Babushkas Are Next Port of Call for Russia Bonds to Plug Deficit

  • Finance Ministry wants to tap 21 trillion rubles of savings
  • Russians will have to overcome memory of People's IPO Debacle

Faced with the widest fiscal shortfall in five years, Russia is dusting off an idea that had been consigned to its Soviet history: state bonds sold to ordinary people at the post office.

The Finance Ministry is "actively working on a special debt instrument for households," it said by e-mail on Sept. 25, tapping a potential pool of 21.1 trillion rubles ($322 billion) of wealth that currently resides in bank deposits. The challenge will be persuading its target audience that they are better off buying the bonds for two or three years than putting their money into the bank, said Dmitry Polevoy, chief economist for Russia at ING Groep.

“Babushkas usually put their money into Sberbank, on short-term deposits,” Polevoy said Tuesday. “I doubt they’ll be able to raise a lot.” 

From war bonds in the U.S. to lottery bonds in Italy, governments have long appealed to the patriotism of their citizens to cover financing gaps. The world’s biggest energy exporter, Russia is seeking ways to narrow a deficit forecast to reach 2.7 trillion rubles this year after the price of oil sank 50 percent over the past year.

"It’s a good idea, supported by international experience," Vladimir Miklashevsky, strategist at Danske Bank A/S in Helsinki said. He cited Japan, where debt is owed mainly to households, and Italy, where government bonds are passed on from generation to generation. "The question is whether they can collect enough."

If the calculation is based purely on return it shouldn’t be a hard sell. The yield offered on three-year government bonds, trading at 11.38 percent, works out to about 90 basis points more than the maximum deposit rate at the 10 largest banks. The premium was as high as 137 basis points last month.

But Russians will have to overcome memories of the disappointment that followed the last time the government conducted a large-scale investment campaign for households. In a May 2007 "People’s IPO," VTB Group, the second-largest lender in Russia, raised $1.5 billion from 131,000 private investors, selling shares at 13.6 kopeks per share. They are now worth 6.7 kopeks.

So far, it’s only an "idea with no concrete terms," Konstantin Vyshkovsky, head of the Finance Ministry’s debt department told Bloomberg. Inspiration for the idea came from Soviet government bonds, which were sold at post offices, the Vedomosti newspaper reported on Sept. 28, citing unidentified Finance Ministry sources. The securities wouldn’t be traded on the open market, insulating them from price changes and a loss in value, according to the report.

In the 1980s, the Soviet Union sold 20-year certificates to people 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 to win a Volga sedan.

While the Finance Ministry has managed to raise 531 billion rubles through sales of debt on the local market, offering new inflation-linked instruments and luring Chinese investors into an offshore deal, it has repaid 947 billion rubles in maturing bonds and coupons in the first nine months of the year. A gap of 400 billion rubles remains.

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