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. Last Updated: 07/27/2016

Moscow Plans to Pay Its Debts at Any Cost

The Moscow government on Thursday pledged to meet its payments on foreign debts next year under any circumstances - even if it means breaking the law.

"We will service our debt obligations no matter what kind of negative circumstances arise," said Yury Korostelev, head of the City Hall financial department.

City Hall intends to earmark 24.5 billion rubles ($765.6 million) to service the debt in next year's budget.

Moscow's total debt by the end of next year will stand at 21 billion rubles of domestic debt and $1.75 billion in hard currency debt.

Moscow Mayor Yury Luzhkov will not sign any draft of the budget that does not allocate enough funds to service the debt, Korostelev said.

To do so, however, Luzhkov would end up breaking a city loan law that forbids City Hall from spending more than 15 percent of the budget revenues on servicing debt.

The Moscow Audit Chamber pointed out that possibility in a recent report on the draft budget, saying that the 24.5 billion rubles intended for debt payments was much higher than 15 percent of the 110 billion rubles ($3.44 billion at City Hall's projected 32 rubles to the dollar exchange rate) forecast in the budget and thatthe mayor's decision contradicts the law on borrowing passed in December 1997.

This year the government earmarked 7 billion rubles to service maturing debts and planned to borrow 9 billion rubles from external sources. Out of the 9 billion rubles, 7.3 billion have already been raised, officials said Thursday.

Next year, the city plans to borrow 9 billion rubles again, but outgoing payments will more than triple to 24.5 billion rubles.

City Hall, therefore, intends to allocate 22.1 percent of revenues to debt servicing.

"It is not going to be an easy ride for Luzhkov in the Moscow City Duma," one of the auditors at the Moscow Audit Chamber said.

The draft budget sailed through the City Duma on first reading, but lawmakers are not expected to let it go through the second and third readings smoothly if the debt-servicing plan is not adjusted to comply with their own laws.

As Moscow scrapes together funds to meet its looming obligations, it faces another problem: The size of the budget is shrinking in dollar terms.

"This year's budget is only 74 percent [the size] of the budget approved in 1994 [in dollar terms]," Korostelev said.

He acknowledged that the 2000 budget would also be smaller than this year's budget, which does not include off-budget funds that will be put in the budget for next year.

Moscow government officials were unable to give an exact estimate of the size of the off-budget funds, saying the figure was between 15 billion rubles and 20 billion rubles or possibly even more.

The government, however, is outperforming its revenue targets for this year and expects to collect 82 billion rubles by year end.

But the bulk of additional revenues was spent to service government debts, officials said. Out of 13 billion rubles in extra revenues for the first nine months of 1999, 6.5 billion rubles were spent on debt payments.

Luzhkov has an incentive for getting the budget passed quickly. If the budget is not passed this year, it will probably have to be modified once again to comply with a federal budget code that goes into effect in January.

Among other things, the budget code obliges the city government to transfer all accounts to the Treasury.

"Neither we nor the Moscow branch of the Central Bank is ready to switch to the Treasury system," Korostelev said.

Currently, Moscow government accounts are kept in five selected banks - Bank of Moscow, MOST-Bank, Promradtekhbank, Sberbank and Mosstroiekonombank.

The city of Moscow has a triple C rating by international rating agency Standard & Poor's.