Investment in FLB as factor of sustainable economic development

Tendency to devaluation of national currency, is available to date, forces Russians to think about how to keep savings in the coming eye. And this can be difficult to implement taking into account economic circumstances developed in the country such as: budget deficit, imposed sanctions, fall in the prices of energy.

Private investors are faced with a question what financial instrument is better for satisfaction of their goals in conditions of high inflation and instability in financial markets. In such circumstances traditional ways of saving money (bank deposits, investment properties, purchase of precious metals) do not allow the investor to be completely confident in their safety or get a decent return on investment.

In conditions of economic instability common people prefer to use more stable and less profitable financial tools, for instance, deposits.

If we talk about inflation, it is noticeable that inflation is higher in percentage than the deposit rates in Sberbank. Especially this gap in rates is noticeable in times of crisis in 2008 and at present. In economically difficult moment inflation depreciates savings the most. This leads investors to the necessity to look for the instrument exceeding banking profitability and which is highly reliable at the same time. Currently federal loan bonds provide such opportunities.

Federal loan bonds (FLB) are registered government securities, issued in documentary form with mandatory centralized storage. Ministry of Finance of the Russian Federation is the issuer of bonds on maturity of bonds FLB can be shortterm, medium-term or long-term. Russian and foreign legal and physical entities can be bondholders. Central Bank of the Russian Federation is the general agent for servicing FLB issues.

Due to the current high level of profitability foreign investors, besides domestic ones and financial institutions, are shown an increased interest in FLB. At the moment they own about 25% of Russian FLB.

FLB yields to reimbursement change every month During a downturn in 2009 FLB prices fell sharply causing an increase in yield, to 15%.

That is, FLB purchase in times of crisis could bring the investor a 15% yield to maturity. FLB yields behaved in the same way in 2014-2015 having reached the maximum value of 15,59% in January 2015. Then FLB yields began to decline smoothly following the key rate that was being reduced by the Central Bank throughout the year, and by the end of 2015 effective FLB yields were fixed at the level of 10 to 11% per annum.

Federal loan bonds in 2018 are submitted by the Ministry of Finance as an alternative to bank deposits of individuals as FLB-n yields are comparable to the interest rates of deposits. And it’s needless to say about their reliability.

Now FLB-n of 3 issue already are being placed. The first issue was sold from 26 April to 25 October 2017. The second one was sold from 13 September 2017 to 14 March 2018.

Federal loan bonds – 2018 are issued for a period of 3 years. Individuals who bought FLB-n will have to return them back to the state in 3 years and receive the invested money with interest. Starting date of placement of 3 issues bonds is 15 March 2018. Redemption will be on 24 March 2021.

Certainly, FLB – holder has the right to surrender them to the state before the expiry of the 3 – year period, for example, after 1 year of bond ownership. But in this case his income will be much lower than after 3 years. And therefore it will be unprofitable to relinquish FLB – n to the state in the first year after purchase.

In a word, in order to get the maximum possible income, the owner of FLB – 2018 should keep them at home for 3 years.

Basic features of FLB – n:

• 1.    Bond maturity is 3 years, coupon payment frequency is every 6 months;

• 2.    Higher yield in comparison with deposits;

• 3.    Redemption of FLB – n by the bank at any time to maturity in a fast – track manner;

• 4.    The bond placement price is determined by the issuer;

• 5.    FLB – n bond redemption right;

• 6.    Automatic redemption of FLB – n by maturity.

Restrictions on circulation and acquisition

• 1)    Only adult citizens of the Russian Federation (individuals) can purchase FLB – n;

• 2)    You cannot transfer securities for depositary accounting to another authorized bank, other depository;

• 3)    You cannot sell FLB – n to another individual or legal entity, except agent bank where FLB –n were bought;

• 4)    You can get FLB – n securities in the inheritance;

• 5)    FLB – n should not be used as security for margin lending or be the subject of pledge.

From all of the above we can conclude that FLB have higher volatility, and therefore have large potential income than deposits and require more, careful study before buying because large number of factors influence on the effectiveness of such investments. In some periods, FLB yields may exceed the profitability of deposits, in other periods there is an opposite tendency. But FLB give an opportunity to get a higher yield than from the bank deposit, especially in times of crisis, if you approach the choice of FLB carefully.

FLB advantages:

• 1.    great choice on yield and maturity. You can find FLB that will be redeemed after 10 and even more years or in a month;

• 2.    potential FLB yield exceeds deposit rates;

• 3.    accumulated income when selling FLB is not lost;

• 4.    due to high liquidity FLB are easy to sell;

• 5.    auxiliary facility to earn money on the growth of FLB prices;

• 6.    coupon FLB yield is not taxed (for individuals) and in selected issues significantly exceeds the deposit rates and corporate bonds.

FLB flaws:

• 1)    buying FLB for a very small amount of money can be simply unprofitable because all profit will be eaten by «commissions and taxes»;

• 2)    investments are not insured but the probability of non – payment is extremely small;

• 3)    income from the difference in purchase and sale prices of FLB is taxed;

• 4)    FLB price and interest rate risks;

• 5)    competent acquisition of FLB requires pilot analysis and understanding of market conjuncture.

Having considered the features of FLB in the contex of the attractiveness of this tool for private investors in conditions of high inflation of small deposit rates, we can draw the following conclusions:

• 1.    This tool is suitable for conservative investors wishing to achieve maximum security of their investments Government bonds have the highest reliability rating and probability of non-payment on them is too small because the state can always make emission of new FLB for redemption of previous issues;

• 2.    Investors with a moderate attitude towards risk will find this tool useful as FLB yield may vary since FLB price can change. When FLB price falls, the yield to maturity of FLB increases. Buying FLB below the par value you can get additional income on price development because FLB will be compensated at face value. On the government debt market there are also issues with coupon income exceeding the deposit rates of the country’s largest banks by 1-2%;

• 3.    Aggressive investors can use this tool in the framework of diversification of their investments using short-term FLB for filling the part of the investment portfolio that is commonly called «bonds».