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Russia: Government Welcomes Debt Restructuring

Moscow, 22 January 1999 (RFE/RL) -- Russian government officials have been encouraged by a decision made public earlier this week by the London Club of creditors to continue talks on restructuring part of Russia's $28 billion in Soviet-era debt to international commercial banks.

The officials called the London Club decision an important precedent for future negotiations with Russia's other creditors --including, notably, new talks with an International Monetary Fund mission that opened in Moscow yesterday. The outcome of these talks will indicate whether Russia has succeeded in restructuring some $4.5 billion of debts to the IMF, which come due this year. An agreement between Moscow and the IMF would give a powerful signal to all of Russia's creditors.

Despite the breathing space provided by the London Club decision, critics of the economic policies of Prime Minister Yevgeny Primakov's government say the risk of Russia's defaulting on foreign debts still exists. They argue that private foreign investors have simply adopted a wait-and-see attitude until the IMF's position on restructuring becomes clear.

The London Club agreement to continue talks with Russia came after Russia defaulted last month on a $362 million payment of restructured interest. At the time, the Bank of America -- the London Club's paying agent, along with Deutsche Bank -- asked holders of the debt to vote on whether to press for full and immediate payment of overdue debts, or to continue talks with the debtor, Russia's state-owned Vnesheconombank. A decision to press on would have effectively pushed Russia into default, a dreadful prospect for both the Russian government and investors worldwide.

Finance Minister Mikhail Zadornov was quoted by Bloomberg news agency as describing the London Club decision as "the best [possible] deal for investors." The government's top economic official, First Deputy Prime Minister Yuri Maslyukov, told journalists that he is confident of reaching agreement with the IMF on new support.

Maslyukov said, "obviously, the London Club decision is a powerful argument" for an accord with the IMF. He had been sure from the beginning, Maslyukov added, "that the [Club's] decision would be positive." He also said that, among Russia's creditors, "there is a will to help... Otherwise, we would fall again under an iron curtain that this time will not have been built by ourselves -- but by others, who might decide we are an insolvent and uncommitted partner."

But IMF officials have recently been quite critical of Russia's draft 1999 budget. IMF First Deputy Managing Director Stanley Fischer said the draft is "neither sufficiently ambitious nor realistic."

After talks last week in Washington with Fischer, Maslyukov acknowledged a number of differences with the Fund over Russia's budget. But he ruled out any substantial revisions of the government's economic policies. Critics say those policies, including planned tax cuts that will reduce budget revenues, are based more on maintaining political consensus than on dealing with the economy.

According to Maslyukov, the government and the IMF mission now in Moscow will have to revise some budget calculations and, he said, "this could entail major [budgetary] changes." But he said he believed that "this would not be the case."

The government's draft budget, approved in a second reading by the State Duma this week, also optimistically assumes the release of yet-to-be agreed upon IMF credits. Maslyukov said any money Russia would receive from the IMF will be used to pay the country's debts to the Fund itself.

But it is not the IMF's usual practice to refinance debts. When asked about possible refinancing this week, IMF senior Moscow representative Martin Gilman declined to comment. Gilman did say, however, that the objectives of the IMF mission, which will be in Moscow for the next two to three weeks, are "to continue discussions on the authorities' economic program for 1999 that could be supported by a new arrangement from the IMF."

Russia is due to pay a total of $17.5 billion in foreign debt this year, and Maslyukov described that as a huge task. The government has forecast it will be able to meet its obligations on more than half of this sum (some $9.5 billion). But this will be the case only if international agencies like the IMF agree to provide new loans to Russia to pay its debts -- the precise scenario that Maslyukov has described.

According to a leading critic of the Primakov government's economic policies, reform economist Yegor Gaidar, this scenario is unlikely. He told a Moscow news conference: "Of course, the IMF will keep talking with Russia. It will try to find opportunities for compromise and will try to draft programs with the government that have some chance of success. But the minimal precondition is that the Russian government does not contribute to the collapse of its own finances."

Gaidar said that what he called the government's "unrealistic budget," as well as the increased printing of rubles already under way, are not positive signs. But Gaidar added that political pressure is likely to be exerted on the IMF in order to influence the organization's economic assessment. Political decision-making, he suggested, could heavily determine international economic decisions on Russia.