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. Last Updated: 07/27/2016

Russia, Germany See Progress Over Debt

Germany and Russia said they had made progress Tuesday on a scheme to swap debts owed by Moscow for stakes in Russian companies.

The economics ministers from the two countries said they hoped to finalize three pilot deals in the energy and furniture industries in time for a summit between Chancellor Gerhard Schröder and President Vladimir Putin in April.

"We're gaining momentum," German Economics Minister Werner Müller told a news conference after a two-day meeting of a bilateral economic cooperation council in Berlin.

The panel, which brought together 200 business delegates, was meeting for the first time in four years after Schröder and Putin decided last summer to revive it.

Schröder subsequently proposed the debt-for-equity swap idea to try to kill two birds with one stone; It would ease Russia's debt burden and offer a chance for German businesses to step up their involvement in Russia's resource-rich economy.

Negotiations at working-group level had been hampered after Russia fell into arrears on servicing its debts to the Paris Club of creditor nations.

But Müller said he was happy with new assurances that Russia would amend its federal budget to ensure repayments can be made on 57 billion Deutsche marks ($27 billion) in debts assumed by Moscow after the Soviet Union collapsed.

Economic Development and Trade Minister German Gref said his government would propose the required budget amendments to the State Duma. But he warned there would be a tough debate.

"It will be difficult. This is a far-reaching political decision that will cause extra costs," he said. "I hope we can convince the Duma that, even though this will be difficult, it is necessary."

Gref added that the government has decided to set up an investment agency to help German businesses cut Russian red tape in getting access to investment projects.

Schröder's debt-for-equity swap proposal met with initial skepticism on the Russian side, which feared that Germany wanted to cherry-pick its prize industrial assets, but mutual enthusiasm for the idea appeared to be growing.

Of 17 business proposals on the table, with an estimated volume of 2.5 billion marks, three should be finalized in time for the April 9-10 St. Petersburg summit, the ministers said.

Gref said those projects involved Swedish furniture retailer IKEA, while MAN AG unit Ferrostaal and Wintershall, a subsidiary of BASF AG, planned cooperation deals with gas monopoly Gazprom.

Germany has ruled out swapping any Paris Club debts for stakes in Russian businesses, insisting that 6.4 billion transferable rubles in trade debts owed by Moscow to communist East Germany instead be mobilized for the scheme.

Germany assumed those debts after reunification in 1990. A 1992 moratorium on the trade debts expired in December, but no deal has been reached on finding an exchange rate at which they could be converted into equity stakes.

Klaus Mangold, representing German business on the bilateral council, said industrial support for the debt-equity swap scheme was growing.

"We have agreed on the essentials," he said. "It should be attractive for both sides to do these debt-for-equity swaps."

Mangold also highlighted strong growth in bilateral trade, which, fueled by high oil prices and Russian economic growth of more than 7 percent, reached a record 40 billion marks last year.

But both he and Müller urged the Russian government to press on with reforms to the banking system and property market and make use of a proposed investment agency to cut back red tape and attract more foreign businesses.

In Moscow, the Cabinet met Tuesday to further discuss how to fill the looming debt gap of 182 billion rubles ($6.1 billion) in the 2001 budget. The Finance Ministry laid out a proposal calling to more than double domestic borrowings to 62 billion rubles, take 33 billion rubles from the Finance Ministry's amassed reserves and turn over 80 million rubles from tax revenues.

Privatization sales would provide another 15 billion rubles, while the remaining 24 billion rubles may come from the Central Bank's vaults.

The proposal would need the State Duma's go-ahead.

However, Duma budget committee head Alexander Zhukov said in an interview Tuesday to Ekho Moskvy radio station that chances of approval are slim, unless Putin "gets heavily involved."

(Reuters, MT)