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. Last Updated: 07/27/2016

T-Bill Debt to Be Paid With '98 Budget Funds

Participants in the government's domestic debt restructuring scheme who are clamoring for the long-overdue cash part of their settlement can take heart: The Finance Ministry promises it will pay them - in 1998.

Of course, January 1999 is almost over, and though the holders of frozen GKO treasury bills were promised 3 percent of their investment in cash by Jan. 5, the government is not saying exactly when the money will be paid out. But a senior Finance Ministry official said Friday that the payments will be made under the 1998 federal budget, not the 1999 one.

The official, who spoke on condition of anonymity, said in a telephone interview that 7 billion rubles ($307 million) meant for the cash part of the GKO settlement was deposited with the Central Bank in late December. That enabled the government to include the payments in the 1998 budget, the Finance Ministry employee explained.

"This is what people call 'creative accounting,'" said Peter Westin, an economist with the Russian-European Center for Economic Policy.

The backdating trick allows the government to run a higher deficit than planned in 1999 without declaring it. An International Monetary Fund mission is currently in Moscow combing through the government's economic performance and 1999 budget figures. The Finance Ministry's clever trick means the mission will not be shown a large part of the debt restructuring expenses.

The government has not announced how much it aims to pay GKO holders in cash this year. Analysts have estimated the total amount at 13 billion rubles. That money is not accounted for in the draft 1999 budget's 101.4 deficit target.

IMF experts, of course, will not necessarily fall for the backdating trick.

"The IMF will look at the complete monetary program and at actual expenses," said Christopher Granville, an analyst with Flemings UCB.

But the additional cash released into the economy this year under the 1998 budget will almost certainly fuel inflation by landing on the foreign exchange market and putting pressure on the ruble.

In late December, the government sought to pay out some of its enormous salary and pension arrears and increased Russia's monetary base by 8 percent. The base, which includes cash in circulation and commercial banks' reserves at the Central Bank, rose to 207.3 billion rubles on Jan. 5 from 192.5 billion on Dec. 21.

As a result, the ruble slumped 6 percent in the first two weeks of January. Later, the Central Bank stabilized the ruble rate by refraining from releasing more rubles into the economy. The monetary base shrank to 202.2 billion rubles by Jan. 25.

"My guess is that they do not want to destabilize the ruble before the budget is approved so as not to make it absolutely ridiculous," said Parvoleta Shetereva, a fixed-income and currency analyst at MFK Renaissance.

By mid-March, however, the budget should be passed and the government aims to finalize the GKO settlement by then.

"March will be a big month for spending money and the ruble will reel," Shetereva said.