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. Last Updated: 07/27/2016

Analysts: Escape Clauses Mar Debt Deal

A historic deal to reschedule $40 billion of debt between Russia and the Paris Club of official creditors for 25 years may turn out to be much more short-lived if escape clauses designed to make sure Russia does not backtrack on economic reform are exercised, analysts and Russian officials said Sunday.


Alexei Smirnov, head of the Finance Ministry's foreign credits and foreign debt department, said that although Russia will not have to return to the Paris Club every year of the 25 year deal for fresh debt relief, under the terms of the deal the rescheduling would be reviewed quarterly by the Paris Club for the next year.


Paris Club chairman Christian Noyer said at the signing of the deal last week that the rescheduling hinged on Russia's strict adherence to its economic reforms under the terms of International Monetary Fund loan. "If the agreement with the IMF collapses, the accord with the creditors collapses," he was quoted by Reuters as saying.


Smirnov said, however, that this did not mean the deal was conditional on Russia's strict adherence to economic reforms. He said the Paris Club reviews would be much less important than Russia's record on meeting interest payments, and the deal would only collapse if Russia defaulted.


The accord with the Paris Club allows Russia to put off payments on its huge $40 billion foreign debt inherited from the Soviet government for 25 years with a six-year grace period from payments on the principal, but it requires some interest to be paid annually during that term.


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 was not signed.


Smirnov said if the government veers from the terms of the IMF agreement following a victory by the Communists in the June presidential election but keeps interest payments on its foreign debt, the Paris Club deal will not collapse.


"There are no foreign creditors in their good minds who would refuse to accept money if they are offered payment on the debts they hold," he said.


Smirnov said Noyer's comments about the importance of IMF approval were more of political than economic significance. "If they [the Paris Club] continue to receive their money, they won't introduce any measures."


Despite the escape clause of regular reviews, the rescheduling has already been criticized by experts for leaving the West little scope to influence the Russian government if the Communists gain victory in the June election.


"This issue is on everyone's mind now," said Yaroslav Lissovolik, an expert at the Russian-European Center for Economic Policy.


"On the one hand the West is doing a lot to boost the Russian government and the incumbent president [Boris Yeltsin], but on the other it provides Russia with motivation to be less careful about keeping their promises under the IMF deal," he said.


But rich creditor countries were eager to support Yeltsin in his campaign to be re-elected in June as recent polls showed he was catching up with his communist rival Gennady Zyuganov, Lissovolik said.


"The West is consciously investing into the [current] political structure in Russia," he said.


Meanwhile, Deutsche Bank announced Sunday that Russia had paid another $95 million with its fifth transfer to the London Club of commercial creditors under last year's agreement on the restructuring of the former Soviet Union's $25.5 billion worth of commercial debts and $7 billion worth of interest, Interfax reported.