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Russia Surprises Investors

Russians, as a rule, love action movies. The standard down-to-the-wire, underdog-wins-big formula always draws a crowd. The government played that role successfully last fall during the Asian crisis, and the Kremlin is trying for an encore performance this week - with mixed reviews from investors so far.

Russia stunned financial markets Wednesday with a successful sale of $1.25 billion in Eurobonds, just days after Moscow was forced to triple official interest rates to stave off a run on its currency.

The Eurobond issue provided Russia with immediate cash to repay the $1.2 billion in Treasury debt that matured on Wednesday, staving off any more pressure on the ruble. However, the government still must make another $3.9 billion in debt payments this month, and a total of $33 billion this year. The government assumed annual borrowing rates of 25 percent in the 1998 budget.

The bond issue, in which Russia placed five-year paper at 12.07 percent, or 650 basis points above comparable U.S. Treasuries, marked a profound turnaround in investor sentiment since last week's steep rise in Russian domestic Treasury yields, traders said.

"What it suggests is that there is confidence Russia can raise money at acceptable levels, which is a very positive sign," said Kimberly Kirkman, emerging market analyst at Alliance Capital.

Equities traders agreed, and they've come back into the stock market in droves. The blue-chip Moscow Times Index of 50 leading shares, up 3.7 percent in midday trading Thursday, closed flat at 162.3, perhaps pausing for a breath, after increasing 11 percent Wednesday, and 13 percent Tuesday.

"Two factors are driving the market. One is the feeling that we've seen bottom. The other is the sense that the cavalry is on the way," said Dan Wilson, head of research for Moscow's Creditanstalt Investment Bank.

Others were not so rosy, saying Russia's woes are not over yet. The country needs more than a single bond issue to resolve a rash of financial difficulties, most notably a massive fiscal deficit, said one trader. "The $1 billion is good for them, but it's not going to solve their problems," he said. "It would have been better as part of an overall package to shift their financing as opposed to just one opportunistic issue."

The stock market is still down about 45 percent this year, losses that only Indonesia's market can match. Over the past week, investors had worried that the Russian economy would crack under the pressure of slumping asset markets that were hit by a flight of investors to safer havens.

The financial difficulties have raised concern that the government may not be able to meet its short-term debt obligations and force the country to devalue the ruble. Deputy finance ministers from the Group of Seven highly industrialized countries are due to meet in Paris next week to discuss the situation, which is still characterized as dire by investors and international observes alike.

Comments by U.S. Treasury Secretary Robert Rubin and Russian officials helped buoy opinion on the Moscow markets that a well-rounded package would come this week, Wilson said.

Speaking before the Eurobond announcement, Russian Finance Minister Mikhail Zadornov said the government would announce a new foreign borrowing program in the next few days. He said the financing sources being considered were the IMF, private banks and Eurobond issues, but did not mention the G-7.

Fixed-income analysts say a package is likely to come from a consortium of international banks, led by Germany's Deutsche Bank, who together have around $3 billion sunk into the Russian markets.

Written By Margaret Coker

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