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Russia: Primakov To U.S. This Week For Debt, Loan Talks

Moscow, March 22 1999 (NCA) -- Russian Prime Minister Yevgeny Primakov flies to Washington this week for talks expected to focus on a possible resumption of international financial assistance for Russia's ailing economy.

During his U.S. visit (March 23-27), which begins tomorrow, Primakov will meet U.S. President Bill Clinton, Vice President Al Gore, and International Monetary Fund (IMF) Managing Director Michel Camdessus in a last attempt to assure the restructuring of Russia's foreign debt. Russia has said it will be unable to pay some $17.5 billion in foreign debt falling due this year if it does not obtain new loans or agreement on the restructuring of the debts.

An IMF delegation left Moscow over the weekend after a week of talks on the debt restructuring issue. Russian Finance Minister Mikhail Zadornov, who is expected to accompany Primakov on his U.S. visit, described the talks as difficult. But he also said that the two sides had moved closer together.

Zadornov said that the IMF had softened its position on revisions to the Russian government's 1999 budget. The Fund had pushed for revenue to exceed spending, not counting debt payments, by at least 3.5 percent of the gross domestic product (GDP). Zadornov said the IMF lowered that demand and a surplus of less than three percent of GDP could be agreed upon. Issues apparently still unresolved include the regulation of prices of natural resource monopolies and the need to increase the proportion of cash payments for electricity and gas services.

Despite these outstanding issues, many analysts expect a deal will be reached during Primakov's visit. Eric Kraus, an analyst with Dresdner Bank in Moscow, told RFE/RL today, "I think in fact it is sort of a done deal. The question remains what the negotiations will bring about... what sort of primary surplus the IMF is going to demand and the Russians are going to agree to."

Kraus said he expects that Primakov will announce a rescheduling agreement upon his return to Moscow. But he said a deal is not likely to be finalized for several weeks. Kraus said, "The question is also of course how large a package is it going to be. Total payments to the IMF this year are $4.800 billion. My personal guess is that...the IMF is going to lend about $3.5 billion... sufficient to cover the very large tranches which are coming due in... May."

Kraus emphasizes that he expects the agreement will allow rescheduling existing debt, not provide fresh funds.

In the view of the IMF, Moscow's current financial program leaves much to be desired. The Fund has called on the government to pass measures prohibiting barter arrangements such as payment of taxes in goods and services. According to Russian official data, some 43 percent of all payments in Russia are made through barter arrangements. Independent economic analysts put the figure even higher, at some 70 percent.

The government did pledge to the IMF to collect taxes only in cash, beginning this month.

Loan talks have been stalled for months, also because the IMF disapproves of Russia's decision to cut some taxes.

A bad sign came last week, when Russia's upper house of parliament, the Federation Council, approved legislation reducing the Value Added Tax (VAT) from 20 to 15 percent effective July 1. The State Duma passed the bill two weeks ago, ignoring Primakov's request to delay a vote until after the conclusion of talks with the IMF. The Fund disapproves of the move, since VAT is one of the easiest-to-collect taxes and its reduction will not help boost revenues.

To become law, the bill must still be approved by President Boris Yeltsin, who is likely to veto it. But the fact that it was approved by the usually Kremlin-loyal Federation Council is a further sign that the present Russian leadership is weak, raising new doubts about its ability to carry out its economic commitments.

Finance Minister Zadornov has said he probably will accompany Primakov to the U.S. Zadornov's unofficial replacement of First Deputy Prime Minister Yuri Maslyukov as the leading Russian negotiator in the IMF talks is a sign that the Russian Government is trying to improve its relations with the Fund. They worsened after Maslyukov harshly criticized the IMF's previous negotiating teams. Maslyukov was conveniently in Asia for most of last week, when the latest IMF team was holding talks. He only attended a meeting on Friday.

Russian television footage showed him telling the IMF officials that "if talks fail to bring a success, we will both be hurt." Western economists tend to agree with his argument. Kraus says the U.S. Government is probably of the same view: "A major de-stabilization in Russia, especially at a time when the Primakov government is doing its best to keep things on a level course, would be something of a catastrophe and I think the U.S. government is very clearly cognizant of the dangers involved."

Kraus also says that IMF support cannot guarantee Primakov's success. But he says that without it, it is clear what would result, --"the crash of the Primakov Government and instability" in Russia.