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. Last Updated: 07/27/2016

INSIDE RUSSIA: London Club Deal Could Bring Default

Finance Minister Mikhail Kasyanov will soon be resuming talks with the London Club. The conditions are well known: We propose to write off 40 percent of the Soviet Union's debt and reformulate the remaining 60 percent of Vneshekonombank's obligation as the obligation of the government.

The Russian financial press, which writes about the brothel of Russian economics in terms delicate enough to describe an institute of noble virgins, is pretending that nothing special is happening. Meanwhile, the conditions of the restructuring pose a number of perplexing questions. First, why are the talks taking place at such a bad time for Russia? Oil prices are soaring and creditors could insist on stricter terms. Russia's reputation, in the wake of the Bank of New York scandal, is very low. And public opinion thinks Russia does have money.

Secondly, the opinion of brokers - which they will tell their friends but not their clients - is that 40 percent is too little. A 40 percent write-off will doom Russia to default on its Eurobonds in 2002-03. Why not take the technical opportunity to bankrupt Vneshekonombank? (They tell me that would ruin Russia's reputation, but how can it get any more sullied after the Aug. 17 crash?)

But the beneficial course of negotiations for investors could easily be explained if we assume that someone from Russia was informed beforehand about the possibility of an agreement, and about the fact that the bonds, which are now worth about 15 percent of their rated value, will double in value.

You will notice that our hypothetical insider, having purchased the bonds for $100 million, could make about $200-250 million on them after the agreement with the London Club is signed. You will also notice that our insider doesn't even have to spend his own money on the deal. He can just borrow it from a state bank at a 6 percent or 7 percent yearly rate and pay it back with interest later.

But you will also notice that such a deal couldn't possibly be kept secret from the Kremlin. But the joy of it is that our insider can simply tell the Kremlin he needs the money for the elections. Where the money actually goes is another question. This isn't the first time strange things have happened with Russia's external debt. Everyone in the market remembers when one of Russia's deputy finance ministers - whose name I will leave to memory - announced in 1994 that Russia was not going to pay out on government bonds. The bonds dropped in price. Then the deputy minister said a week later that he had been misunderstood on the payment issue. The prices of the bonds went back up, and a major bank, in collusion with the above mentioned deputy minister, reaped a hearty profit - he alledgedly bought the bonds all week.

Russia isn't a pioneer in these matters. In his time, Walter Langdon, finance minister for the court of King Edward I (1272-1307), pulled a similar trick. He refused to pay Edward I's creditors, and then bought the king's debt through a group of go-betweens. Then, as the official treasurer, he paid the debt, which went right to him.

It is sad to think that Russia, at the end of the 20th century, is living by the financial scheme of the early 14th century - and that for the sake of a few hundred election millions, you can doom the country to another default.

Yulia Latynina writes for Segodnya.