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. Last Updated: 07/27/2016

Paris Club Deal Awaited Despite Official Caution

Finance Ministry officials took a step back Friday from their claim a day earlier that a debt restructuring deal with the Paris Club was near completion, instead stating only that both sides had moved closer to a resolution.

But one analyst said that, although Russia overstepped diplomatic protocol, the announcement was a good sign that a deal may soon be completed.

Reaching a Paris Club agreement is vital not only to postponing debt payments that would otherwise bust the country's 1996 federal budget, but also to gaining Russia entry into the group -- a move that would aid its quest to collect up to $130 billion owed by numerous Third World countries.

"While there are active negotiations under way and conversations with the G-7 [Group of Seven leading industrialized nations] ... you can't say a deal is done," said David Boren, head of emerging market research for Salomon Brothers in London.

"You need to have a formal meeting of the Paris Club, and they have to agree," he said. "[But] I am optimistic that there will be a Paris Club deal agreed before June."

Russian debt rose about a point on international markets Friday following comments the previous day by Russian chief negotiator Oleg Davydov that talks between the club chairman, Christian Noyer, and Prime Minister Viktor Chernomyrdin were successful and had brought an agreement in principle.

A club official in Paris, however, told Reuters on Friday that there had been no new movement on the deal since negotiations last year and that serious hurdles remained. Hours later, a senior Finance Ministry official elaborated.

"Yesterday was a new step in terms of general understanding and of bringing positions closer," Alexei Smirnov, head of the Finance Ministry's international credits and foreign debt department, told Reuters. "It is true, in a sense this agreement [in principle] was already achieved long ago."

Current negotiations with the Paris Club -- which represents government lenders worldwide -- concern $38 billion in Soviet-era loans inherited by Russia.

Similar talks with the London Club of commercial creditors ended with a deal last year to reschedule $32 billion in credit and interest owed that group of banks, but formal signatures await a Paris Club decision.

Paris Club talks have long been considered tied to Russia's conclusion of a three-year, $10 billion loan agreement with the International Monetary Fund.

Now, with the IMF loan expected to be awarded in the next month, Paris Club negotiations are stymied by disagreement about how to classify Russia's debt, traditionally broken into 17 categories ranging from interest arrears to trade credits.

"One of the sticking points is whether this debt should be bundled together and treated that same way," said Boren. "That's probably one of the largest issues outstanding."

International markets trading in Vnesh loans -- paper traded internationally as bonds that represent the Soviet-era loans -- rose to 34.25 cents to the dollar Friday from 33 cents in the morning, said John Gibbens, an Eastern European debt trader with Morgan Grenfell in London.

Suggestions that the Russians exaggerated progress in the talks were unlikely to cause much of a fall unless there is a general sale in international government bonds, which trade similar to Vnesh paper, Gibbens said.