Federal Government Bonds (OFZ) are a type of security issued by Russia’s Ministry of Finance. When you purchase OFZ, you are lending money to the Russian government for a fixed period. In return, you receive coupon income (typically paid twice yearly) throughout the bond’s term, and your initial investment is returned at maturity.
OFZ bonds are backed by the full faith and credit of the Russian state, making them one of the most reliable investment instruments available. The bonds trade on the Moscow Exchange and can be purchased through any licensed broker.
Types of OFZ Bonds
Federal government bonds are classified by coupon payment structure and principal repayment method.
By Coupon Payment Type
- OFZ-PD (Fixed Coupon Income) – The coupon rate remains constant throughout the bond’s life, with payments made twice yearly.
- OFZ-FD (Stepped Coupon) – The coupon rate is predetermined but changes at specified intervals. For example, the rate might be 7% for the first several years, then 6% for subsequent years.
- OFZ-PK (Floating Rate Coupon) – Coupons are tied to a floating benchmark rate such as RUONIA (the overnight interbank lending rate among Russia’s 28 largest banks) plus a fixed spread. For instance, the coupon might equal RUONIA + 0.74%. Each coupon is calculated based on the average RUONIA rate over the preceding six months, so returns rise when money market rates increase and fall when rates decline.
By Principal Repayment Structure
- OFZ-AD (Amortizing Bonds) – The principal is repaid gradually in installments according to a predetermined schedule rather than in a single lump sum at maturity. Payments may occur at regular intervals or with gaps, and may be equal or unequal amounts.
- OFZ-IN (Inflation-Indexed Bonds) – The principal is indexed daily to consumer price inflation. The Ministry of Finance publishes current and projected principal values at least two business days before each month begins. Coupon income and inflation gains are not subject to taxation.
How OFZ Rates Are Determined
OFZ market rates can be fixed or variable. Fixed rates are set for each coupon period of each individual bond issue. Variable rates are calculated using official inflation data. The OFZ rate is heavily influenced by the Central Bank of Russia’s key policy rate.
OFZ Yield and Returns
Total return on OFZ consists of two components:
- Coupon income paid to the bondholder
- Capital gain from purchasing the bond below par value
If you purchase a bond above par value (excluding accrued coupon), you will realize a loss upon maturity since redemption occurs strictly at par. As a bond approaches its coupon payment date, its price rises to reflect accumulated coupon income. An investor selling before the coupon payment date must account for accrued interest. Bond prices typically fluctuate around par value, with exact pricing determined by market conditions.
Tax Considerations: Capital gains from buying and selling OFZ are taxed at approximately 35%. Coupon income is taxed at 15% of the amount received. These tax implications are critical when evaluating the net profitability of bond trading strategies.
Advantages of OFZ Over Other Securities
Investing in government bonds is among the safest investment strategies available. Compared to bank deposits, OFZ offer superior reliability. Bank deposit safety depends directly on the issuing bank’s credit rating—higher-rated banks offer safer deposits but typically pay lower interest rates. Major Russian banks such as Sberbank and VTB offer some of the lowest deposit rates in the sector, often 50–80% below market averages.
The Russian government guarantees OFZ repayment. The credit quality of government bonds equals the sovereign credit rating of Russia itself. The state is obligated to meet its debt obligations to bondholders. Default occurs only if the government fails to meet these obligations, but sovereign default risk is substantially lower than corporate default risk. Only foreign government bonds rank higher in safety, though they typically offer lower yields.
Where to Trade OFZ and Who Can Buy
OFZ bonds trade on the Moscow Exchange and can be purchased through any broker. Both Russian and foreign individuals and institutions may buy and hold OFZ. Each bond has a par value of 1,000 rubles and pays returns in rubles.
Purchasing OFZ is straightforward—comparable to opening a bank deposit. Simply select a broker, sign a client agreement, and place your order. Many major Russian banks also offer OFZ services and can provide personalized advice on which bonds suit your investment objectives.
FAQ
What is the minimum investment in OFZ bonds?
Each OFZ bond has a par value of 1,000 rubles. You can purchase one or more bonds through any licensed broker on the Moscow Exchange.
How often do OFZ pay coupon income?
Most OFZ pay coupons twice per year. The exact payment schedule depends on the specific bond issue and is set at issuance.
Are OFZ safe investments?
Yes. OFZ are backed by the full faith and credit of the Russian government, making them among the safest securities available. Default risk is extremely low compared to corporate bonds or bank deposits.
