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. Last Updated: 07/27/2016

Seoul to Pay Moscow's Debt of $1.6Bln to Korean Banks

SEOUL, South Korea -- The South Korean government will repay $1.59 billion in loans and interest that Russia owes to South Korean banks with treasury bonds, the Finance Ministry said Friday.

The move would resolve one of South Korea's longest-running financial disputes, one pitting the government against banks angered about loans to the former Soviet Union they said they were forced to make.

"We agreed to pay back the guaranteed Russian loans to banks by issuing treasuries," the ministry said in a statement. "And we will keep trying to retrieve loans from Russia."

South Korea's three biggest banks -- Kookmin Bank, Woori Finance Holding Co and Shinhan Finance -- are among the lenders in line for repayment.

South Korean banks extended loans to the former Soviet Union in 1991 under a government guarantee to assist Russia's transition to a market economy, as the two countries opened diplomatic relations at the end of the Cold War.

The ministry said the government would repay the banks next September pending revision of a related law in 2003.

"It's better than not getting the loans back ever," said one bank official, who asked not be identified. "But the government should repay it right now, as it guaranteed the loans."

The move promises to ease loan losses at banks, a major factor that has eaten into their earnings in recent years.

"Now, the issue of additional loan-loss provisions [on the Russian debt] is likely to be resolved," state-run Korea Development Bank said in a statement.

Bad loans in the coffers of nationalized banks have hurt efforts to sell lenders such as Seoulbank, which lent Russia $110 million, or 11 percent of the loans South Korean commercial banks provided. The two countries have been haggling over the unpaid loans since 1992.

Moscow has reduced its debt to South Korea by providing $370 million worth of weapons.