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. Last Updated: 07/27/2016

Investment Funds Push for Paris Club Write-Off

Russia has acquired an unexpected ally in its negotiations with the Paris Club from a group of Western investment funds that met for the first time as the Emerging Markets Creditors’ Association on Friday in New York.

Its members include Pacific Investment Management Co., Morgan Stanley Dean Witter Investment Management, D.L. Babson & Co., HBK Investment, MFS Investment Management, Metropolitan Life Insurance Co. and Western Asset Management Co.

The association will lobby for the restructuring of the $43 billion Soviet-era debt Russia owes the Paris Club of sovereign creditors on the same terms that were achieved with the London Club.

In February, Russia signed an agreement with the London Club, in accordance with which 36.5 percent of its $32 billion debt was canceled, and the remaining part was restructured into 10- and 30-year Eurobonds.

Previously, other groups were established to participate in the negotiations of the restructuring of emerging markets’ debts — for example, groups of London Club creditors.

However, the London Club represents banks and does not fully take into consideration the interests of other investors. The negative experiences involved with the restructuring of loans in Russia and Ecuador compelled non-bank portfolio investors to form their own association.

One of the tasks of the EMCA is to ensure that sovereign creditors, for example the Paris Club, adhere to the principles of equal treatment of debtors and agree to write off that portion of the debt that private creditors had written off.

The Paris Club has promoted the principle of equal treatment for many years but it turned out that sovereign creditors wanted to be granted better conditions. Therefore, the Paris Club is now offering Russia the opportunity to forgive any portion of its debt while maintaining that under present circumstances, Russia would be able to pay it all off.

The members of the EMCA, which agreed with the terms set for the restructuring of Russia’s debt to the London Club, find the position of the Paris Club unacceptable.

In their view, the more Russia’s debts to the Paris Club are reduced, the smaller the risk that Russia will fail to meet its remaining obligations and the more prices of Russian assets in portfolio funds will rise.

The position of the EMCA could influence the balance of power at the negotiations of the Paris Club. The Russian government understands and values this.

"If the association demands equal treatment of all creditors [private or sovereign], this could have a serious effect on Russia’s negotiations with the Paris Club and exert pressure on the participants to make a fair decision," said Andrei Cherepanov, head of the department for management of external state debt.

A different source in the government recalled that foreign investors have in the past declared their intentions to put pressure on sovereign creditors, but little came of that.

The founders of the new association are nevertheless certain that this time, international organizations and the Paris Club will have to listen to their opinion.

"The EMCA includes large funds and they can influence international organizations to play by the rules," said Mark Helie, head of management at Grammercy Advisors, a company that gained notoriety during the negotiations between Russia and the London Club, when it formed an alternative group of investment funds.

"We understand that Russia might need more lenient payment terms in order to again become active on international markets," said Helie. "But we believe that Russia should not participate on world markets solely in order to pay the Paris Club."