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. Last Updated: 07/27/2016

Stern Words For Foreign Creditors




Russia's relations with its foreign creditors turned to Cold War Thursday as Central Bank chairman Viktor Gerashchenko warned that "excessively greedy" and "stubborn" foreign banks could receive nothing.


It was supposed to be the day that the new government presented its blueprint for restructuring the billions of dollars in treasury-bill debts on which it defaulted last month. But instead, Gerashchenko and the government at a press conference threatened, floated contradictory plans, and asked for still more time.


Gerashchenko showed impatience at the indifference of foreign bankers to Russia's problems.


"There are sensible Western banks, but their stubbornness in their conservative, excessively greedy position could mean they will receive nothing," Gerashchenko said at a news conference.


He and Deputy Prime Minister Alexander Shokhin, who is in charge of debt talks, floated several vague plans for restructuring the 240 billion-ruble treasury bill debt and also another $150 billion of hard currency debt. But Western banking analysts said the proposals were a worrying sign that Russia was not ready to negotiate realistically.


Gerashchenko's words were "pretty frightening," said Denis Rodionov, financial analyst at Brunswick-Warburg. "Russia should be much more active and work with investors to find a compromise, rather than bullying investors."


"There was a lack of understanding on the issue on the Russian side," said one source close to negotiations. Analysts called Thursday's proposals "inappropriate," as they were vague and excessively harsh on foreigners.


Acting Finance Minister Zadornov said Thursday it would take a few more days to agree on terms for the treasury bill debt and negotiations would include 18 leading Western banks as well as local Russian bondholders.


Russia froze its treasury bill debts on Aug. 17 and a week later announced a harsh restructuring deal that would have returned only a few cents in the dollar to investors. Shokhin last week curried favor with Western investors by offering to cut a sweeter deal, perhaps increasing the payout and providing more of it in dollars.


Shokhin also pledged that the terms of the new deal would treat foreigners and Russians equally. But Russian banks are now able to swap frozen treasury bills, or GKOs, for short-term Central Bank bonds, or else sell the GKOs to the Central Bank for cash to fill reserves held at the Central Bank.


Among proposals floated Thursday, the Ministry of Finance proposed paying back all of the debt that has already come due at nominal value. But to prevent foreigners from dumping their rubles for dollars and causing the exchange rate to fall, the Ministry proposed freezing foreigners' bank accounts for 6 to 12 months. In the meantime, the value of the rubles would be destroyed by inflation.


Analysts said they thought the government was trying to goad foreigners into reinvesting in new government bonds. Shokhin said that the government had proposed a "wide range of instruments will be offered from which investors will be able to choose an option they find acceptable."


Shokhin also said there were several other proposals on the table, but would not elaborate until talks were finished.


Another Finance Ministry proposal called for the government to sell short-term convertible bonds to local banks, the proceeds from which would foot 80 to 90 percent of the repayment. Those new bonds would be valid in privatization bids.


But analysts scoffed at the proposal, saying much depended on whether the local banks wanted to buy Russian property, and whether the bonds would be worth their full ruble value during privatization.


The Ministry also proposed that Russian banks be allowed to use frozen T-bills to pay an estimated $50 billion in debts they owe to foreign banks for forward contracts against the ruble.


The plan presents a double whammy to foreigners, who took out the forward deals originally to hedge their bets against state bond risk. Forward contracts promise foreigners that banks will buy their ruble bond earnings for dollars at a predetermined rate.


But analysts said the proposals showed the Russian side did not understand how to properly negotiate. "What we're seeing is perhaps a group of three or four people who don't know what they're talking about brainstorming a bunch of plans," said Irene Shevchenko, a senior fixed income analyst at Alfa Capital. "Nobody can answer any concrete questions because nobody has a clue."


Aside from the 250 billion rubles owed for GKOs and OFZs, Russia faces $150 billion in foreign debt, $22 billion of which falls due before the year 2000. Economists have said they have no idea where Russia will get the money. Russia earlier in September defaulted on $800 million owed to the Paris Club, which represents the world's creditor nations.


Shokhin said Thursday he thought the debt should be repaid with loans approved from the International Monetary Fund.


He also said Russia's debt to the Paris Club should be offset against the $100 billion owed to Russia by countries like Nicaragua, Angola, North Korea and Iraq. Russia inherited the debt from the former Soviet Union but the countries are all basket cases and the debts are worthless.


"The Russian government made a mistake when it joined the Paris Club a year ago," Shokhin said, referring to the discounted terms ex-Soviet assets were calculated at.


"I think now that we should try, within the Paris Club, to negotiate mutual offsets of the Russian obligations to the Paris Club and the obligations to Russia of the countries with which the Paris Club has conducted negotiations on rescheduling debts. I do not rule out that we may come up with a zero option."


But analysts said Shokhin's words did little more than discredit Russia on the international financial scene.


"I don't think anyone has ever dared make the assumptions Shokhin did today," said Rodionov of Brunswick-Warburg. "It's wishful thinking. The world of finance doesn't work like that, and it's a bit embarrassing that Shokhin does not understand that."