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Russia: Landmark Debt Restructuring Deal Signed

  • Stephanie Baker

Moscow, 7 October 1997 (RFE/RL) -- Russia and the London Club of commercial creditors have signed a landmark agreement to restructure thousands of millions dollars of Soviet-era debt which officials said would open the door to a wave of new investment into the Russian economy.

First Deputy Prime Minister Anatoly Chubais told a news conference yesterday following the signing ceremony: "Today leaders of the biggest banks in the world recognized the irreversibility of our reforms and the prestige of Russia in the international community."

The long-awaited restructuring deal allows Russia to pay off $33 billion of Soviet debt over 25 years. Russia inherited the massive debt after the collapse of the Soviet Union under a deal with the former republics that gave Moscow control over all Soviet foreign assets. But Russia defaulted on the loans in 1991, casting a shadow over its credibility on international financial markets.

The agreement could pave the way for Russia to improve its international credit rating, a step that would ease terms for the government to raise a planned $3.4 billion through Eurobond offerings in 1998.

Tessen von Heydebreck, board member at Deutsche Bank who worked on the restructuring, told reporters that the agreement heralds Russia's return to the international capital markets "as a reliable creditor." He said the agreement could result in a credit rating upgrade for Russia, which would reduce its costs of borrowing on global financial markets.

The London Club deal comes after Russia joined the Paris Club of official creditors last month, following an agreement to reschedule $40 billion in Soviet debts owed to foreign governments over 25 years.

Chubais said the London Club agreement would speed up Russia's efforts to join other international financial institutions and help pump desperately needed funds into the economy.

"Today's decision creates unique possibilities for hundreds of thousands of Russian companies," said Chubais.

He said the agreement would allow Russian enterprises to tap international sources of finance, weaning them off of dependency on the nation's powerful banks.

"In effect it opens the door to a non-oligarchic capitalism in Russia," he said.

Top officials from 13 major banks took part in Monday's signing ceremony together with Vneshekonombank, which has been the Russian government's agent in the negotiations. Altogether the deal involves some 430 foreign banks which are sitting on 27,000 separate outstanding loan agreements. Von Heydebreck described the agreement as "one of the largest financial transactions of its kind."

Banking officials attending the signing said the deal would be an incentive for commercial banks to lend to Russia. Thomas Wells, vice-president of Bank of America in London, said it would "give commercial banks additional confidence to lend to Russia and to private enterprises."

Chubais moved to bolster confidence further Monday when he announced that Russia will now focus on restructuring an additional $4 billion in outstanding debts owed by Soviet-era enterprises to commercial creditors outside the London Club deal. These credits were not guaranteed by the Soviet authorities.

The London Club deal has been six years in the making and has kept foreign investors at the edge of their seats as they watched the negotiations unfold.

Eric Fine, an analyst at Morgan Stanley, called the deal "one of the most important events in emerging markets this year."

A grey market for trading London Club debt, known as Vnesh, was created in 1996 and has soared over the past year on hopes that a deal would be clinched by the end of 1997.

Eyes are now zeroing in on the December 2 closing date for the deal, which is when Russia is scheduled to pay $3 billion in cash towards the overdue interest. At that time, the holders of the loans will retire the defaulted debt and receive payment in principle and interest arrear notes, which will be known as Vneshekonombank bonds.

Fine said there could be volatility on the market as the closing date approaches. But he maintained that in the long term the London Club deal would help Russia attract a new class of investors and boost its reputation as a reliable creditor on international markets.