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. Last Updated: 07/27/2016

State Bank Rules Out London Club Default

The London Club of commercial bank creditors is unlikely to declare Russia in default even if the country fails to win full support from club members for debt restructuring proposals, Russia's debt agent said Monday.

"Default is not worth talking about at all," Vneshekonombank spokeswoman Tatyana Golodets said. "Since negotiations are going on now, we are ruling out the possibility of a default because parties cannot be in talks and making decisions at the same time."

Vneshekonombank is responsible for the $30 billion debt Russia inherited from the Soviet Union.

At stake is $362 million that Russia was supposed to pay by Tuesday. The government announced Monday it will not be paying because enough holders of the debt have permitted a rescheduling.

Russia struck a restructuring deal in October with the London Club's bank advisory committee, but by last week it had collected only 72 percent of debt holders' votes; 95 percent was required.

Golodets said Russia had proposed a "nonessential'' amendment to the deal, which would lower the support requirement to two-thirds of the debt holders.

The announcement is likely to provoke an intense legal battle with the London Club of commercial creditors, and Western investors are likely to declare Russia in default if it doesn't make the payment, analysts have warned.

But Golodets said the London Club would have to collect more than 50 percent of votes in order to declare a default. She noted that the creditors who had failed to back Russia's proposals were in a minority.

The restructuring scheme covered an interest payment on PRINs, Soviet-era debt principal, which fell due Dec. 2.

According to the original payment schedule, the $724 million interest was to be paid half in cash and half in new Interest Arrears Notes, or IANs. Under the restructuring, Russia would make the interest payment entirely in IANs.

Prime Minister Yevgeny Primakov said last week that Russia would pay its debts and would not default, but the government is counting on restructuring Soviet-era debts to both the London Club and Paris Club of country creditors.

Golodets said one point being discussed by the London Club and Russia was whether Russia's recent proposal constituted a significant, or a nonsignificant change to the restructuring agreement closed last October.

She said Russia considered the change insignificant, therefore it would require acceptances from only two-thirds not 95 percent of creditors. The restructuring agreement did not specify which changes were significant, she said.

Golodets said if Russia and the London Club failed to come to an agreement, new negotiations would start and new terms would be discussed.

Also, Kasyanov said Friday that he hoped restructuring talks with the Paris Club - creditors of post-Soviet debt - would start in late February, although much depends on International Monetary Fund approval of the 1999 budget. Russia desperately wants the IMF to release hundreds of millions of dollars in fresh loans. Russia's parliament is still considering a draft budget.