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Russia: Debt Talks To Resume In London

Washington, 26 October 1998 (RFE/RL) --Negotiators from Russia's Central Bank and Finance Ministry will sit down again with representatives of major commercial banks in London this week to continue working on a solution to Moscow's debt problems.

Germany's Deutsche Bank, which is leading the commercial lenders committee, says the discussions did not break off last week.

The negotiations are "very complex and difficult," said a Deutsche Bank spokesman in Frankfurt, but they are continuing.

International banking sources in Washington and London, closely familiar with the situation, say the issues are so complicated that it could easily take a year or more.

"This is not going to be done in an afternoon with a handshake," laughed one banking source, using extreme understatement.

On August 17th, as part of its de facto devaluation of the ruble, Russian authorities declared a 90 day moratorium on most government and banking debt and imposed a forced rescheduling of major parts of treasury debt instruments.

An estimated $40 billion worth of ruble-denominated treasury notes therefore went into technical default and the global banking community -- along with the International Monetary Fund (IMF) -- decried the "unilateral" action.

Russian officials quickly realized that without negotiating any rescheduling with lenders, bond holders and other investors, Moscow would be cut off from commercial money markets for decades.

The new Russian government of Prime Minister Yevgeny Primakov immediately said Moscow would negotiate with foreign creditors to work out mutual agreement on the debts.

The talks with the major bank committee are held in the British capital under auspices of the so-called London club. Only last December, Russia finished six years of negotiations in the club on old Soviet Union debt to the commercial banks.

But if the issues were complicated and difficult for those talks, banking sources say the current situation goes far beyond anything dealt with in the past.

First, the creditors are no longer a handful of major banks with straightforward loans to a government. Now, there are literally hundreds of banks and thousands of non-bank firms which hold most of the Russian government's frozen treasury instruments, known as GKOs.

The sources say each of these groups of creditors has a different interest at the moment. For example, those who hold just the GKOs, those who have GKOs plus sophisticated contracts called "hedges" (bets with Russian banks that the ruble would not be devalued), and those who hold just hedges but no GKOs, would all want the rescheduling worked out differently. Banks and commercial firms also may want different results out of any rescheduling.

Banking sources say the creditors are going to have to set up some interim mechanism to trade among themselves to equalize their situation as one way to help move the talks forward.

But that is a mere detail, say the sources. Larger issues are still being dealt with. For example, in the first talks in London, the banks said they must have at least 20 percent of the debt repaid up front in cash. The Russian negotiators were only willing to talk about trading the old GKOs for bonds repayable in 17 years -- with an eight year grace period on interest payments.

Jeffrey Anderson, director of research of the global organization of commercial finance firms, the Institute of International Finance (IIF), says the bigger problem for the Russian side is giving priority to the external debt when domestic problems -- such as wage and pension arrears -- are so pressing.

Anderson told our economics correspondent that this means the Russian government must deal with the same old basic need for reforms. He says that Russia is going through an unwinding of financial stabilization, so it must first restore some semblance of the reforms, such as reducing the budget and improving tax collections, that it did not do when circumstances were far easier.

The budget is critical, says Anderson, because it could cost the government at least $4 billion more than what it is planning right now just to get the banking system functioning again. The banks are critical, he says, not only to the debt negotiations, but for any long-term recovery.

Anderson says restructuring the banking system is almost a precondition and it is going to be very difficult. In a country where the banking system is the entire payments system, the government cannot even collect taxes properly until the banks are revived. This is why revenue collections are getting worse by the day.

Anderson says that it would facilitate the London debt talks if the Russian government would move quickly on the domestic side, cutting wasteful budget outlays while increasing revenues and pushing ahead with the structural reforms that have been delayed. Those delays, he says, have only made the situation far more difficult for Moscow.