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. Last Updated: 07/27/2016

State Agrees to Repay Some T-Bill Debt in Cash

Foreign bankers have persuaded the Russian government to pay out some of their frozen Russian treasury bill investments in cash, and both sides now say they are close to a final deal on restructuring the T-bill debt.

But some important issues remain to be settled during the next round of talks between the government and a group of major Western banks in London. The talks are scheduled to restart Nov. 16.

Russia is asking foreign investors to accept 10 percent of the money owed them in cash rubles, 20 percent in ruble-denominated zero-coupon bonds that can be used to pay tax arrears or to buy stakes in Russian banks and 70 percent in ruble bonds of four- to five-year maturity, Finance Minister Mikhail Zadornov was quoted as saying in Monday's edition of The Wall Street Journal.

The details followed Friday's announcement that Russia had agreed to allow foreign banks to negotiate settlement of their forward contracts with Russian commercial banks in separate talks.

"Most people believe it is a better deal than the one offered in mid- to late August by the Russian government," said one Western banker close to the talks.

Russia has been locked in settlement talks with a group of foreign banks since it defaulted on its domestic debt Aug. 17.

Russia's frozen treasury bill debt is worth about $16 billion at the current exchange rate, and foreigners own about a quarter of it.

The maturity and interest rates the ruble bonds will carry remain a key point in future talks, the Western banking source said.

Whether the bonds will carry some kind of protection against currency and inflation risk is another question, said Robert Devane, an independent investment adviser in Moscow.

"If you take a four- to five-year ruble bond with no currency or inflation risk, with a low coupon - and the Russian Federation isn't going to pay a high coupon - then it's going to be pretty worthless," Devane said.

The bonds will be worth more if they are tradable, but that, too, remains to be clarified.

The Western banker familiar with the talks said the zero-coupon bonds will likely be tradable to Russian entities wishing to use the bonds to clear their tax arrears.

Investors preferred to accept short-term ruble bonds over the long-term, dollar-denominated Eurobonds that Russia had been offering in previous talks, which matured in 17 to 18 years and carried a low interest rate, the Western banker said.

"If one is looking at a very long-dated dollar instrument at a time when the government has serious foreign currency problems, it might be better to have rubles," he said.

Foreign banks seem to be willing to make concessions on T-bill restructuring in order to shake commercial banks free of government protection and pursue them individually, analysts said.

Russia had been attempting to protect its ailing banking sector by trying to wrap Russian banks' forward contract debts into the T-bill deal. Investors in Russian domestic bonds signed the forward contracts with Russian banks in order to hedge their investments against ruble risk.

The net value of the outstanding forward contract debt is thought to be $15 billion to $16 billion.

Foreign bankers reportedly argued that Russian banks have moved millions of dollars offshore in recent months and have the ability to repay their debts.

Russia's decision to expose commercial banks to Western lenders may prompt more foreigners to follow the example of U.S. investment bank Lehman Brothers, which got a London court to freeze the British assets of Russian banks SBS-Agro, Uneximbank and Inkombank in September in an attempt to retrieve $113 million in forward-contract debt.

"They believe these forward contracts have significant value," Devane said. "If they pursue them, they could recover significant value."