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. Last Updated: 07/27/2016

State Restructures Last Vestiges of Soviet Debt

Russia has put the finishing touches on Soviet-era debt restructuring by converting the last part into Eurobonds and may have opened the door for a sovereign upgrade, analysts said Monday.

Prime Minister Mikhail Kasyanov signed a long-awaited decree on Saturday to restructure $4 billion to $6 billion still owed to commercial creditors.

"This restructuring concerns the last piece of Soviet-era debt, so once it is done, Russia will have its obligations fully regularized," said Philip Poole, emerging markets analyst with ING Group in London.

The move, however, was already priced in by the market. Russian 30-year bonds stood at 79.8 in midday trade Monday. The EMBI+ Russia Index had gained 0.5 percent Friday on the expectation of the debt restructuring, bringing the Russia 2030 bonds to 78 3/4.

As a result of the restructuring, Moody's Investor Services may upgrade Russia's sovereign rating, Chris Weafer, head of research at Alfa Bank, said in a note to investors.

Moody's announced in October that it was considering raising Russia's sovereign rating one or two notches from the current Ba3.

The Emerging Markets Creditors Association, which includes FTO debt holders, sent a letter to Moody's at the end of the month requesting that the rating not be upgraded before the issue is resolved.

Moody's promised to take this request into account, which analysts said created additional pressure on Russia to complete the restructuring.

The total amount of commercial Soviet commercial debt -- referred to as foreign trade organization debt, or FTO -- is estimated at $6 billion. The debt, however, might be even less.

Deputy Finance Minister Sergei Kolotukhin said last week that $1.7 billion to $1.8 billion of principal debt and the same amount in interest payments should be restructured, Prime-Tass reported. So far the government has already checked debts worth $1.1 billion.

Government officials have said the decree allowing for the restructuring had to be signed by Monday to make it possible to issue the requisite bonds by the end of the year.

The 2002 budget allows the Finance Ministry to issue up to $2 billion in new Eurobonds to restructure this debt by the end of 2002.

But analysts said this is doubtful.

"I don't expect any new issue this year because the government is expecting to attract a lot of money through the sale of its stake in Slavneft," said Alexei Moiseyev, an economist with Renaissance Capital, referring to the privatization of the state-controlled oil company.

The Finance Ministry can issue $1.25 billion worth of new Eurobonds next year to restructure the FTO debt, according to the federal budget for 2003.

Analysts said the original holders of the FTO debt, suppliers of goods to the Soviet Union, have already sold it over the course of the last 10 years.

"People who trade FTO debt now generally bought it because they wanted to hold Russia," Poole said.

They bought much of this debt when Russia defaulted in 1998 because they knew that it would eventually be restructured and they would get a new, more liquid instrument, he said.