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. Last Updated: 07/27/2016

Russia Skips Payment of $855M on Soviet Debt




LONDON -- Cash-strapped Russia skipped Soviet-era debt payments again Wednesday, sticking to a strategy some analysts and bankers think could soon backfire on Moscow.


Russia was due to pay $855 million to the London Club of commercial creditors on restructured former Soviet debt, but failed to transfer the funds.


The approach stands in contrast to debt contracted after 1992 by the Russian Federation, which Moscow has continued to honor. On May 27, Russia paid $46 million due on a Eurobond issued in late 1996.


"I wouldn't characterize this as a good strategy. It's a kind of default strategy," JP Morgan economist Arnab Das said.


"But with $17.5 billion in debt due this year and just $23 billion in the federal budget, they haven't any choice but to make selective defaults."


Moscow has at least been consistent in its attempts to ring-fence some $100 billion in Soviet debt, which it has said it wants to restructure again, from around $15 billion in post-1992 foreign debt, which it says it will service.


"Markets usually reward consistency," BankBoston economist Peter Botoucharov said.


But pressures from irritated creditors are growing as Russia continues to miss payments on $26 billion of Soviet-era debt owed to the London Club - known as principal, or PRINs, and interest arrears notes, or IANs - without first striking a restructuring deal.


The debt - commercial bank loans made in Soviet times that have already been rescheduled once by the London Club in 1997 - is now widely held in secondary markets.


Russia, which also owes around $38 billion in bilateral loans to the Paris Club of creditor nations, last missed a London Club payment in December.


"If Russia continues to meet the Eurobond payments and manages to reschedule the PRINs and IANs fairly quickly, then it may not have much of a price to pay," Santander fixed-income analyst Barbara Peitsch said.


Mixed tempers at a recent meeting of the London Club, a loose grouping of commercial banks, do not augur well for speedy restructuring talks. London bankers said they were faced with a "fait accompli" when Russia presented plans to default on scheduled payments rather than an offer open to discussion.


Another group of New York-based institutional investors, which claims to hold up to 15 percent of London Club debt, has also said it might sue Russia under British law if they do not get money soon.


London bankers were skeptical that the group, called the Russian London Club Portfolio Managers Inc., could punch at that weight.


Finance Minister Mikhail Kasyanov asked the new group Wednesday to abstain from any legal action and give Russia and the London Club time to work out a mutually acceptable restructuring deal. Although another round of talks is scheduled for the end of June or early July, serious London Club negotiations are not expected to begin until after Russia signs a new agreement with the International Monetary Fund, and after elections next year.