast, theRepublic of Ingushetiya, the Kabardino-Balkar Republic, the Komi-PermAutonomous District, the Magadan oblast, the Primorski Territory, the TaimyrAutonomous District, the Republic of Tyva, the Ust-Ordynski BuryatskiAutonomous District, the Chukotka and Evenki Autonomous Districts have yet tostart to honor their respective obligations.

Table 35

Consolidated data on the redemption of thepar value of the first tranche of the rural bonds issued by territorialsubjects of the Russian Federation (as at 1 of November 2001)

Data source: Rosbank'sDepositary

The available assets on the budgetaccounts of those regions that have not yet begun to discharge their financialobligations several times, or even dozens of times, exceed the amount of accumulated debts (Table 36).It is quite obvious that the Primorsk Territory andthe Magadan oblast could quite easily redeem the respective rural bonds.

Table 36

Outstanding liabilities on the rural bondsprincipal of the regions that have not started the redemption of rural bonds(thousand RF Rubles)*

Issuer	Balances of budget accounts **	Outstanding liabilities on the first tranche ofrural bonds ***	Ratio of outstanding liabilities on the firsttranche to balances of budget accounts, %	Ratio of total outstanding liabilities on ruralbonds to balances of budget accounts, %
Arkhangelsk oblast	180 145	17 250	9,6	28,7
Republic ofIngushetiya	132991	6020	4,5	13,6
Kabardino-Balkar Republic	52435	44030	84,0	251,9
Komi-PermAutonomous District	48452	4380	9,0	27,1
Magadan oblast	169462	8040	4,7	14,2
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