Brezhnev Bonds Haunt Putin as Investors Hunt $785 Billion
The European Court of Human Rights in Strasbourg ordered Russia last month to pay Yuriy Lobanov, a septuagenarian from the Ivanovo region near Moscow, 37,150 euros ($46,497) in compensation for the 1982 notes he held, or about 140 times the average monthly pension. Mariya Andreyeva, a 95-year-old survivor of the Nazi blockade of Leningrad, won a preliminary 4,300 euros on the bonds, which doubled as lottery tickets.
The securities are part of the 25 trillion rubles ($785 billion), equal to almost half of Russian economic output, the government says it still owes the public from lost Soviet savings. Putin is stalling, most recently signing an order in April to halt payments on the notes until at least 2015. Now, armed with court rulings, veteran speculators are joining pensioners in seeking to cash in.
“This all should have been settled back in the 1990s,” said Boris Kheyfets, a Soviet debt specialist at the Russian Academy of Sciences’ Institute of Economics in Moscow. “How do you assume a debt that huge? It would collapse everything immediately.”
Soviet authorities began selling the 20-year certificates in 1982 for 25, 50 or 100 rubles, partly to redeem earlier bonds and partly to sop up cash from a command economy with few consumer goods. The State Domestic Lottery Bonds offered a token 3 percent interest and a chance at payouts of as much as 10,000 rubles, Kheyfets said. The top winners were entitled to a “chic” Volga sedan, while second prize was a Zhiguli.
Unlike other former Soviet republics that settled similar debts in the 1990s at a fraction of what was lost, Russia pledged to cover the whole amount. President Boris Yeltsin signed a law in 1995 ordering the government to restore savings via bank deposits and Soviet bonds based on what those holdings could have purchased in 1990. Payments started in earnest during Putin’s first term, when surging oil prices pushed the budget into surplus. Now Putin is back in the Kremlin for a third term and the budget is barely breaking even.
“Clearly, implementing this plan to restore the public’s savings would impose exorbitant obligations on the federal budget,” the Finance Ministry said in its most recent debt strategy report, released a year ago. “Were that actually to happen, the state would be deprived of the ability to pay for other expenses for an extended period of time.”
In the 1990s, Russia was passing laws without thinking of how they’d be funded, Putin told a meeting of regional human rights officials Aug. 16. Repaying all lost savings immediately would mean “nothing left to pay salaries to soldiers, to doctors, to teachers,” Putin said, according to a transcript on the Kremlin’s website. Russia should continue to pay what it can to the most elderly people who lost savings, he said.
The Finance Ministry’s plan to compensate the most elderly “victims” is the best approach, and gradual payments should be continued, Putin said. “This is something we’ve inherited from the past, but we need to do something about it.”
The government has earmarked 50 billion rubles in this year’s budget to repay lost deposits, and the same amount for 2013 and 2014. Savers who die are also eligible for 6,000 rubles, less than $200, in funeral costs.
“We make the payments every year, but it’s a miserly amount,” Kheyfets said. “I guess that’s just how it’s going to be until the people die.”
Running out the clock may now be a losing tactic. In their Lobanov ruling, the Strasbourg judges cited Russia’s refusal to say how many of the 1982 bonds are outstanding and its repeated suspension of a mechanism for redeeming them, “for reasons that remain unclear to the court.”
The Justice Ministry, which represents Russia in Strasbourg, said in a faxed statement that it honors all judgments by the European Court of Human rights, adding that the Lobanov ruling only applies to the 1982 notes. The Finance Ministry declined to comment.
The estimated 25 trillion rubles in liabilities, if fully recognized, would boost Russia’s debt nearly 10-fold, Vladimir Osakovskiy, chief economist at Bank of America Merrill Lynch in Moscow, said today in an e-mailed comment. Earlier settlements suggest Russia will find a way to avoid damage to its credit ratings or sovereign debt, he said.
“Back in 1997, Russia settled outstanding tsarist bonds in France for $400 million, which was less than 1 percent of foregone purchasing power in nearly 100 years of foregone interest,” he said. “We expect similar settlement in this case as well.”
There are no public records for how many Brezhnev bonds were sold, Kheyfets said. As bearer bonds with no ownership records, the 1982 notes served as a second currency supporting the Soviet shadow economy, he said.
