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Risky Russian bonds are back

Suitably icy winds and flurries of snow carried the historic message to the City yesterday that the Russians are back. After an 80-year enforced absence, the city of St Petersburg announced a return to the international bond markets.

Buoyed by the success of its domestic fund-raising, Russia's second city felt it time to brave the stigma of Soviet default and tempt London's investment community with the prospect of sensational rewards - and a little risk.

Dispensing with the heavy American investment bank artillery traditional for these occasions, the honours were done, at great Russian length, by Anatoly Sobchak, the mayor of St Petersburg. The domestic political situation may be confusing, he said, as prime ministers come and go and 42 political parties jostle for position, but St Petersburg is a beacon of stability and prosperity.

There is to be no special international bond issue, but probably from January, international investors will be encouraged to participate in the regular municipal bond auctions. The attraction is that the city is now able to issue 18- to 24-month bonds, which by Russian standards is long-term. Earnings will be tax-exempt, and institutions will be able to get their money out, Mr Sobchak said.

But even Russian investors demanded more than the mayor's smooth assurances. Earlier this year the yield on the nine-month zero coupon bonds was up to 250 per cent. International investors, with memories alive of all those useless, defaulted Russian bonds decorating the walls of just about every investment bank in the City, will no doubt be looking for similar returns. Even on three-month zero coupon bonds, the yield has only come down to 80 per cent.

At those sort of rates, St Petersburg is not expected to try to raise much, but rather to open the first chink in the door of international acceptability for the return of Russian bonds.

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