Germany to Russia: Pay Up

Talks aimed at rescheduling Moscow's debt have collapsed. But the door isn't shut yet to a restructuring down the road

Talks between Berlin and Moscow about rescheduling the $20 billion that Russia owes the German government have broken down. Russia has been pressuring Germany to reschedule the debt since the beginning of this year, and a number of negotiating sessions have been held. But officials in Berlin have been reluctant to countenance debt relief, because the Russian economy is growing strongly and the country's foreign reserves have been boosted by last year's high oil prices.

German officials have told the Russians that they see no point in taking the talks any further. "They've got the money and should have no difficulty paying," says an official at the German Finance Ministry. All told, Russia owes Western governments $48 billion and foreign banks a further $117 billion. Its hard-currency debt equals 65% of GDP. In theory, the Russians should easily be able to pay the $16 billion due this year in principal repayments and interest. Costly oil means billions of dollars more than expected have flooded into central bank coffers, and the country now boasts more than $30 billion in foreign reserves.


  But Deputy Finance Minister Sergey Kolotukhin insists it's too "simplistic" to conclude that Moscow won't face a problem paying the debt. He points out that $16 billion is equal to 33% of this year's projected budget revenues of $46 billion and that the repayments will rise to a peak of around 40% of budget revenues in 2003.

"Finding the money to service that amount of debt won't be easy," he says. "That's why we want to reach a rescheduling agreement now. We're preparing for the future." He adds that foreign-debt servicing costs Russia and other emerging-market governments an average of 25% of their budget revenues. The figure for Brazil is 15%, and for Poland a mere 10%. "Our creditors should be sympathetic," Kolotukhin says.

In January of this year, Russia threatened to withhold some debt repayments in a crude attempt to force Western governments to reschedule. Several countries, such as France and Italy, seemed likely to be flexible. But the Germans, who are owed almost half of Russia's total sovereign debt, demanded repayment in full and on time.

Then the Russians tried a new tack -- offering a series of debt-for-equity swap deals whereby Germany would get stakes in Russian companies in lieu of debt. But the Germans worried the Russians would saddle them with poor-quality assets. After three months of wangling, "there was nothing more to discuss," says a German Finance Ministry official. "They should repay."


  Most bankers gathered in London for the European Bank for Reconstruction & Development annual meeting, which started on Apr. 23, still think the Russians have a point. In particular, they say Moscow needs some sort of debt relief before the 2003 repayment spike. They fear that by then the repayment situation will actually be worse than the Russian government predicts, because the economic slowdown in the West means energy prices will fall, thus driving down tax receipts and foreign-reserve levels. But they also say whatever happens, Russia must meet its obligations. Otherwise, its standing in the capital markets will be undermined.

While the talks have been halted for now, German Chancellor Gerhard Schröder concedes that Germany might consider some rescheduling in the future if Russia does face a serious repayment crunch. Meanwhile, the Russian Finance Ministry plans to hold regular meetings with institutional investors aimed at more disclosure and clearer lines of responsibility in managing Russian debt.

Kolotukhin says he hopes a new system will be in place by midyear. "We still want to renegotiate, and will be doing our best to persuade our Western partners to listen," he says. End of story? Not quite, considering Germany's decision to turn a deaf ear.

By David Fairlamb in Frankfurt

Edited by Douglas Harbrecht