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GKOs, Gosudarstvennye Kratkosrochnye Obyazatelstva, are short-term ruble-denominated treasury bills issued since 1993. They played a major role in Russia's August 1998 economic crisis.

In the 1990s Russia was unable to balance its budget. The general government budget deficit varied from 5 to as much as 25 percent of GDP without any declining trend. First the deficit was covered by money emission, which contributed to very high and variable inflation. The Russian government started in May 1993 to issue short-term zerocoupon bonds known as GKOs. This was meant as a non-inflationary method of financing the deficit. The GKO maturity is less than a year. Sometimes the average maturity has been as short as half a year. There are also ruble-denominated mediumterm federal bonds known as OFZs (since 1995). Other government debt instruments were also issued, but GKOs remained the most important ones.

Russian inflation came down after 1995. The root problem, the budget deficit, was not addressed. It was believed that deficits could be financed by increasing debt. The government debt market was the fastest-growing market in 1996 and 1997. Domestic ruble-denominated debt remained very small until 1996 but rose to 13 percent of GDP in January 1997. This is still not an internationally high figure. But the high yields, short maturities, and large foreign ownership shares of GKOs made the situation explosive.

The GKO real interest rates were first highly negative due to unexpectedly high inflation. As inflation subsided but GKO nominal yields remained highdue to high inflation expectations, political uncertainty or other reasonsreal interest rates shot up. They were 3060 percent in 19961997. Later they decreased, only to reach new highs in early 1998, as the danger of default became evident. Interest payments rose to 27.6 percent of federal government revenue in 1995 and more than half in early 1998. Most GKOs were consequently issued to service earlier debt. By 1997 the GKO contribution to financing the deficit was actually negative. On the other hand, they had become the main revenue source for the larger Russian banks.

Access for foreigners to the GKO market was quite restricted until 1996. Due to the small size of the market relative to international capital flows and very high real interest rates, access was only liberalized gradually. Measures were used to keep the non-residents' earnings within limits. Still, by the end of 1997 their share in GKO stock was at least a third, perhaps more. The rest was basically owned by the Central Bank and the state-owned Sberbank. The risk of sudden exit of nonresident GKO holders was real. Nonresident behavior soon became a major source of the GKO market crisis in the spring of 1998.

After the crisis of August 1998, the government chose to restructure the GKOs and OFZs, which were to a large part frozen. Afterward, Russian government debt market has remained quite illiquid. With budget surpluses, the government has not needed new debt. Investors remain wary. GKO stock is less than 1 percent of GDP. However, debt instruments would be useful for liquidity control and protection from inflation.

See also: economy, post-soviet; sberbank


Gobbin, Niko, and Merleverde, Bruno. (2000). "The Russian Crisis: A Debt Perspective." Post-Communist Economies 12(2):141163.

Malleret, Thierry, Orlova, Natalia, and Romanov, Vladimir. (1999). "What Loaded and Triggered the Russian Crisis?" Post-Soviet Affairs 15(2):107129.

Willer, Dirk. (2001). "Financial Markets." In Russia's Post-Communist Economy, eds. Brigitte Granville and Peter Oppenheimer. Oxford: Oxford University Press.

Pekka Sutela