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. Last Updated: 07/27/2016

London Club Expected to Wipe One-Third of Soviet-Era Debts

Foreign creditors are likely to forgive Russia a third of the $32 billion Soviet-era debt it owes the London Club in a pre-Christmas deal, but terms could become unbearable for Russia without reform, analysts said Friday.

They said the club of commercial creditors would likely agree to 35 percent debt relief and restructure payments over 20 to 30 years, including a five- to eight-year grace period.

"If this is the kind of deal that Russia gets, it will be very beneficial for Russia," said Philip Poole, director of research for Eastern Europe and Russia at ING Barings.

"You'll be writing off part of the debt, and you'll have a period of low market interest rates with pretty long-term instruments. I think it will be a much better deal."

The government completed Thursday the sixth round of talks with the club's banking advisory committee, and Finance Minister Mikhail Kasyanov said afterward he was optimistic of meeting a self-imposed deadline for a deal before Christmas.

The government agreed to a previous deal with the London Club only two years ago, and the debt issued at that time is in technical default after the ruble devaluation in summer 1998.

Russia owes more than $1 billion, having missed payments at the end of 1998 and in mid-1999.

Alexander Shokhin, a parliamentarian and negotiator in the 1997 deal, said the government could have obtained a 70 to 80 percent write-off though creditors now were ready to reduce Russia's debt by 30 percent.

Russia says it cannot pay up without debt reduction.

Gintaras Shlyuzhius, chief economist at Raiffeisen Bank's Moscow branch, said even with a cut and a longer repayment term, Russia was under threat of default, if reforms were not speeded up.

"During the five to seven years grace period, Russia will have minor problems, but when payments on the principle of the debt start, the answer to the problem is economic changes," he said.