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. Last Updated: 07/27/2016

Mega-Bond Proposal for Soviet Debt Stirs Interest

Russia, which only six years ago suffered a humiliating financial meltdown, says it wants to use growing oil wealth to pay creditors early but may find it hard to swap debts for a massive bond issue, analysts said Friday.

A senior Finance Ministry source said Thursday that Russia plans to make an offer to Paris Club creditors next month to settle the former Soviet Union's outstanding debts, which totaled $47.7 billion at the start of the year.

"We can propose various options of repayment, or our Eurobonds, or cash, or a combination," said the source.

One Western official welcomed the idea.

"I don't know the details yet of the Russian position but I am encouraged obviously by any initiative that helps to bring down that international debt burden," Canadian Finance Minister Ralph Goodale told reporters.

Russia, flush with cash from oil exports, has the means to speed up payment of its debts, but exchanging its exposure for bonds could be expensive.

"I think it makes no sense to issue relatively expensive Eurobonds to repay relatively cheap Paris Club debt," said Peter Worthington, a strategist at CSFB in London.

The cost to Russia of issuing sovereign Eurobonds would be higher than servicing its existing Paris Club debts. A bond issue would not make any real dent in Russia's debt profile.

"Net public debt does not change if you swap debt for Eurobonds," said Alex Garrard, emerging market debt specialist at UBS Warburg in London.

Russia's biggest concern was to head off any further issues of Russian Paris Club debt-backed notes after Germany's issue of 5 billion euros ($6 billion) in Aries notes.

But Russia, which was given practically no warning of the deal, was infuriated even though there is nothing in the Paris Club rules to prevent such issues.

With rumors Italy -- which like Germany needs cash because of difficulties in keeping public sector debt within Maastricht Treaty guidelines -- is also planning an Aries-style issue, the Russians may have decided to make a pre-emptive strike.

"[The Russians] don't want a slew of Aries-style countries doing Aries type deals," said Garrard. "Part of this is putting sand in the works of the process and there is no question it is partly designed for the ears of the Italians and with any possible further German issue in mind."

Big Aries-style issues can "crowd out" Russian corporate borrowers who are competing for investment dollars to fund their business expansion programs.

A senior Finance Ministry official was quoted on Friday in Vedomosti as saying Moscow wanted to play a role in any future securitization deals.

Straight repayment ahead of time of Paris Club debt may be the simplest option for Russia although it would have to meet rules forbidding bilateral debt reduction deals.

Germany is Russia's biggest Paris Club creditor by far with $20.3 billion owed to it, followed by Italy with $5.7 billion and France with $3.4 billion.

"We may just end up with an agreement to accelerate repayment," said ABN-Amro analyst Zsolt Papp. "Given Russia's strong cash position, it makes sense to seek early repayment."