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. Last Updated: 07/27/2016

Russia 'Promises' to Pay on Eurobonds

Russian officials have said the country will meet its Eurobond obligations under any circumstances, but international credit rating agencies take that with a grain of salt.

Some alarming recent suggestions by government financiers have also cast doubt on the sincerity of the Cabinet's Eurobond pledges.

Standard & Poor's recently rated Russian Eurobonds "CCC-," suggesting a high probability of default. Fitch IBCA's "CCC" rating means the same.

At the time they were issued in 1997, Russia's Eurobonds symbolized the country's triumphant return to international capital markets. They remain a priority also because defaulting on them would be extremely damaging to Russia's prospects of recovering its ability to borrow abroad.

"About the worst thing you can do as a debtor is default on Eurobonds," says David Riley, Fitch IBCA's director of emerging markets. "Compared to other types of default, the markets will have a very long memory of that particular failure, because essentially, when you buy Eurobonds, you take the government's word."

Russian officials shrug off the rating agencies' pessimism.

"The agencies have come under a lot of criticism recently for overlooking the Asian financial crises," said Alexei Smirnov, head of the Finance Ministry's external debt department. "Now they try to be on the safe side and proceed from the worst scenarios available."

The agencies themselves, however, argue they have good reasons to expect the worst.

"The Russian government says it considers Eurobonds senior to anything else, but the more interesting question is whether they consider them senior to International Monetary Fund debts," Riley says. "And you have to be realistic; they are in default on several of their obligations and the current rating is justified."

The Cabinet will face the choice between paying the IMF and the Eurobond holders in the worst-case scenario - if it fails to convince the IMF and the World Bank to refinance the $5.5 billion in debt maturing this year. Eurobond payments may also have to be axed if the government fails to secure all of the $7.05 billion in foreign loans envisaged by the draft 1999 budget.

Alexander Pochinok, head of the finance department of the government staff, shed some light on the Cabinet's thinking.

Of the $9.5 billion the draft 1999 budget allocates to foreign debt repayment, Pochinok said the government considers some $6.9 billion as "absolutely essential to pay," adding that $5.8 billion of it cannot be restructured under any circumstances. If Pochinok has his numbers right, only $300 million of the $1.7 billion due on Eurobonds falls in that "untouchable" category.

Finance Minister Mikhail Zadornov also appears to be less certain of Russia's debt repayment prospects than his public utterances suggest. One State Duma deputy who attended Zadornov's talks with members of the Duma budget committee says that while the minister kept insisting on the allocations set out in the draft budget, his arguments betrayed a more "flexible" position.

"When some deputies proposed to cut foreign debt allocations by another $2 billion, Zadornov responded that that would bring the total to the 'absolute minimum' and leave the government no room for maneuvering in its talks with creditors - which would not be wise," the deputy said, speaking on condition of anonymity.


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IMF 4.7

World bank 0.8

Sovereign Eurobonds 1.7

Sub-Total 7.2

Other payments

(not exhaustive)

Post-1992 obligations

to the Paris Club 1.7

IAN 0.8

Prin 0.4

Min-Fin 3 1.3

Other Min-Fin 0.2

Sub-Total 4.4

Total 11.6

Source: IIF and ING Barings