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. Last Updated: 07/27/2016

Debt Deal Increases Commercial Paper Prices

LONDON -- Russia, fearsome giant of emerging markets, looked a little less unnerving Monday after its Western government creditors agreed to let it restructure its debts.


Prices in the country's commercial debt, which Moscow is also in the throes of restructuring, leapt on the news.


"More and more, investors will begin to take seriously Russia coming into international bond markets," said Jonathan Hoffman, economist at CS First Boston in London.


At stake is some $70 billion of commercial and official foreign debt that Russia inherited after the collapse in 1991 of the Soviet Union and which it has, until now, refused to pay back to its creditors.


The market that trades defaulted commercial debt -- so-called Vneshekonombank paper -- jumped a cent to just over 41 cents on the dollar following the news.


The price has surged about 20 percent this month in anticipation that Moscow would sort out its debts, a vital step if it is to join the international financial community.


Russia has said it wants to raise as much as $2 billion this year on international capital markets.


But investors, apart from the more steel-nerved, have been reluctant to place too many bets on Russia until they feel more certain that the country's economy really is on a clear track towards reform.


Later Monday, Russian officials were due to start talks to wrap up the final details of an agreement with foreign banks on restructuring over $25 billion in debt.


The moves on debt follow a swathe of offers of help from Western governments and financial institutions in recent months, including loans from France and Germany and a three-year financing package from the International Monetary Fund.


All of it is an attempt by the West to give as much visible support to President Boris Yeltsin ahead of the June 16 presidential election when he faces a tough fight from Communist Party chief Gennady Zyuganov, analysts said.


But they warned against jumping the gun on the commercial debt agreement, which will still take several months to close.


"There is still substantial risk out there," said Philip Poole, head of emerging market research at ING Barings, noting that Moscow has dragged its feet in the past.


Even if they do agree on final terms with commercial banks, creditors may have to wait until the end of the year for the transformation from defaulted to performing debt that may finally pay them some of the money they are owed.


One of the biggest difficulties is trying to sort out who is owed what.


"It'll be something of a nightmare to reconcile," said Poole.


Richard Gray, emerging markets analyst at Bank of America, said Russian debt prices could have an additional 15 percent higher to go, eventually.


But there was the pending presidential election and final closing of the debt deal to get through first, he added.