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. Last Updated: 07/27/2016

Germany Agrees to Revamp $8Bln of Soviet Debt

The German government finally signed off on a long-frozen Paris Club restructuring deal with Russia on Wednesday and reopened an export credit guarantee scheme in a move that might pave the way for better business relations with the nation's biggest foreign investor.

The restructuring deal means that Germany has finally implemented its side of a multilateral accord Russia signed with members of the Paris Club in August 1998 to postpone payments on Soviet-era debt originally due from 1998 to 2000 until 2015 and 2020. It means Russia can move out of technical default on its Soviet debts to Germany.

The German government had made resolving a dispute over losses incurred under a credit guarantee scheme run by state insurance agency Hermes a key condition for signing off on the restructuring deal.

A high-level committee also signed a deal Wednesday under which Germany will provide a new 1 billion Deutsche mark ($490 million) export credit line under Hermes' guarantee.

"Germany, through its actions, is standing by Russia and will continue to offer its wholehearted support," said German Deputy Finance Minister Caio Koch-Weser at the signing with his Russian counterpart, Sergei Kolotukhin, in a Berlin hotel, Reuters reported.

Wednesday's restructuring deal makes Germany the 15th Paris Club member nation to sign off on the 1998 accord. The accord reduces Russia's interest charges from 7 percent to 5.48 percent, the Finance Ministry said earlier this week, AP reported. And it cuts the nation's overall sovereign debt service payments to $600 million for this year from $8 billion. The bulk of repayment is postponed until 2015.

Koch-Weser said a further Russian debt-restructuring deal could be reached in the course of negotiations with the International Monetary Fund scheduled for this fall on a new financing package for Moscow.

But he said Russia would have to make more progress on liberalizing the tax regime and cleaning up the banking system for that to be possible.

Germany has so far strongly opposed writing off any of the nation's Soviet-era debts. It has described other Paris Club member nations' suggestions to ease repayments as "fooling around with other people's money."

German Chancellor Gerhard Schr?der last week spoke out strongly against any Paris Club debt relief for Russia on the eve of the Group of Seven leading industrial nations and Russia summit in Okinawa, Japan, last week.

"Russia is not a poor developing country but a world power," Schr?der was quoted as telling Nezavisimaya Gazeta in an interview last week. "Your country has the human and material resources necessary to self-sufficiently cope with its financial obligations."

"Only in that way can [Russia] demonstrate its creditworthiness," he was quoted as saying.

Prime Minister Mikhail Kasyanov was meanwhile maneuvering for a debt write-off similar to the one he clinched with the London Club of commercial creditors earlier this year, when creditors agreed to give Russia a 36.5 percent reduction and reschedule the rest for 30 years. Kasyanov claimed at a news briefing at the summit that the nation's massive debt burden was putting the brakes on economic growth. It owes Paris Club creditors $42 billion. About half of that amount is owed to the German government.

However, analysts said Wednesday it was unlikely that the German agreement on the previous debt restructuring accord would mean it was going to be more lenient and approve debt forgiveness.

"The signing of today's agreement does not have any automatic link to a new Paris Club deal in any way whatsoever," said Philip Poole, head of emerging markets at ING Barings in London. "It was long expected and it does not affect setting terms for restructuring beyond the year 2000. Whether Russia will be able to reach a further agreement on rescheduling those longer-term payments depends firstly on its negotiations with the IMF."

On Wednesday, Koch-Weser also signaled that Germany was not going to soften its stance. He noted that Moscow was reaping in a large current-account surplus, which meant that it was not in need of any further foreign loans. But he did concede the granting of new IMF credits would send a positive signal to financial markets.