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. Last Updated: 07/27/2016

New Multibillion Debt Shock for Foreigners

Foreign lenders are preparing themselves for another multibillion Russian debt write-off. Following Russia's default on billions of dollars of domestic treasury bill debt owed to foreigners in August, of which a fraction would be repaid, the government announced it could service only about half the $17.5 billion on foreign obligations that fall due next year.

The government has appealed for a restructuring and refinancing of Russian and Soviet debt. First Deputy Prime Minister Yury Maslyukov, in charge of the economy, has warned Western creditors that they must expect "forced compromises."

With a Russian government facing bankruptcy and major economic and social problems at home, as well as a weak ruble, which makes repaying foreign debts extremely expensive, debt analysts say many creditors invited for "talks" with the government should not expect to see a lot of their money back.

The first two new debt deals - on short-term domestic debt and some Soviet interest payment - left foreigners complaining. And the fact that the government announced them as "deals" before its counterparties agreed to proposals among themselves goes to show that Maslyukov's term "forced compromises" has to be taken seriously.

The government's announcements have spurred analysts into drawing up lists of creditors that could fall victim to a foreign debt write-off. The long lists shows that basically all lenders are at risk - with a few exceptions.

Only the International Monetary Fund and the World Bank can count on getting their money back. An estimated $4.8 billion falls due to the IMF in 1999. IMF debt cannot be renegotiated. The only way to prevent these loans from eating up Russian dollars is obtaining fresh money. Some analysts expect the IMF to come up with a partial refunding of the debt.

Russia's total debt to the IMF is $19 billion but the IMF cannot risk politically alienating Russia if it misses payments, said a Western banker, who did not want to be identified. "You do not want to kill a chance of being friendly with Russia," he said.

No matter what, the IMF should give new loans, at least balancing out the amount Russia has to pay the fund, the banker said. The same views are expressed by officials in the Russian Finance Ministry.

If Russia defaults on IMF repayments, it would join the ranks of countries such as Somalia and the former Zaire.

The World Bank is owed some $800 million next year. This bank may also come up with some new funding, analysts said.

After debts to international financial institutions, there is another category of debts on which Russia cannot easily restructure.

As much as $4.3 billion of the debt that falls due next year is subject to strict "cross-default" provisions. This debt, including Eurobonds and trade financing, has a clause saying that all the debt falls due the moment the debtor misses one payment.

If payments are missed, foreign lenders could start seizing Russian state assets abroad. Russia wants to prevent this from happening at all costs. But a few debt analysts nevertheless expect Russia to miss payments on some Eurobonds.

"In this sort of environment ... not all Eurobonds are going to be paid," said Philip Poole, the London-based head of emerging markets and equity research at ING Barings. He thinks the risk of Russia defaulting on its Eurobonds is 25 percent to 30 percent.

Outside cross-defaultable debt and debt to international financial institutions, the chances of timely repayment falls dramatically, analysts say.

This means that holders of MinFins, long-term hard-currency bonds, who are owed at least $1.3 billion in 1999, and holders of Soviet debt, who would like to collect roughly $6 billion next year, could be left out in the cold.

The government has already announced it cannot pay Soviet debt, even though it was run up when current government officials such as Maslyukov, Prime Minister Yevgeny Primakov and Central Bank chairman Viktor Gerashchenko held top posts under President Mikhail Gorbachev.

"Soviet debt is especially a problem for the holders," said Eric Kraus, the Moscow-based head fixed income at Dresdner Bank.

There are two clubs representing the holders of Soviet debts: the London Club of commercial creditors, which has $26 billion outstanding, and the Paris Club of sovereign lenders, which is waiting for $40 billion. These creditors finished negotiations with Moscow only in 1997 after seven years of talks.

Payment is expected on some of the paper. Russia was supposed to honor an amount of $216 million in payments this week on so-called IANs - bonds representing the interest part of Soviet loans. Since the interest was run up after the collapse of the Soviet Union, Russia feels an obligation to honor this paper.

But last week it became clear that Russia is not going to pay $724 million in PRINs, former principal Soviet debt, with a mix of $362 in cash and the rest in bonds. It will all be bonds.

The first large repayment on state debt missed was $685 million of old Soviet debt to Germany in September and October. Russia's financial situation rekindled a global debate on whether the country should be granted a debt forgiveness, but there is no political unanimity on this matter.

The devaluation of the ruble is the underlying cause of the foreign debt crisis, since dollar debts must now be repaid with tax revenues that are now worth one third in hard currency terms of their value four months ago. No one is predicting a major appreciation in the real exchange rate of the ruble next year or a big jump in state revenues.

Other sources of foreign exchange are the reserves of Russia's Central Bank and new loans. But the reserves are already down to around $14 billion and no one is likely to lend to Russia now.

The Russian government is heading for "a difficult year with a lot of uncertainties," said ING Baring's Poole.

Exactly how difficult the year will be is not clear yet. But indications in the country's budget point at a gloomy future. A huge gap looms between revenues and expenses and the question is if a set of taxation measures would indeed yield more tax income.

How much Russia is going to pay on its foreign debt will much depend on possible financial assistance from the International Monetary Fund. The fund has delayed payment of a $4.3 billion tranche due last September, after the August financial crisis created an economic and political vacuum.

The IMF has shown little eagerness in restarting the loans because of the new government's lack of a clear revenue plan. Primakov's new policy of scoring political points by publicly criticizing the IMF is also not likely to win the fund over.

IMF Managing Director Michel Camdessus is expected in Moscow on Tuesday to discuss the country's budget and economic plans. He has said that the fund is still willing to assist Russia, but that "Russia must first show it is willing to help itself."

There is an increasing confidence that Russia at least is going to honor its Eurobonds. Prices for this paper have shot up over the last few weeks, although the base is still low, with some paper being traded at 30 cents on the dollar, up from 20 cents.

These investors are willing to take the risk of another Russian default. They follow the advise of a market analyst who said: "Now is the time of high speculation risk but high potential reward."

For that same reason foreigners held $10 billion worth of domestic debt last fall.


Public and private foreign debt:

State Debt Total outstanding Due in 1999



Fund $19 billion $4.8 billion

World Bank $6 billion $800 million

MinFins $11 billion $1.3 billion

Eurobonds $16 billion $ 1.8 billion

Soviet debt

(London and

Paris) $66 billion $6.3 billion

Other $ 32 billion $ 2.5 billion

Total $150 billion $17.5 billion

Commercial debt

Total $ 45 billion $ 15 billion

Source: United Financial Group and The Moscow Times