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Russia: Financial Community Awaits Debt Details

Washington, 24 August 1998 (RFE/RL) -- The global financial community is waiting with bated breath for Russia's decision on exactly how it will handle the rescheduling of its government debt.

As part of its emergency program which effectively devalued the ruble, Moscow suspended repayment for 90 days on an estimated $40 billion in treasury bonds and bills coming due by the end of next year. An announcement on exactly how that rescheduling will be handled, expected today or tomorrow, could have an impact far beyond the $11 billion of the debt held by foreigners.

Russia's chief negotiator with international lending institutions, Anatoly Chubais, told a television conference in Moscow on Friday that the overhaul will be tough but will respect the principle of equal treatment for all investors.

Chubais' reassurance was considered vital because an early announcement from the treasury that the restructuring would not discriminate against foreigners did little to calm investor's fears around the world late last week.

On Friday, the uncertainty was reflected by a strong movement of investment money into U.S. Treasury bonds and bills -- a move known as "flight to quality." One commentator on an American financial television network said it had gone from "a flight" to "a stampede."

So much money went into U.S. Treasury instruments that the price was pushed to a higher than usual level, pushing the return to investors down below 5.5 percent for the first time in years. In bonds, when the price goes up, the return goes down. But investors like them because the principle does not fluctuate the way a share of stock can.

Financial commentators said the uncertainty surrounding Russia was a major factor in Venezuela's decision to widen the band within which its currency is traded against the dollar and the deutsche mark. The reason, they said, was that investors consider the continuing Asian financial crisis and now Russia's problems as examples of the rising risks in so-called emerging or developing country markets.

That prompts investors to move their money out of such markets and into investments with less risk, like U.S. Treasury instruments.

Mostly, investors seem to be stepping aside from markets like Russia's to wait until the dust settles. However, Andrew Cowley, head of Russian operations for Dresdner Kleinwort Benson, -- Dresdner Bank's investment banking arm -- was quoted as saying Russia's reassurances on non-discrimination against foreign investors is "encouraging." He said the statement was strong enough to "make it hard to wriggle out of."

A scholar of Russia's economy in Washington, however, thinks it won't make any difference how Moscow deals with this particular moment.

Clifford Gaddy, a fellow at the Brookings Institution, told a conference on Friday that "whatever happens in the next few days is by no means the end of even this crisis, not to mention further ones." He said Russia is in a "very deep debt, a hole" and that however the government reschedules the debt this week, it will "with almost 100 percent certainty" be changed before the end of the 90 day moratorium.

Gaddy said the problem is that Russia has not really undergone a fundamental reform of its economy and that until that occurs, "we're looking at a continuing crisis -- it's not over with this."