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Russia: Resurgent State Looks For Debt Relief

  • Michael Lelyveld

Boston, 30 November 1999 (RFE/RL) -- A newly resurgent Russia may get an unexpected boost from the banking community, thanks to an agreement on debt relief with the London Club of commercial creditors.

The outlines of an agreement could give Russia something it has quietly sought since the collapse of the ruble in August 1998 -- a write-off of at least some of the old Soviet debt that it assumed eight years ago.

Russian officials say they are close to a deal to restructure $32 billion of the Soviet obligations, including possible forgiveness for 40 percent of the old loans. In return, the Russian government would provide a sovereign guarantee for the remaining amount with a new Eurobond, which is seen as better security than the current backing by Russia's Vneshekonombank.

Hopes for agreement by a December 2 deadline have sparked a sharp rise in the trading value of Russian debt, despite the government's default on payments last year. A deal would be a major step for Russia in coping with its $150 billion in foreign debt burdens as it climbs out of the slump that followed the August 1998 collapse.

But the agreement would also come at a curious time. While Western banks pursue their own interests, the fate of International Monetary Fund lending for Russia remains uncertain. Sharp differences among U.S. officials have been reported about the wisdom of continuing IMF loans, as long as Russia continues to pour funds into the Chechnya war.

Last week, the debate and Russia's defiance prompted U.S. Secretary of State Madeleine Albright to stress the importance of supporting economic stability, saying, "The last thing I think that we should be doing is trying to turn Russia back into an enemy."

While some U.S. statements suggest that the decision to pay the next IMF loan tranche of $640 million should be based on economic performance, there is evident reluctance to proceed until the fighting stops. So far, the IMF has made only one payment in July under a $4.5 billion loan program that was supposed to run for 17 months. The second tranche was expected in September. At the current rate, only a fraction of the program may be used.

The apparent slowdown provoked Gennady Seleznyov, speaker of the Russian State Duma, to say last week that the country could get along without IMF funds if unreasonable conditions continue to be set. The results of a second audit of central bank subsidiaries and transfers remain unknown. In the meantime, Russia's tax collections and oil revenues have improved enough that it can apparently consider funding its war costs even without IMF loans.

A break from the London Club of banks would help. Russia's improved fortunes were also seen in the exchange market last week when the central bank intervened to support the ruble against the dollar for the first time in months.

But Russia may be getting some indirect help from another unexpected quarter with Iraq's decision last week to halt its oil exports. The move, in response to a dispute with the United Nations over renewing the oil-for-food program, has helped boost world oil prices. A major beneficiary of higher prices will be the Russian government, which saw its revenues tumble last year after oil prices slumped.

Direct links in such cases always seem tenuous, but the interplay of forces is notable after a tumultuous week of events. Reports suggest that the Iraqi government grew alarmed by two developments.

The first was a story that Russian Foreign Minister Igor Ivanov had hinted to Secretary Albright that Moscow might ease its stance against Iraqi sanctions if the United States would restrain its criticism of the Chechnya war. Reports also appeared that France had moved closer to the U.S. position of demanding renewed weapons inspections in Iraq, leaving Baghdad increasingly isolated and reliant on Russia in the UN Security Council.

Whether the halt in Iraq's oil exports was designed to help Russia or not, Moscow has now denied that it tried to link the UN sanctions and Chechnya issues. It has also said that it could support a six-month renewal of the oil-for-food program with an increase in the spare parts that Iraq would be allowed to buy.

Russia continues to hope that Iraq will repay some $7 billion in loans. It has also signed major oil development deals with Baghdad. The net effect of all these separate threads is that Russia appears to be piling hope upon hope to improve its finances without bending to Western criticism.

The attempt may be to portray a stronger Russia that is able to pursue its own interests and work its own will, particularly in the days before the Duma election on December 19. But the memory of a Russia that needs Western aid is still not so long past that Moscow can afford to take its will to extremes.