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Moscow developed a debt strategy keeping a conservative approach, – said Denis Mikhailov, head of SBI MosFinAgency, in an interview with Reuters

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INTERVIEW – Moscow developed a debt strategy keeping a conservative approach – Russian television and radio communications (RTSR)


Elena Orekhova

MOSCOW, 8 July 2014 (Reuters) – A debt strategy of Moscow for a three year term presumes the continuation of the current conservative approach to the placement of bonds, which constitute more than 90 percent of the debt, while the volume of new issues will be limited to large free cash balances, – said Denis Mikhailov, head of the State Budgetary Institution "Financial Agency of the City of Moscow" (SBI MosFinAgency) in an interview with Reuters.

The strategy was developed in accordance with new requirements of the RF Ministry of Finance to the regions. The strategy’s draft will be transferred to the Department of Finance by the end of July, and its abstract will be taken into consideration in the next year's budget. Moscow is the first region to draft such a document.


According to Mikhailov, the priority in the strategy has been given to a conservative policy, market instruments prevail in the borrowings, and an external debt will be gradually replaced by a domestic debt. In particular, he said:

"The city will actively manage its debt, constantly analyzing the market situation and status of the revenue part of the budget, and will conduct, if necessary, the exchange and repayment operations in order to reduce the burden on the city budget and to smooth the peaks of payments, for example, in 2016, when Moscow will face a large amount of repayments in the domestic and foreign markets (57.08 billion rubles)."

The borrowings in 2013 amounted to 29.7 billion rubles, 40.8 billion rubles were spent on debt repayments.

The amount of public debt in 2013 had been decreased by 4.8 percent to 179.2 billion rubles, and continued to decline in 2014: as of June 16, the city debt amounted to 142.86 billion rubles, including 121.62 billion rubles of ruble and euro borrowings, according to the Moscow Department of Finance.

"With the advent of new Moscow authorities the paradigm has changed: Yuri Mikhailovich’s [Luzhkov] team had a huge investment program, and in fact Moscomzaim [the Moscow Borrowing Committee] was engaged in this program’s funding. Today the city borrows only to finance the budget deficit," – said Mikhailov.

"The maximum amount of borrowings for this year amounts to 135 billion rubles; in the recent years the revenue plan was executed in full, while the expenditure plan was executed only partially, as a result of which free cash balances were formed. Therefore, we do not resort to large-scale borrowings, and arguments [of investment banks] that Moscow could borrow quite cheap and quite a lot are not convincing, although the situation may change at any time."

The city's budget for 2013 was accomplished with a deficit of 47.4 billion rubles: the revenues amounted to 1.481,4 billion rubles and the expenses to 1,528.8 billion.

The budget deficit in 2014 is planned in the amount of 216.3 billion rubles: the income – 1,528.7 billion rubles and the expenses – 1,745.0 billion.

"A new budget plan’s discussion begins in late August. General trends will not be changed, the budget deficit is unlikely to be increased."

In the near future no "dramatic" changes in Moscow’s debt policy will occur, but since it will work within the framework of a new budget plan (for 2015-2017 instead of 2014-2016), the borrowings’ parameters will be adjusted to the currently drafted budget.

"The duration of the bonds being placed will be up to 5 years, we will place standard bond issues in the amount of 20-40 billion rubles, the net borrowings will be the same [as compared to the previous plan]," – said Mikhailov.

"We do not plan to issue complex derivatives. Currently used instruments are positively accepted by the market and understandable to us."

In a budgetary plan for 2014-2016 the net borrowings in 2014 are planned in the amount of 88.5 billion rubles, in 2015 and 2016 89.5 and 46.0 billion, respectively.

In 2014, four bond issues were registered, each costing 40.0 billion rubles and maturing in 2017, 2018, 2019 and 2021, respectively. The constant coupon rate was set at 7.00, 7.20, 7.25 and 7.50 percent per annum.

Interest rates on the coupons were calculated taking into consideration the goal of the new issues’ allocation at a price close to a par value (95.1-100.0 percent of the nominal value).

"The practice of allocating securities without premium will remain," – the interviewee specified to Reuters.


The Budget Code of the Russian Federation stipulates that the region's debts should not exceed its revenues, and expenses for their service should not exceed 15 percent of the budget expenses. The ratio of the budget deficit to income is also limited to 15 percent.

Indicators of debt sustainability of the capital’s budget also include a debt capacity index, that is in fact the amount of funds available in the budget after the execution of all running costs: the total (for the current and the planned period) debt capacity should be at least 20 percent of the budget revenues of the current year, and the available debt capacity should be not less than 5 percent.

The ratio of debt repayment expenditures to budget revenues should not exceed 6 percent, while the amount of external debt is limited to 25 percent of Moscow’s total public debt.

