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. Last Updated: 07/27/2016

Debt Revamp Talks Reach Breakthrough

A breakthrough occurred Friday during the fourth round of GKO restructuring talks between the Russian government and a steering committee of Western banks.

Finance Minister Mikhail Kasyanov, who is leading the talks for Russia, was quoted by Interfax as saying that both sides agreed not to link the defaulted domestic bonds with forward currency contracts that Russian banks signed with foreign investors who put their money into Russian treasury bills.

In addition, Kasyanov said that the actual debt restructuring will take place not with new hard-currency bonds, as originally planned, but with some new form of ruble-denominated bond. Originally, Russia offered to restructure the frozen T-bills into 17-year Eurobonds.

The arrangement was, according to Kasyanov, "a compromise result of very complex and intensive talks." He declined to discuss any details of the new ruble securities or how the forwards will now be handled.

"This is basically a good solution," said Eric Kraus, head of fixed income at Dresdner Bank. "The Russian government has decided not to take on private liabilities to save its friends in the banking industry."

Originally the government wanted to protect Russian banks from their huge exposure on the forward contracts, which analysts have estimated at $6 billion. But after this sudden change of sentiment, banks will now have to deal with their foreign counterparts on an individual basis, said analysts.

"Foreign banks will attempt to solve their claims on Russian banks individually," said Kraus. "They could push some Russian banks to the wall, and claw back those assets which have been moved abroad."

Andrei Ivanov, fixed-income analyst at Troika Dialog, said the new development boded ill for Russian banks, as they will now be forced to fight out the liability problems on their own.

"Overall the decision [on forwards] is good, as Russia has shown it will make changes in its banking sector," said Ivanov.

As for Kasyanov's proposal that the T-bills be restructured into ruble-denominated bonds, analysts said one possibility would be to offer foreign investors a convertible bond, exchangeable for shares in privatized enterprises, a concept government officials have hinted at before.

The next round of talks will continue during the week of Nov. 16, said Kasyanov, although a concrete date has yet to be set.