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. Last Updated: 07/27/2016

INSIDE RUSSIA: Foolish Haste In Signing London Deal




Last week, Finance Minister Mikhail Kasyanov signed an agreement with the London Club on the restructuring of Soviet debt.


The government will assume responsibility for the debts of Vneshekonombank. In return, 35 percent of the principal will be written off, and a third of the interest on the debt will be written off. The first seven years will be favorable, but starting in 2015 payments will grow by $1.5 billion more per year than according to previous arrangements. In all, Russia will pay the London Club $40 billion dollars.


Negotiotians were conducted at a very inopportune time for Russia. Prices on oil are high, and the scandal at the Bank of New York has convinced the Western public that there is money in Russia - though it's just stolen money. But most analysts think that writing off only 35 percent of the debt, which before the start of negotiations was worth less than 10 percent of face value, is unforgivably foolish. Alexander Shokhin, figures in hand, showed that in this case, Russia will default again before 2015.


So why the rush to sign?


There are various reasons. Kasyanov himself asserts that the agreement will improve Russia's image and will draw more money into Russia. But Russia's financial reputation won't change just because it has signed another piece of paper.


Other opinions are less flattering toward the government. Yabloko leader Grigory Yavlinsky says that the restructuring is a tactical victory for Kasyanov but a strategic loss for Russia. The government has restructured its external debt to spend money now on Chechnya. But it's not concerned about what will happen in 10 years' time.


There is another opinion, widely known in a small circle. The thought is that Vneshekonombank was not declared bankrupt because it has recently become a dominion of tycoon Boris Berezovsky, that there are too many people loyal to him there, and that the Kremlin and Berezovsky were loath to lose such an obedient instrument.


That's another good explanation. But it's not totally logical. It wasn't necessary for Vneshekonombank to be declared bankrupt. It would have been possible simply to buy up its debts. Before the start of talks, they could have been had for a song. At that time they cost $3 billion. And the Kremlin has oligarchs, which it can order around. There are various interesting firms such as FIMACO. If FIMACO had gone under, it would have been possible to organize another firm. If the firms had started buying up debts, their price would have risen. They wouldn't have been bought for $3 billion, but for $4 billion.


Yet now Russia has placed a $40 billion millstone around its neck. Where's the logic in that? Alas, there is a certain logic.


Some people in banking circles insistently whisper that on the eve of negotiations, a Kremlin insider bought a significant tranche of PRINs and IANs. It's clear that if that were the case, the Kremlin would have been very interested in two things. First, it would have been interested in seeing that the paper was worth kopeks before the start of talks (in fact, at the time, rating agencies gave them an index of "D," for default); second, that after the restructuring the price of paper would rise to an optimal level, that is, so that as little as possible would be written off.


Yulia Latynina writes for Segodnya.