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. Last Updated: 07/27/2016

Russia Tries to Keep Creditors From Suing




With Russia in technical default on $855 million of restructured Soviet obligations, Finance Minister Mikhail Kasyanov flew Wednesday to New York to soothe creditors threatening to sue over Moscow's debt delinquency.


There was no sign that Russia had made the payment - originally due June 2 - before Wednesday, the end of the grace period.


A recent upsurge in market sentiment toward Russian debt and equity could well reverse if Kasyanov fails to satisfy the Russian London Club Portfolio Managers Inc., informally known as the Group of 10.


The organization - set up by U.S. non-bank holders of Russian debts to the London Club of private creditors - has said that it could declare Russia in default and file suit to try and gain redress.


Such an action could bring down the delicate house of cards that Russia has constructed - unilaterally honoring some debts at the expense of others - by triggering cross default provisions in major debt agreements such as those underpinning Russia's $15.4 billion worth of Eurobonds.


The Group of 10, which claims to hold about 20 percent of the London Club obligations, is large enough to block the club from agreeing to roll over the payment due June 2.


With those obligations subject to British law - and Russia having waived sovereign immunity as a defense in the 1997 restructuring deal - representatives for the Group of 10 have said they were confident of success should they move to sue.


Even though many observers have called the group's threats mere saber-rattling, continued truculence on their part could cause damage to Russia's standing that it would like to avoid, analysts said.


"Kasyanov is obviously flying to New York to prevent something unraveling that could knock current market optimism hard," said Ben Slay, a Russia analyst with PlanEcon Inc., a U.S.-based consulting group. "It's totally out of the ordinary to meet with a small group of individual creditors."


Although the Group of 10 is unlikely to be satisfied unless Kasyanov at least coughs up some cash, Russia is expected to cry poor and offer nothing beyond a formal voice in London Club negotiations, industry sources said.


"There's little doubt that the U.S. group will force Russia to pay something immediately," said a London banker close to the London Club who declined to be identified. "Most probably, Kasyanov will offer the U.S. investors a seat on the [London Club] steering committee."


The London Club's rules give the U.S. investors plenty of leverage. At least 98 percent of the London Club must agree to any restructuring program.


The club negotiated a restructuring program with Russia in 1997 that rolled over Soviet-era debt to private creditors into two tradable instruments: PRINs, or principal payments, and IANS, or interest arrears notes.


The New York talks do give Kasyanov a chance to tidy up Russia's remaining loose ends regarding its foreign debts.


The country this weekend won a reprieve until the end of 2000 on its debts to foreign nations during the meeting in Cologne, Germany of the Group of Seven leading industrial nations.


That concession gives Russia a full five months after the 2000 presidential elections to restructure the billions it owes the Paris Club of creditor nations.


The trip could also act as a chance for Kasyanov to test the waters in order to work out what kind of restructuring terms would eventually be acceptable, analysts said.


"Kasyanov shows flexibility which has so far not been typical for Russian officials," said Maksim Arkhipov, a trader with Nomura Securities in London.


Meanwhile, the U.S. group's hard line - along with Kasyanov's willingness to talk with them and the G-7 concessions - have helped rally prices on Russian debt in recent days.


Their tactics could be similar to those of Kenneth Dart, an international investor who bought up 4 percent of Brazil's debt just when restructuring talks were underway in 1994.


Dart threatened to ruin the restructuring deal and negotiated a $1 billion check which gave him a return of 161 percent on his investments.


Russia's creditors could also be buying debts on the secondary market and threatening the government with legal action to get better restructuring terms, analysts said.


"They could have been on the buyers' side to get a better leverage in talks with Russia," said Denis Pakhomov, a trader with National Reserve Bank.


"There is a perception on behalf of the clients that a more aggressive set of holders may force the Russian government to come to an agreement on debts," said Michael Marrese, senior emerging markets economist with Chase Manhattan's London division.


As a result, PRINs and IANs rallied over the past days, gathering further speed after the G-7 leaders agreed to discuss debt issues with Russia.


Russia's debts to the London Club were up roughly 30 percent on a weekly basis, with PRINs close to 11 cents a dollar. IANs traded at 15.5 cents on Wednesday.


Russia is now close to catching up with Ivory Coast and Madagascar, both of which are traded at 15 cents a dollar, the deep, dark bottom of the market for defaulted debts.


Russian Eurobond yields have declined to less than 30 percent, back to pre-crisis levels, although booming world oil prices have probably played the biggest role in that shift.


"Russia is a buy when energy prices are up," Marrese said.


While the recent rally was not a deeply thought out reaction - fundamentals have not changed - a bull market could readily develop with the right results in looming presidential and parliamentary elections, analysts said.


"The positive scenario would be if parliamentary elections produce a State Duma which is concerned about economic growth and if after presidential elections Russia will have a president who can work with the Duma," Marrese said.


"Psychologically, the market is ready to take off," said Arkhipov at Nomura Securities.