Reforming the Russian federal debt market

[The full text of this paper is in Russian language only.] This paper analyzes the market for Russian government debt and proposes ways to reform it.

According to the authors, the key objectives of the federal debt market are:

• financing the federal budget
• stabilizing excess liquidity on other financial markets
• regulating money supply
• stimulating economic growth through the banking sector

The authors claim that the greatest problem facing the federal debt market is the negative interest rate on debt. According to the authors, although it increases the borrowing capacity of the government and reduces the possibility of default, the overall effect of the low interest rate on GKO is negative for the following reasons:

• commercial banks will be forced to invest in risky assets, as government debt is most likely to be held by financial institutions with cheap liabilities (such as the Russian Savings Bank)
• negative interest rate on government debt implies a low interest rate on bank deposits and an increased demand for foreign currency
• negative interest rate on government debt will result in a large spread in interest rates across various financial instruments, which results in a reduction of growth in the banking sector and underinvestment
• corporate debt is issued at a higher interest rate because of lack of adequate information

The authors conclude that the government should take steps to raise the interest rate on its debt. That, in turn, should lead to:

• lower inflation and protection from external economic shocks
• greater domestic savings and a larger banking system
• development of the country’s financial markets
• greater ability to borrow from the domestic market, and the ability to use the interest rate as a tool of macroeconomic policy.