Russia didn’t mention the notes or estimate of Soviet savings debt in the 143-page prospectus for its $7 billion sale of Eurobonds this year.
Some of the securities were cashed in or swapped for new debt in the early 1990s. After the 1995 law, when Russia agreed to restore lost savings at 1990 levels, the state converted the 1982 bonds into so-called promissory rubles, essentially increasing their face value by 40 percent. Later legislation pegged their value to a basket of consumer goods and ensured they would accrue interest of at least 9 percent. The government last valued the promissory ruble in 2003, at 32.34 current rubles, a figure cited by the court in the Lobanov case. The ruble fell 0.5 percent to 32.02 per dollar by the close in Moscow.
Lobanov offered a “very sound” valuation, leaving little room for rebuttal, said Vasily Vasilyev, a lawyer at Yukov, Khrenov & Partners in Moscow. Russia dodged similar rulings by changing the law during European court proceedings, he said.
Speculation on the certificates has made it as far as EBay.com, where 25-ruble 1982 bonds are being offered for $2.85 apiece.
On Russian websites, some sellers claim to have proof their bonds are listed as subject to payment in a Finance Ministry registry. Others are offering notes sold in former Soviet republics, which Russia isn’t legally obligated to repay.
Zakir Agabayev said he discovered 600,000 rubles of the notes in a trunk at his wife’s grandmother’s home in Kyrgyzstan. He said he offered to sell the bonds on the Dorus.ru message board, but the best offer was 2.5 percent of face value, so he declined.
“People called two or three times, but the offers weren’t serious,” Agabayev said by phone.
The biggest bet so far was made by Artem Tarasov, a commodities and computer trader who shot to fame in 1989 after claiming on national television to be the first legal Soviet millionaire. He became part owner of Moscow-based Vitas Bank, which lost its license this year after trying to put 3 billion rubles of the Brezhnev bonds on its books at face value.
Putin signed the three-year payment freeze after the central bank first noticed Vitas’s accounting move, Tarasov said in an interview in his Moscow office. After the moratorium, the regulator classified the notes as Category 5, or hopeless, and told the bank to form 100 percent provisions for loan losses.
“How could we have ever imagined the central bank would come and declare their country in default?” Tarasov said. “But that’s just what they did.”
Central bank First Deputy Chairman Alexei Simanovsky said Vitas’s license was revoked because its capital adequacy ratio fell below the mandatory 2 percent level, not because of the notes. Regulators only saw a fraction of the 3 billion rubles Vitas claimed to have, Simanovsky said by phone.
“The bank maintained that this was two tons of paper, that they were in some special depositary and that getting in was somehow very hard,” Simanovsky said. “It’s all a bit like the story of Cinderella, where the pumpkin turns into a carriage.”
Still, Tarasov has access to 50 billion rubles of the certificates that he plans to “tender for all they’re worth,” he said.
“Suppose they really do start making payments on these bonds in 2015,” Tarasov said. “Their value today in Russian money is 50 to 60 times the nominal value.”
Russia probably will only resume payments if a group with enough political clout starts amassing them, said Saleh Daher, managing director at Turan Corp., which has invested in Soviet commercial debt.
“People will make money from this,” Daher said by phone from Boston, where Turan is based. “And I doubt very much that much of it will go to the pensioners or the people who actually had the claims in the beginning.”
One of those people is Boris Andreyev, a 65-year-old retired electrician with no legal training.
For almost two decades, Andreyev and his mother, Mariya Andreyeva, have sent hand-written petitions to courts and ministries seeking repayment. The 4,300 euros the judges in Strasbourg awarded, based primarily on his mother’s advanced age, is a pittance, he said.
Their notes, deposited in 1986, were bought up in a state program in 1993 that left them with about 3,000 rubles in a bank account, an amount that shrank to 3 rubles after the currency’s redenomination in 1998. The account, still open and untouched, has grown to 5 rubles, thanks to years of interest payments.
Andreyev, who lives on a monthly pension of 6,000 rubles, plans to continue his campaign in Russian courts.
“In Soviet rubles, the bonds were equivalent to the cost of a one-room apartment,” Andreyev said. “The 5 rubles we got are equivalent to a roll of toilet paper.”
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