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Russia: Debt Payback Accelerated, Investors Sense Sudden Opportunity

Suddenly, Russia is in vogue among international investors. After threatening to default on its debt in 2001, the country has reversed course and is now making regular debt payments -- and even pre-paying some obligations. Investors are noticing, and Russian dollar-denominated bonds are among the hottest international investments. RFE/RL correspondent Mark Baker spoke to analysts, who said better tax collection and an oil price windfall have brought about the dramatic improvements. But they also questioned how long it will last.

Prague, 28 February 2002 (RFE/RL) -- Russia is paying down its foreign debt, and Russian government bonds, once pariahs on international markets, are now the darlings of bond traders.

Economists and analysts said this reflects a drastic improvement in the Russian budget and rising oil prices and also a new, more positive attitude on the part of Russian financial officials.

Letitia Rydjeski, a bond analyst at ATON Capital in Moscow, said the Russian Finance Ministry has adopted what she calls a more prudent strategy for paying off debt after stunning the capital markets last year by threatening to suspend its debt payments.

She said Russia is already pre-paying part of the massive $19 billion in obligations that come due in 2003, after facing debt payments of about $13 billion this year.

"[The Finance Ministry] has tried to pay down some of [next year's debt], and they've probably paid down 3 billion [dollars] of that, so instead of owing 19 [billion dollars] next year, they owe 16 [billion dollars] next year. That's the best [figure] to anyone's knowledge."

Russian Prime Minister Mikhail Kasyanov recently confirmed the country's overall financial improvements, announcing that Russia's total foreign debt to governments and banks fell to about $138 billion by the end of 2001, from $157 billion a year earlier. He said debt-service payments dropped to 20 percent of the country's gross domestic product (GDP) from 30 percent previously and implied that the policy of pre-paying debt will continue.

The situation is a far cry from last spring, when Kasyanov shocked international capital markets by saying Russia would suspend some debt payments. The move was sharply criticized by Germany, traditionally Russia's biggest foreign lender. Russia eventually backed down.

Since then, finance officials -- benefiting from two windfalls -- have radically changed their attitude.

One windfall is a jump in tax receipts, which rose some 40 percent in 2001 from the previous year. Konrad Reuss, a managing director with Standard & Poor's Corporation in London, cited favorable changes to Russia's tax laws, which simplified the system and broadened the tax base.

"We saw a substantial cut in personal income taxes. The whole tax system was simplified. Rates were brought down. The base for collection was broadened," Reuss said. "This kind of streamlining, the simplification, the broadening of the tax base, the bringing down of tax rates -- which obviously makes it less interesting for both individuals and [corporations] to go into tax avoidance -- all that together did result in better collection."

Reuss continued: "With the kind of reform momentum we have seen -- and these reforms are now being implemented -- we are seeing a change of quality of economic growth. Which means, going forward, Russia will not be as sensitive as it used to be to changes in the oil price. And in the future, we will see economic growth really more on a broader base than just economic growth driven by the oil and gas sector."

In the shorter term, in the event oil prices fall, officials have established a reserve fund to be used for debt payments. Analysts said any future default is highly unlikely.

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    Mark Baker

    Mark Baker is a freelance journalist and travel writer based in Prague. He has written guidebooks and articles for Lonely Planet, Frommer’s, and Fodor’s, and his articles have also appeared in National Geographic Traveler and The Wall Street Journal, among other publications.