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Russia: Taking A Look At Its Commercial Debt Problem

  • Robert Lyle

After rescheduling it's debt owed to official creditors in the Paris club, Russian officials are now attemping to restructure the country's debt with commercial lenders in the London club. Finance Minister Mikhail Kasyanov says the restructuring is needed to allow greater domestic spending by the government. RFE/RL's Robert Lyle in Washington reports that a senior member of the Russian negotiating team has explained what Moscow wants.

Washington, 30 September 1999 (RFE/RL) -- Andrei Kostin, chairman of Russia's Vnesheconombank (Bank for Foreign Economic Ties) says there is still a wide gap between what Russia is asking from commercial creditors and what is being offered.

The discussions are about an estimated $30 billion in Soviet era debt owed to commercial banks and similar firms. If it is not rescheduled, Russia would have to repay in excess of $17 billion next year alone. Kostin says that would push total Russian debt repayment or servicing to 70 percent of the federal budget. That, he says, is unsustainable.

It's also obviously politically untenable since the Russian state Duma this week already rejected the government's draft budget for 2000, saying it spends too much on debt servicing and not enough on domestic social needs.

Kostin is in Washington attending the annual IMF/World Bank meetings, but is spending most of his time meeting with American investment firms and commercial banks. He was at the Russian embassy for a reception to celebrate his bank's 75th anniversary Tuesday night and met beforehand with journalists.

There is a requirement in the London club of not publicly discussing the negotiations, but Kostin said it would be no violation to say what Russia is seeking.

It is asking that a small amount of the debt be written-off, or forgiven, and the rest restructured into entirely new debt instruments or bonds, which would have repayment schedules set to what Russia can afford to pay over the next 10 years or more.

London Club negotiators do not like the idea of debt foregiveness, Kostin acknowledges. But he says it could be part of a comprehensive package that would include replacing the government bonds that were defaulted last year with new Euro-bond quality securities.

There is no way the government could replace the defaulted bonds without it being part of a comprehensive package. Says Kostin:

"You understand if today we issue new bonds in unrealistic amounts and circulate them in European markets, they will not accept it and think we're preparing another round for Russian default, so nobody's interested in this."

Kostin says he believes the market perception is that creditors would like to find a comprehensive solution because bankers want to get the issue resolved once and for all. Otherwise, he says for the next year or two they will be left with bonds which are in default and any banker prefers to have something that is valid and negotiable and is in the market.

That is why Kostin says he's optimistic that they may still beat what is the effective deadline of December 2 to reach agreement in the London Club. That is the date on which Russia owes the next installment of $600 million.

If no agreement is reached in time, he says, he expects a temporary, two-year short term rescheduling to be adopted similar to what was done with official creditors in the Paris club. But Russia's preference, says Kostin, is to get a long-term agreement.

"Our approach to these negotiations is very serious. We intend to make sure that this restructuring is the last one."

Kostin said the only limit on a comprehensive package with commercial lenders, as far as Moscow is concerned, is the country's ability to pay.