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. Last Updated: 07/27/2016

Russia Wins Huge Debt Relief Deal

Russia on Monday won a key agreement from its foreign government creditors, allowing the country to put off payments on its huge $40 billion foreign debt inherited from the Soviet government, the West's second major financial boost to Moscow in two months.

The accord with the Paris Club to reschedule payments over 25 years came only after a sleepless final night of talks and a desire by some of the creditor countries to delay a deal until after Russia's presidential election in June, Russia's chief negotiator Oleg Davydov said.

"In the end, common sense prevailed, as well as confidence in Russia's economic reforms," Davydov, a deputy prime minister, told Interfax after returning to Moscow on Monday night.

The deal lifts a potentially crippling burden from Russia's budget, clears the way for a similar deal with commercial banks and sets the stage for Moscow's return to the international capital markets with an expected Eurobond issue later this year.

"It is a historic agreement," Paris Club chairman Christian Noyer said Monday after the conclusion of four days of talks, noting that it was the largest debt-rescheduling deal the group of creditor nations had agreed in its 40-year history.

"We have designed something that we believe is necessary for Russia to implement the reforms and establish sound macroeconomic policies," Reuters quoted him as saying.

Under the terms of the agreement, Russia will pay back about $2 billion in 1996, down from $8 billion due this year if the rescheduling accord had not been signed, Noyer said.

The Paris Club deal was expected to fall into place after Russia won final approval in March from the International Monetary Fund on a three-year, $10 billion loan. Noyer said the rescheduling agreement hinged on Russia's strict adherence to the IMF terms.

"If the agreement with the IMF collapses, the accord with the creditors collapses," he told a news conference.

Market reaction to the expected agreement was positive and debt prices rose on the news. (Story, Page III.)

"It is generally favorable and under the circumstances both sides are probably happy," said one New York-based trader of Russian debt.

One analyst pointed out that the Paris Club members -- countries such as France, Germany, Italy and the United States hold most of the $40 billion debt -- are eager to support President Boris Yeltsin in his re-election campaign.

"Yeltsin will probably use it and say, 'Look, we have become a creditworthy nation and we can hold our head high, and it's only a matter of time before we become a member of G-8,'" said Keith Bush, senior associate at the Center for Strategic & International Studies in Washington, D.C.

Bush said Western creditors "see the country just reneging on its debt ... they know they won't get anything back" if Communist challenger Gennady Zyuganov wins the June poll.

Zyuganov has pledged that Russia would meet its debt obligations under his administration, but he has been vague about whether a Communist government would stick to policies demanded by the IMF.

The deal allows for so-called exit rescheduling, which means Russia will not have to return to Paris Club every year for fresh debt relief. This includes a six-year grace period in which Russia will not have to pay any interest on the principal.

The terms appeared to be favorable to Moscow. Before the final round of talks creditor sources had been talking of a 20-year deal.

"I do believe this agreement will be fulfilled and we will not be having any more discussions about Russian debt," Noyer said.

Monday's agreement also paves the way for Russia's joining the Paris Club as a creditor to reclaim billions of dollars owed to it by developing countries.

"Hopefully we will have increased discussions about the way we can cooperate with Russia on the claims side," Noyer said.

This year's federal budget provides for only $8.5 billion for payment of Russia's foreign debts, about half of which will be used to cover the new debts run up by Moscow since the collapse of the Soviet Union in 1991.

"The agreement relieves a serious budget strain," said Sergei Storchak, deputy head of the foreign debt department at the Finance Ministry.

"Of course now that the issue has been settled from the legal point of view, the climate for direct foreign investment and further loans will improve dramatically," he said. "At least in theory."

The Paris Club deal clears ground for all types of investment, but its most powerful influence is on Russia's access to borrowing on the international capital markets, namely the sale of Eurobonds. Moscow is expected to try to float $2 billion in the bonds in July.

"Sovereign guarantees are of little value to investors if the sovereign government in question is not creditworthy," said Christopher Granville, head of research at United City Bank in Moscow, calling the Paris Club deal a "prerequisite" for a Eurobond issue.

A Russian delegation was scheduled to begin negotiations with commercial creditors in London to discuss technical details of a rescheduling agreement on about $25 billion of debt reached last November.