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. Last Updated: 07/27/2016

Maslyukov: Russia to Default on Sovereign Debts




The Russian state will not be able to pay sovereign debts that are rapidly coming due and plans to start restructuring talks with its creditors, First Deputy Prime Minister Yury Maslyukov said Wednesday.


If the government follows through on Maslyukov's announcement, it would mean Russia is defaulting on its national debts. Russia would go down in history as the first large economy to default on both its external and its domestic debt obligations.


"This debt is one of our biggest problem at present," Maslyukov said at a news conference. "The only way out is either [to adopt] a cripplingly austere budget or to try to restructure those debts. We shall take the latter path."


Russian external debt instruments, already trading near default levels, plunged at the announcement.


Russia owes the rest of the world about $150 billion, of which $3.5 billion in interest and principal is due by the end of this year and $17.5 billion in 1999. Maslyukov lumped the 1998 and 1999 debts together in announcing they would be beyond the capacity of Russia's shattered economy.


His statement came a day after Finance Minister Mikhail Zadornov had reassured Paris and London Club creditors and Eurobond holders that interest payments due this year would be paid in full. Zadornov said Russia would find the money by dipping into the Central Bank's reserves, which now stand at $13.3 billion - but which will also be needed to finance some of a 1998 budget deficit of 70 billion rubles ($4.51 billion).


Payments due by the end of this year include $1 billion in interest on Paris Club debts - which are Soviet-era debts Russia assumed when the Soviet Union collapsed - and two Eurobond coupons. Next year, Russia needs to make payments to the International Monetary Fund and some payments on the principal on Paris Club debts.


In normal circumstances, Russia's $150 billion external debt is not unusually large, constituting just 33 percent of gross domestic product.


But a large portion of this falls due in the near future, and Russia is still reeling from the so-called financial crisis - a catch-all term for a series of economic disasters in recent months, including a steep drop in world oil prices, the stock market's collapse, the ruble's crash, the government's default on about $40 billion in ruble-denominated short-term domestic debt and the banking system's collapse.


"Given the size of the debt burden and the level of their [Central Bank] reserves, the announcement ... is not surprising," said Ashley Dodd-Noble, an analyst with Paribas in London. "The question is which debts they will restructure and what will be the terms."


Dodd-Noble said Russia would seek to roll over its Paris Club and IMF debts in 1999 but would pay off its 1998 debts.


The international financial community has been predicting a default on some components of the sovereign debt, but it still expects Russia to honor its Eurobond commitments. The volume of Eurobond payments in relation to the total is small, constituting just $1.8 billion in 1999 out of the $17.5 billion total.


"Russia has set a number of precedents but defaulting on a Eurobond will put them in a hideous class of their own," said Roland Nash, an economist with MFK Renaissance in Moscow.


Markets have already factored in the possibility of a default, and Russia's credit rating has been lowered to CCC-minus, just a step above D for default.


Still, Maslyukov's statement sent Vnesh PRINs paper - restructured Soviet debt instruments - down to 7.5 cents to the dollar from Wednesday's average of 8.4 cents. Russia's benchmark 10 percent Eurobond fell to 23.5 percent from Tuesday's 25.25 percent.


The bond traded at 75.8 percent in July, just before Russia froze its $40 billion debt market and devalued the ruble.


Maslyukov, a Communist Party member and minister who believes in increasing capital controls and supporting ailing industries, said his government is doing the best it can under the difficult circumstances it inherited in September.


He stressed Russia would have to print money to cover budget shortfalls, but said emissions would be held to an absolute maximum of 15 billion rubles this year. The deficit will be covered in part with new debt paper.


Maslyukov pledged to submit to parliament a stern 1999 budget with a small 3 percent deficit and plans for just 35 billion rubles in new monetary emissions.


The debt commitments are part of the reason why Russia has been desperately seeking a $4.3 billion loan tranche from the IMF. But it is unlikely to get the much-needed funds any time soon.


A draft stabilization plan approved by the Russian Cabinet last week was panned by the IMF as a retreat from free market economics. But Maslyukov said Russia would stick to its guns.


The international community is also watching for progress on talks Russia is holding in London with foreign banks on restructuring its treasury-bill obligations, or GKOs. The deal announced originally would have given investors less than 30 cents on the dollar.


Maslyukov said the state had four alternative restructuring schemes that it would unveil shortly, but he did not offer any details. Analysts from banks participating in the talks said negotiations would drag on at least a few more weeks.