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. Last Updated: 07/27/2016

London Club Cuts Russia Slack Over Default




Russia scored its first victory in talks with international lenders on Wednesday when the London Club of creditors declined to press for immediate full repayment of overdue debts.


The good news fueled government optimism about Thursday's talks with the International Monetary Fund, when Russia will attempt to restructure $4.5 billion of IMF debt that matures this year.


The London Club voted Tuesday on declaring Russia's $20 billion debts "immediately due and payable" but the motion, technically known as "acceleration," did not collect the majority of votes need to pass.


Deutsche Bank, which chairs the club, and Bank of America, the club's payment agent, both declined to release any details of the decision.


However, Vneshekonombank, Russia's payment agent for the debt, issued a statement confirming that talks with the club will continue.


"We express gratitude to our London Club creditors for their expression of understanding and support in these difficult times," said Vneshekonombank chairman Andrei Kostin in the statement, carried by Agence France Presse.


The vote became necessary after Russia defaulted on a $362 million payment of restructured interest on Soviet-era debts in December. Russian negotiators had requested a new restructuring arrangement that would replace cash with new bonds, but the proposal failed to gather the required 95 percent of votes.


When the Soviet Union collapsed in 1991, it owed some $90 billion to private banks - many of which combined to form the 600-strong London Club of creditors - and foreign nations, who are represented by the Paris Club.


Russia assumed theoretical responsibility for this heavy debt not long after the Soviet collapse, but the obligations were only restructured in 1997 after years of negotiations. At that time, the London Club debt was restructured into PRINs, representing the principal loans, and IANs, or interest-arrears notes.


The club's decision not to press for immediate payment had been expected.


"There are three major arguments in favor of not accelerating the debt," said Arnab Das of J.P. Morgan in London. "One is that acceleration might raise the default risk on IANs, which is already high.


"Second, Russia would not have a strong incentive to pay anymore - that incentive had been strong when Russia was trying to persuade creditors to accept new IANs in full payment of the PRIN coupon.


"Finally, acceleration could complicate negotiations on restructuring Russia's debts, by starting the process with a more confrontational attitude on both sides."


The draft 1999 budget now being discussed by the State Duma, parliament's lower house, envisages $9.5 billion for repayment of foreign debts compared with $17.5 billion maturing this year. The government hopes to persuade foreign creditors to reschedule the payments.


"It's pretty clear to anyone following the situation in Russia closely that the budget makes no allocations for servicing the Soviet debt; therefore, there is going to be either some form of restructuring or arrears, which amounts to a default, leading eventually to a restructuring," Das said.


The government has shown much greater commitment to fulfilling its post-Soviet obligations, which add up to about $60 billion. Finance Minister Mikhail Zadornov said Wednesday that Russia has already set aside the $320.6 million it needs to cover two coupons on Eurobonds that fall due this Sunday, Interfax reported.


Those payments will be made whatever the result of talks with the IMF due to start Thursday, he added.


A team of IMF officials arrived in Moscow on Wednesday to investigate whether Russia's economic plans qualify it for further assistance.


Zadornov said Wednesday the fund now "realizes that a primary surplus of 4 percent of gross domestic product which it had insisted on is unrealistic."


"Fulfilling a program like that could lead to a breakdown," Zadornov said. "Therefore we want to adopt a program that can be seen through. We do have the task of building up tax collection and that we are going to implement."


The draft budget provides for a primary surplus - excluding debt servicing - of 1.64 percent of GDP. However, the actual deficit after loan payments is projected at 2.53 percent of GDP and the state has factored in new loans from the IMF and the World Bank to bridge the gap. A large portion of the debt is $4.5 billion owed to the IMF and new loans would amount to a restructuring.


The IMF has led a chorus of Western and Russian skeptics who have called Russia's current budget unrealistic.


The areas of the draft 1999 budget that have drawn the most scorn are the projections for inflation - set at 30 percent year-on-year - and for the ruble-dollar exchange rate, which the government is predicting will average 21.5.


The IMF has also criticized government plans to cut value-added taxes from 20 percent to 15 percent.


The ruble staged a 2.6 percent rally on Wednesday, but it remained stubbornly above the government's predicted rate, closing at 22.39 per dollar at the special trading session reserved for foreign-trade operators only.


Pessimism about the ruble's long term prospects remains strong.


"Obviously, the ruble is stabilizing, but it's only short term," said Pavel Demenkov, an analyst with Russian Development Bank. "The increase of money supply in December already allows for a 50 percent inflation, and if the trend continues nothing will stop the ruble from falling."


The Central Bank printed 23.5 billion new rubles last year, but only 16.5 billion were released into circulation, Zadornov said Wednesday. This year's draft budget provides for further emissions totalling 32 billion rubles.