The Sticky Problem of Russia's Old Red Ink

Western governments are inching closer to accepting Moscow's argument that the payment schedule for debts from the Soviet era must be renegotiated

It increasingly looks as though Russia will soon sign an intermediate agreement with the Paris Club of sovereign lenders, inking a deal that could adjust its debt-servicing levels for the next 25 years. "We think it makes sense at the moment to reach a deal with the Paris Club about restructuring outstanding payments," says Sergei Kolotukhin, deputy minister of finance. "That could mean reaching a deal similar to the temporary one we reached with the Paris Club on Aug. 1, 1999."

Such an agreement would allow for a reexamination of the Soviet-era debt-repayment schedule, probably reducing the annual amounts that Russia is due to repay -- by up to 50%, in some years. The temporary 1999 agreement expired last December. Russia is seeking a restructuring of the $38.7 billion of debts to Western governments that it inherited from the Soviet Union. In January, it said it could not afford to repay the $3.4 billion due in 2001.

Russia's initial comments provoked a furious response from Paris Club members, most notably Germany, which is owed some $20 billion. Germany and other creditors say Russia can easily afford to repay the debt in cash and on time. They point out that the Russian economy is now growing strongly and that the country is benefiting from a $60 billion balance-of-payments surplus as a result of strong oil sales. "It does not need a new debt deal for the time being, as far as we can see," said a spokesperson for the German Finance Ministry on Jan. 14.


  Since then, however, relations have improved. Western governments have accepted that a rescheduling may make sense because it would help ensure Russia's macroeconomic stability over the medium term. "They can definitely repay everything this year," says a French government official. "But it might be more difficult next year, if the price of oil falls and their revenues from exporting it decrease."

In the last week of January, Russia's Deputy Prime Minister and Finance Minister Alexei Kudrin agreed that the country was in a relatively strong position to service its debt this year and said it had no wish to renege on repayments. "We don't want to be considered a poor risk," he says. "But we do want to renegotiate because we aren't sure what position we'll be in next year or the year after, when we will have to repay more money."

Kudrin pointed out that there had not been adequate provision in the 2001 budget to cover Soviet-era debts because the government hadn't expected oil revenues to be so buoyant. He says it is in everyone's interests for Russia to be given a rescheduling: "We don't want to risk our hard-earned macroeconomic stability by undermining the state budget."

That's why, Kudrin says, he would not be in favor of a loan from the central bank to cover repayments. "Credit from the central bank is not a good idea, because it would cut foreign reserves and threaten macroeconomic stability," adds Kolutukhin. However, central bank Chairman Viktor Gerashchenko has promised bank support in repaying the debt, if necessary.


  Russian analysts say that the country has deliberately provoked a row over repayments to soften up the West for a major rescheduling. "They are definitely going to repay," says one Western banker at the World Economic Forum in Davos, Switzerland. "But they want to get the best terms out of the West as possible, and this is their way of sounding governments out. I think they will now show a lot of flexibility and move fairly quickly to a partial restructuring."

Russia also hopes to establish a debt-for-equity program with the German government, in which it would hand over stakes in Russian companies instead of repaying the debt with cash. The shares would then be sold to German companies that guarantee to recapitalize and invest in the Russian companies.

Germany was initially hostile to the idea, assuming that the Russians would try to hand over shares in companies that no one else would buy. "We think they would try to give us the bad assets they can't privatize any other way," says the German Finance Ministry official. But Russia has now said it is willing to include all industrial sectors in the plan.

However, Oliver Wieck, managing director of the East European Committee of German Industry, says that neither he nor anyone else has yet seen a list of the companies that could be included in such a deal. Wieck says many questions remained unresolved after two days of closed-door talks in Berlin between German and Russian government and industry representatives. "You will see investments from German industry only if the appropriate framework is in place," Wieck says. But a renegotiated repayment schedule will probably be unveiled soon.

By David Fairlamb in Davos, Switzerland

Edited by Beth Belton

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