By all indexes Moscow has a significant margin of safety. Our studies show that in case of general economic problems or crises the situation with income would commence to deteriorate in the third year," – said the head of MosFinAgency.

Moscow did not enter the public debt market in March and April in accordance with previously announced plans, and it was said that in 2014 the city would not issue bonds at all due to the accounts’ balance and the sale of property.

In 2013 the city received 105.4 billion rubles from the sale of non-core assets.

"Of course, if a sharp deficit increase takes place, the funds to be received from the planned privatization may not be enough, and then the city’s government faces a question whether to use the accounts’ balance or to borrow."

The city places temporarily free budget funds in bank deposits, general agreements on the funds’ placement are concluded with Sberbank, VTB, RAB, VTB 24, Bank of Moscow and Raiffeisenbank. Information on the amount of accumulated accounts’ balance and temporary placement conditions are not published.

"Yes, maybe we will not allocate [bonds in 2014]. We constantly monitor the situation with income and see that it is very good; for example, current cash accounts’ balance is more than 300 billion rubles," – said Mikhailov.

He said that the structure of budget revenues is being changed: in recent years the major share in tax revenues belonged to the income tax, but now the focus will be shifted towards the tax on personal income due to the introduction of consolidated groups of taxpayers.

BONDS AS AN ALTERNATIVE TO PPP [public-private partnership]

The city borrowings’ limit in 2014 is defined by the budget in the amount of 134.5 billion rubles. Perhaps the city will implement a part of these plans as an alternative to the PPP, which is more suitable for financing long-term projects rather than current needs.

"For example, this year we are to purchase rolling-stock for the metro. This is a tremendous amount of more than 40 billion rubles (not counting the cost of the public transport renovation). One of the discussed forms of financing is the leasing schemes, but they are very expensive. So, in theory the easiest and cheapest way is to borrow within the approved program of borrowings," – said the head of MosFinAgency.

"The PPP is a separate issue. There is a lot of talk about this, but successfully realized projects, such as Pulkovo, are rare. In addition, the PPPs are contracts of a long life cycle, and how they can affect the budget situation and how they can be linked to the three-year budget and Moscow’s borrowings are still the open questions."


The Financial Agency of the City of Moscow was established in July 2013 as a result of reorganization of the Public Debt Committee [Moskomzaim] that had been managing the public debt and temporarily available funds of the city budget since June 1999. The city bonds are traded by a subsidiary brokerage company CJSC Garant-M.

MosFinAgency is subordinate to the Moscow Department of Finance. General functions previously performed by Moskomzaim have been transferred to the Department of Finance, while analytical issues together with new tasks have been transferred to MosFinAgency.

"The range of tasks has been changed significantly. We are engaged in, for example, analysis of budget revenues and generally implement functions of an analytical center as there is no separate analytical unit in the structure of the Moscow Department of Finance" – said Mikhailov.

"The staff has been decreased significantly. In the best years more than 100 people were employed, and now less than 30. Recently we recruited professionals from the banking sector, the HSE [the Higher School of Economics] and probably will recruit more for macroeconomic and budget research."

Moscow's debt strategy involves enhancing the analytical component in the framework of decision-making in the field of debt management, as well as the development of the city bond market infrastructure as one of the largest segments of the regional market.

MosFinAgency also intends to provide analytical services to regions. In addition, we do not abandon the idea of creating an agency for the organization of regional bonds’ allocation mentioned by the former head of Moskomzaim Sergey Pakhomov.

"For many years we talked about the fact that regions appealed to us. Even the Accounting Chamber supports the idea to create a centralized agency for borrowings. We understand that it is not a proper time to create a new state structure right now, but in general this idea is likely to be correct", – said Mikhailov.

He added that he does not share the concerns of rating agencies regarding the maximum amount of the borrowings of a number of Russian regions in relation to their budgets and opportunities to service debts.

"Of course, it is necessary to talk about this, because currently seven RF subjects are in a dangerous situation. But the federal government will support them, we see that support."

Since June 30, Russian regions are allowed to attract budgetary loans at a rate of 0.1 percent per annum instead of the previously applied ¼ of the refinancing rate of the Bank of Russia, which means the cheap funding for the weakest.

In 2014 the cost of borrowings on the public debt market for subnational issuers was from 10% to 11% per annum.

"In connection with the need to fulfill the May presidential decrees, and in connection with substantial social obligations, which were actually obtained within the framework of budgetary authority, the regions had to (due to the lack of the revenue part) refinance, among others, the social spendings. The latest transactions were completed at high prices, but they are dictated by the current market conditions," – said the head of MosFinAgency.

"Under the current system it is very important to improve administration, the proper reallocation of funds within the federal budget between the subjects. The question is not in the system, but in the organization of inter-budget relations, its reform with a view to be more responsive to the needs of the regions."

With the participation of Olga Voitova

Editor Dmitry Antonov


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