New Debt Deal? Dealers Are Betting on It

In a market case of "out with the old and in with the new," dealers in Russia's commercial debt have started trading a new kind of paper based on a major restructuring deal that hasn't even been concluded yet.

Analysts said high initial interest in the notes was another sign of confidence in international markets that President Boris Yeltsin will win re-election July 3 against Communist Party challenger Gennady Zyuganov and that Moscow will make good on its Soviet-era debt.

The new paper represents billions of dollars in interest payments owed to the so-called London Club of commercial creditors. Called Vnesh paper, the notes are traded on a "when-issued" basis only, meaning deals done now are valid only if the debt-restructuring deal be completed, most likely in late autumn.

"If a [restructuring] deal doesn't close, then these deals don't exist," said Bob McCarthy, a director at Deutsche Morgan Grenfell in London.

Trading began Tuesday, just days ahead of what will likely be a July 1 cutoff date for trading the old Vnesh paper -- a mandatory step the market will take to settle accounts before finalizing the rescheduling deal.

Russia currently owes about $25.5 billion in principal and $8 billion in interest to commercial bank creditors. It is seeking to refinance the debt over 25 years with a seven-year grace period, as well as $40 billion owed the Paris Club of governmental and institutional lenders.

Under the plan, Russia will pay $2 billion in cash on interest owed to London Club debt holders. The remainder will be rolled over into the new interest arrears note -- on which trading began this week -- and a separate restructured-debt note.

The government will put $95 million a month through December in an escrow account with the Bank of England, from which the $2 billion in cash will be alloted. It has paid $1.285 billion to date, Interfax quoted a Finance Ministry official as saying Wednesday.

The new paper opened trading at 55 cents on the dollar, compared to 49 cents for the old paper, traders said. The old notes have been on the rise of late, reaching their highest mark since 56 cents on the dollar in late 1993.

"You both have a deal where you know what you're going to get, combined with a government that looks like it can carry out the deal," said McCarthy. "The presumption is that Yeltsin will win the election."