ECONOMY: Russia’s Debt Burden Remains Burdensome

By IPS Correspondents Reprint | | Print |

Sergei Blagov

MOSCOW, Feb 22 2000 (IPS) - Russia’s heavy debt burden has eased slightly with the recent rescheduling of 32 billion US Dollars of Soviet-era debt to the London Club of commercial creditors.

This includes a more than one third write-off.

However, analysts warn that Russia will not find it so easy to re-negotiate its sovereign debt to the Paris Club of creditor nations or to recover money from its debtors.

Economists warn that failure to achieve this may result in Russia facing yet another default.

“Russia does not necessarily need a debt write-off from the Paris Club as other ways of the debt relief are possible,” First Deputy Prime Minister Mikhail Kasyanov said a radio interview this week.

In another address, this time to the State Duma, Russia’s lower house of Parliament, Kasyanov admitted that it would be difficult to negotiate a similar write-off with the Paris Club.

“It is also not possible to link Russia’s debt to the Paris Club with the money owed to Russia by some countries within the framework of the Paris Club,” Kasyanov said.

Kasyanov, who has served as Russia’s chief foreign debt negotiator in his previous capacity as deputy finance minister, said earlier that Moscow would try to persuade the Paris Club to agree to similar debt restructuring terms as those accepted by the London Club earlier in Feb.

The London Club agreed to cut 32 billion US dollars of Soviet- era debt by about 36,5 percent and to extend repayments over 30 years.

They also agreed to swap the defaulted post-Aug 1998 payments of 2,8 billion dollars into 10-year bonds.

But critics argue that Russia needs a 40 percent or more debt reduction saying that without that level of write-off, the country could face yet another default in three or four years.

Communist leader, Gennady Zyuganov, former finance minister Mikhail Zadornov, and former deputy prime minister and debt negotiator, Alexander Shokhin, have criticised the government for not succeeding in negotiating a larger write-ff.

Former Finance Minister Boris Fyodorov recently wrote in Segodnya newspaper that Russia could service its sovereign debt if it could reduce theft, corruption and capital flight.

“In the early 1990s – in a more favorable political environment – Russia could have achieved better terms in various debt deals than the Feb 36,5 percent write-off,” Oleg Ostroukhov, senior researcher of the Institute of World Economy and International Relations, Moscow-based think-tank, told IPS.

Furthermore, foreign loans have failed to turn Russia into a vibrant market economy and the International Monetary Fund, IMF, aid schemes have been ineffective, with the cash either misused or embezzled, he added.

Before the deal, Russia’s total debt was about 150 billion US Dollars owed to Western governments, banks, the World Bank and the IMF.

About two thirds of that debt was incurred by the former Soviet Union, and Moscow has vowed to repay it.

Furthermore, said Kasyanov, the German government voiced its opposition to viewing the London Club deal as a precedent-setting for Paris Club talks, due in the second half of 2,000.

Russia owes Germany some 16 billion US Dollars of the 43 billion US Dollars in Paris Club debt.

Economists say Russia began actively seeking membership in the Paris Club over the past several years, in order to boost the repayment of the money it is owed by developing countries within the Club.

They say Moscow had hoped the Paris Club deal would triple reimbursements from debtor nations.

However, these expectations have yet to materialise. Since the beginning of 2,000 Russia has only received some 40 million US Dollars from its debtors, Kasyanov said.

Notably, Mozambique, Yemen, and Madagascar – who did not pay since the Soviet collapse in 1991 – have started paying, he said.

Russia has applied grace periods and lengthening the repayment periods below market interest rates with these countries and is expecting to get some 100 million US Dollars a year, he said.

In 1999 Russia received some 800 million US Dollars from India in debt repayment, Kasyanov said. However Russia’s debt deal with India was beyond the framework of the Paris Club deals.

Russia reportedly inherited billions of US Dollars of debt owed both by and to the former Soviet Union, when it collapsed in 1991.

Russia insists it is owed over 113 billion US Dollars by other nations, mainly its former allies during the Cold War, and much of the debt is in transferable rubles – Soviet block quasi-currency.

But this calculation is based upon the exchange rate of 0,6 rubles per dollar, the official rate in 1991, which many debtors refuse to accept.

Roughly half was owed by 27 countries with agreements with the Paris Club. Russia expected to recoup only 26 to 30 billion US Dollars of the total, including 12 billion US Dollars from countries covered by the Paris Club.

For Russia, the top debtors are Vietnam, Cuba, Mongolia, Mozambique, Algeria and Yemen. Algeria has periodically made payments to Russia, while Vietnam has paid with export goods. The other nations have reportedly hardly paid anything.

Despite joining the exclusive Paris Club of creditor nations, Russia remains a heavily indebted nation. Furthermore, Russia had asked several creditor nations to allow it to pay some of its Soviet-era debts in kind because it lacks sufficient hard currency.

Two years ago Kasyanov announced that Moscow had asked the Paris Club and some nations to consider repayment in goods.

Earlier this month Russia’s acting President Vladimir Putin announced said foreign borrowing would only be possible for Russia ‘as an exception’.

Nonetheless, Kasyanov said the government was still counting on resumption of a 4,5 billion US Dollar loan program from the IMF because the money is envisaged in the 2 000 budget.

The IMF suspended Russia’s loan program in September 1999 after issuing a 640 million US Dollar installment. The Russian government has tried hard to convince the IMF to re-open the purse and release new loans – to refinance debts to the IMF itself.

“Russia simply does not need the international loans. they just spoil the Russian elite and fuel corruption” argues Andrei Illarionov, director of the Institute of Economic Analysis, Moscow- based think-tank.

He said despite almost 19 billion US Dollars of IMF loans pumped into Russia since 1992, the economy is still in a mess. In fact, by some measures such as total indebtedness, the country is worse off, he added.