The new requirements for regional governments placing Eurobonds and other international debt issues include:
- limiting the total amount of borrowing and debt servicing costs;
- obtaining at least two credit ratings from international agencies;
- compliance with established local budgets in accordance with Russian budgetary and tax legislation; and
- submitting a full account of revenues, expenditures and budget deficits for the past three years with a prospectus for each new issue.
The Decree specifically sets limits on the amount of borrowing and debt servicing costs by referring to existing requirements for Moscow, St Petersburg and Nizhny Novgorod (under Presidential Decree No. 304 of April 8 1997). Under these requirements, the amount borrowed must not exceed 30% of annual regional revenue, and the cost of debt service must not exceed 15%.
On the application of the funds from international debt issues, the Decree recommends that proceeds be used for reforming local budget systems to secure stable future revenues. The Decree also directs the government to adopt more detailed regulations on international debt issues.
Perhaps the most significant part of the Decree is its pronouncement that, in approving access to international financial markets, the ministry of finance must give first priority to federal government borrowing. This implies that the regional governments must wait their turn. The policy may prove to be a greater limitation on the ability of regional governments to place international debt issues than any of the above requirements.
Given high domestic interest rates (exacerbated by recent turmoil on the financial markets), the regional governments are likely to continue to seek access to cheaper foreign credits. So far, about 10 Russian regions have either issued or are in the process of issuing Eurobonds. Meanwhile, this year alone the federal government has issued Eurobonds denominated in US dollars, Deutschmarks and lire for a total of about US$4.9 billion. The annual ceiling for such federal debt issues has been raised to US$6 billion, leaving room for further borrowing.
Robert Wood and Sergei Stepanov