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. Last Updated: 07/27/2016

Russia Strikes $4Bln Debt-Restructuring Deal

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Russia has struck a deal to restructure about $4 billion in ex-Soviet trade debt under which it will issue about $2 billion of Eurobonds this year, a senior government official was quoted as saying.

Deputy Finance Minister Sergei Kolotukhin told Interfax that the agreement, reached at talks in London on Thursday, allowed for 36.5 percent of the debt to be written off, shaving off only a fraction of Russia's total $144 billion debt burden.

"The restructuring terms make it possible to reduce the foreign debt by $1.5 billion," Kolotukhin said, adding that favorable terms for the swap into Eurobonds would enable Russia to reduce debt servicing and repayment by another $400 million.

Kolotukhin said the total amount of Eurobonds to be issued under the commercial debt restructuring would be $2.5 billion.

He said the swap of the new bonds would take place gradually as the exact amount of the so-called foreign trade obligation debt still had to be verified, but the verified part would be converted this year.

The scheme is similar to a deal agreed last year between Russia and the London Club of commercial creditors, which restructured $32 billion of Soviet-era loans into $21 billion of 10- and 30-year Eurobonds.

Lyudmila Khrapchenko, fixed income analyst at Alfa Bank in Moscow, said the agreement had been expected, especially after the Finance Ministry said earlier this year that FTO holders would be offered almost the same terms as the London Club.

"This is a sort of preliminary arrangement. It was well-known for the market that the FTO restructuring was very likely to take place this year," she said.

Russia proposed in November that the foreign trade debt, estimated at the time to have a nominal value of $2 billion to $8 billion, be exchanged for long-dated dollar Eurobonds, although there was uncertainty about exactly how much debt was outstanding and how much would be included in the restructure.

Khrapchenko said she did not expect much market impact from the deal until closer to the time when it is finalized and the new bonds appear in circulation. Then there could be some pressure on Russia's 10- and 30-year paper, she added.

"The bonds will stay at the current level for a long time, and we will likely see some selling pressure nearer to the closing date, which is very likely to be at the end of the year," she said.

It took about half a year between signing of the London Club restructuring last year and closure of the deal in August.

The FTO agreement Thursday leaves the Paris Club of creditor nations, to which Russia owes about $40 billion in Soviet-era debt, as the main cloud hanging over Russia's ability to cope with its future foreign debt obligations.

The government has lobbied the Paris Club for terms similar to those agreed with the London Club, but to no avail as the concept of equal treatment usually involves commercial creditors accepting the same restructuring terms as sovereign lenders.

In Russia's case, a deal was struck first with the commercial creditors, and Paris Club members have argued since then that Moscow does not need debt relief at the moment.

Khrapchenko said she did not expect a Paris Club deal until 2003 or 2004. "Given the very favorable economic conditions, a huge trade surplus and so on, I don't see any way for sovereign creditors to accept any debt deferral or restructuring."

Russia's foreign debt obligations will jump to about $18 billion in 2003 from this year's $14 billion.