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CIS: Debt Another Tie Binding Commonwealth Of Independent States To Russia

Armenia this month agreed to give Russia control of five state enterprises to pay off $100 million of the country's debt to Moscow. The Kyrgyz prime minister says he'd like to do something similar. But is this the best way of wiping out debts to Russia, and could other CIS countries follow suit?

Prague, 13 November 2002 (RFE/RL) -- The deal signed in the Armenian capital Yerevan this month had been in the works for the best part of a year. Armenia agreed to hand over five enterprises: the country's largest thermal-power plant, an electronics factory, and three research institutes. In return, Russia will forgive Armenia some $100 million in energy debts.

Armenia isn't the only CIS country to owe Russia what are, in regional terms, significant amounts of cash.

The former Soviet republics started their independence with a more or less clean slate after Russia took on the external debts of the entire Soviet Union. But new debts quickly piled up in the following decade, thanks to corruption, lack of reforms, conflicts, and the cost of gas and oil imports from Russia.

Now, for example, Russia accounts for more than 10 percent of the several billion dollars in government debt owed by Armenia, Georgia, Kyrgyzstan, Moldova, and Tajikistan.

After the Armenian deal was signed, Kyrgyz Prime Minister Nikolai Tanaev said his country has proposed doing a similar deal with several enterprises in the military and industrial sectors. "We have proposed to the Russian government a number of enterprises where the state still holds some shares, to transfer these shares to the Russian Federation to settle our debt. [The] Russian Economic Development and Trade Ministry has these documents and is looking at them now. In the area of military technical cooperation, it's four enterprises: Dastan, Zhanar, Ainur, and Bishkek's former Lenin factory [which produces cartridges for automatic weapons]," Tanaev said.

The debt-swap deals have some obvious advantages.

Armenia is ridding itself of the debt burden, plus the roughly $20 million spent servicing that debt every year. It could breathe new life into the enterprises and boost employment. That's why the deal received the World Bank's blessing. And Russia benefits too -- the alternative could have been a debt default.

But such arrangements are not without their critics.

Vladimir Socor is a regional analyst for the U.S.-based Institute of Advanced Strategic and Political Studies. "In my view, these are very questionable advantages because the enterprises being refloated are obsolete Soviet-era enterprises, not competitive internationally. They will be forced to export their entire output to Russia, a market that operates on low standards of quality. Therefore, these enterprises, and with them a significant part of Armenia's economy, will be locked into a second-rate economic system," Socor said.

Such deals also mean a further boost to Russian influence in these countries, said CIS expert Peter Havlik, deputy director of Vienna's Institute for International Economic Studies. "It is no secret that Russia is using its economic strength to put pressure on CIS republics but also on the Baltic countries. We have observed it for instance in the case of Russian relations with Ukraine, where Russia has been attempting for some time also to get some debt-for-equity swaps in exchange for Ukrainian indebtedness for energy. So the dangers are that in some of these countries the perceived adverse influence of Russia could increase," Havlik said.

To see how debt can be politicized and used as an economic lever, look at Belarus, where arrears on Russian gas payments blew up this month into a full-scale row.

Russia's partly state-owned gas company Gazprom halved its supplies to Belarus, saying Belarus had already used up its supplies for the whole year and owed some $200 million. This prompted an outburst by Belarusian President Alyaksandr Lukashenka, who labeled the move a ruse by Moscow to take control of Belarus' pipeline operator, Beltranshaz.

On 11 November, the countries' prime ministers said they settled the dispute. Belarus's Henadz Navitski apologized for Lukashenka's outburst and promised to pay this year's debts of $82 million soon and to unblock Beltranshaz's privatization.

The smaller CIS countries, at least in the short term, have few alternatives to the debt-for-equity swaps. Unlike the former communist countries of Central Europe, the poorer CIS republics don't exactly have foreign investors lining up to snap up state property.

One obvious alternative is debt relief. Seven of the poorest CIS countries -- Armenia, Azerbaijan, Georgia, Kyrgyzstan, Moldova, Tajikistan, and Uzbekistan -- are now grouped together under an IMF/World Bank initiative that has produced limited debt relief for some. But Kyrgyzstan's efforts to renegotiate its more than $100 million debt to Russia hit a snag when Moscow said Bishkek was benefiting financially from its cooperation with the U.S.-led war on terrorism.

The debt-for-equity deals potentially carry disadvantages for Russia too, not least in the amount of investment needed by the enterprises it receives. Michael Alexeev is a Russian economics professor at Indiana University. "My guess is that Russia would generally prefer to be paid in cash rather than in these presumably outdated, maybe dilapidated, enterprises. So with countries that could afford to pay their debts in more conventional currencies, my guess is that the Russian government would prefer debt payment that way. In fact, these kinds of transactions may be somewhat questionable, somewhat problematic for Russia precisely because they may set a precedent that other countries could want to try to arrange this kind of deals when Russia would not necessarily want them," Alexeev said.

Analysts say other CIS countries could follow suit and point to Moldova as a prime candidate for such debt-for-equity swaps -- it owes upward of $800 million to Russia for energy, though $600 million of this is owed by the breakaway Transdniester region.

(Ainura Asankojoeva of RFE/RL's Kyrgyz Service and Vitalie Condratchi of the Romania/Moldova Service contributed to this report.)