By IPS Correspondents
Jul 25 2000 (IPS)

Russia had hoped to use the Okinawa summit to negotiate a write-off of multi-billion in Soviet-era loans it owes to Western governments.

However, economists say Russia was given a clear signal by its G-8 partners that it is not appropriate for a world power to beg for debt relief, and that a total write-off was out of the question.

The G8 leaders gathered in Okinawa, Japan, at the weekend to discuss common political and social concerns and the state of the world economy.

The leading industrialised nations were expected to reject Russian pleas for a write-off of 42 billion US dollars on the grounds that Russia, a former superpower, has long way to go to become eligible for debt reduction – along with the world’s poorest states.

On the eve of the summit, German Chancellor, Gerhard Schroder, told journalists that Russia is neither a developing country nor an emerging economy, but a world power, thus Russia does not need debt write-off.

Paris Club countries have said they do not favor a debt write- off, instead offering Russia more time to repay the debts.

Germany, Russia’s largest creditor, and the lead state for the western debt talks with Moscow, showed its readiness to consider a long-term debt rescheduling deal.

Germany offered debt rescheduling – Russian debt from 1998, 1999 and 2000 is to be restructured in the amount of around eight billion Deutsche marks (3.8 billion US dollars).

Russia owes Germany some 16 billion of the 42 billion dollars in Paris Club debt.

Russia took the initiative during the Okinawa summit, said Dmitry Rogozin, head of foreign relations of committee of Russia’s State Duma, lower house of parliament.

The debt restructuring deal with Germany – though limited – is very important for Russia’s reform process, he told RTR television.

Putting aside debt write-off issue – and thus avoiding outright refusal – Russian President Vladimir Putin made a strong showing at his first appearance at the Okinawa summit of the Group of Eight.

Putin told the Russian media on Monday that the debt issue was discussed ‘in the most general way.’

While visiting Russia’s far eastern town of Petropavlovsk on Monday, Putin told journalists he was satisfied with the results of the Okinawa summit.

Nonetheless, the Kremlin had serious hopes to secure a debt write-off. Prime Minister, Mikhail Kasyanov, warned on July 20 that if Russia is forced to pay, it would slow down the country’s development of the fully-fledged market economy.

Russia will have to spend 30 to 40 percent of budget revenues on servicing its debt unless it wins relief, he said.

‘Russia could do it to demonstrate good will, but it would be difficult,’ Kasyanov said, speaking at a news conference ahead of Okinawa summit.

‘If Russia can pay, this does not mean that it should pay,’ argued Kasyanov.

Furthermore, Russia now faces political conditions in debt negotiations.

On July 19 the US House of Representatives voted to prohibit the United States from participating in multinational rescheduling agreements until Russia shuts down an electronic intelligence facility in Cuba.

It makes no sense to tie these two things – the station in Cuba and the debts, Russian Prime Minister, Mikhail Kasyanov, told the ITAR-TASS news agency recently.

Kasyanov, who had served as Russia’s chief foreign debt negotiator in his previous capacity as deputy finance minister, had 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 in February 2000.

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-August 1998 payments of 2.8 billion US dollars into 10-year bonds.

Russia’s total debt is about 150 billion US dollars owed to Western governments and banks, to the World Bank and the International Monetary Fund.

This debt represents roughly four fifths of the country’s gross domestic product (GDP), or 1,000 US dollars per every citizen. About two thirds of that debt was incurred by the Soviet Union, and Moscow has vowed to repay it.

However, even Russian experts argue that it sounds strange for probably the richest country on earth in terms of natural wealth to get a debt forgiveness, while many poorest countries in the world are yet to get debt relief – notably given Russia’s extraordinary – and growing – foreign trade surplus.

Former Finance Minister, Boris Fyodorov, has argued that Russia could service its sovereign debt if it could reduce theft, corruption and capital flight.

The Russian economy has begun to pick up in recent months, after a decade-long decline.

Russia’s financial health has improved significantly since the 1998 economic crisis, thanks largely to high world market prices for its main energy and commodity exports and the 1998 ruble devaluation.

The nation’s gold and hard-currency reserves rose to 22.3 billion US dollars by mid-July, almost doubling last year level, according to the Central Bank.

Rising prices for its gas and oil exports had boosted Russia’s revenues.

During the first five months of 2000, Russia’s foreign trade surplus reached an unprecedented 27 billion US dollars – compared to some 30 billion US dollars for the year 1999.

Russia 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 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.

Russia does not need debt write-off, argues Andrei Vavilov, director of the Institute of Financial Research, Moscow-based think-tank.

“The country just needs good debt management,’ he adds.

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