The development of the state bond market

This paper studies relations between various segments of the Russian financial market. Special attention is paid to the GKO market.

Analysis of the daily data suggests the following:

• The heavy leaning of the GKO market on nonresident portfolio investors determined the high sensitivity of the Russian financial and currency markets to the Asian financial crisis in 1997-1998
• The outward rush of foreign investors capital and withdrawal of their hard currency profits gave rise to the sharply increasing indebtedness and to the currency crisis
• At the lowest point of the crisis the government made a decision to freeze and restructure the state debt in GKO and OFZ
• The GKO and stock markets grew increasingly integrated with time to the extent that the stock market became capable of generating natural constraints on the efforts made by the Central Bank with the purpose of decreasing GKO borrowing costs
• The GKO non-zero risk premium was estimated as the costs of position hedging in the GKO futures market. The procedure used for estimating the risk premiums may be useful for the governmental agencies as an instrument for estimating investors expectations and, hence, future spot prices of any government debt obligations
• Analysis has been made of the relations between sector indices on the stock market (Russian Trading System). Surprisingly, the structure of such relations before the crisis of August 1998 was similar to that of stock market indices in the industrial countries (USA, Great Britain). The only exception were the energy and telecommunications sectors, probably owing to the backwardness the Russian telecommunications industry in comparison to the American one and to the intense market activity in the privatization of the Sviazinvest company
• Before the crisis the activity in the over-the-counter currency market determined the activity in the foreign currency exchanges
• The analysis of the GKO and currency forwards markets revealed that the foreign investors favored portfolio investments in the period between 1996 and 1997. This suggests that the market was quite mature and fairly liberal for foreign investors