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$10Bln Debt Write-Off Derided as Too Little

The Moscow Times,
By Igor Semenenko, Staff Writer

Tuesday, February 15, 2000

A day after the government claimed a major triumph in convincing Western banks to write off $10.6 billion in Soviet-era debt, authoritative voices ranging from former finance ministers to the Yabloko Party came out firmly against the deal.

Critics argued either that the write-off could have been larger perhaps even $20 billion instead of $10 billion, or that the actual details of the deal are more onerous than has been made clear, or that Russia would be better off simply repaying the entire amount it borrowed, instead of seeking debt relief.

"Talk of this partial debt write-off as a victory is simply hilarious," said Sergei Ivanenko, deputy head of Yabloko's Duma faction.

Ivanenko was not alone. Former Russian Cabinet ministers Mikhail Zadornov, Boris Fyodorov and Alexander Shokhin all of them at one time or another men who handled the nation's finances have now questioned the deal. Perhaps tellingly, the Russian stock market at first rallied on the news Monday, then fizzled.

Russia owes more than $145 billion to Western banks and governments and to multinational lending agencies like the World Bank and the International Monetary Fund. About half of that debt was racked up by the Soviet Union, and Moscow intends to repay it.

Hundreds of Western banks who lent to the Soviet Union are banded together into the so-called London Club; until last week, they had been seeking reimbursement of $31.8 billion.

On Friday, however, First Deputy Prime Minister Mikhail Kasyanov and the London Club agreed to restructure the debts writing off $10.6 billion, and postponing the heftiest repayments on the remaining $21.2 billion until 2008.

Acting President Vladimir Putin promptly announced himself pleased with Kasyanov, an assessment endorsed by other officials and politicians and by foreign markets-watchers.

"This agreement with the London Club helps Russia's battered image of an insolvent borrower," said Andrei Kokoshkin, the chief economist of Fatherland, the political vehicle of Moscow Mayor Yury Luzhkov.

Charles Blitzer, who used to head the Moscow delegation of the World Bank and now is the London-based head of research for the investment house Donaldson, Lufkin and Jenrette, was also complimentary. "I think that this is a very favorable deal for Russia," Blitzer said in a telephone interview.

But for Fyodorov a former finance minister who has for years warned against extravagant borrowing from the West, yet also insisted that everything borrowed also be repaid Kasyanov's deal was a cause to grieve.

"Everyone around is trumpeting about a triumph, congratulating each other, shouting hysterically about this brilliant victory of Russian economic diplomacy and of Mikhail Kasyanov. But I am just sad," Fyodorov wrote in Tuesday's issue of Segodnya. "Because now the entire world knows for certain: Russia is an African country.

"For a pretender to status in the 'G-8' [group of the leading industrialized nations] it is simply shameful, in my view, to beg for debt forgiveness."

Fyodorov asked why it was that given the export boom now enjoyed by industry thanks to the weak ruble and to the soaring world oil price Russia couldn't simply pay off these debts.

"Russia could certainly service its entire sovereign debt and also have a decent [federal] budget, if it could significantly reduce theft, corruption and capital flight," Fyodorov wrote.

That same argument has been put forward by the well-known liberal economist Andrei Illarionov. "The problem of paying off the state debt does not exist," Illarionov said, in an interview Monday with the Vedomosti business daily.

Illarionov calculated that all of Russia's sovereign debts, both Soviet and otherwise, together amount to about 5.3 percent of national GDP. He compared that with debts taken out by other nations as a percentage of GDP, including Bulgaria at 9 percent, Kazakhstan at 10.5 percent and Nicaragua at 14.5 percent.

Vedomosti quoted a finance ministry official as questioning Illarionov's math, and drily adding that this was simply "a striking example of how any conclusion can be supported if you carefully select the facts."

In Segodnya, Fyodorov also suggested that Russia might also eventually decline to pay these debts too.

That was a view echoed by Zadornov, who was finance minister during the August 1998 meltdown. Zadornov said he expected Kasyanov's deal would, in some distant future, also have to be improved upon.

"Looking at the conditions of the agreement, I conclude that this is not the final restructuring," Zadornov told the Ekho Moskvy radio station.

Zadornov's colleagues in Yabloko noted, in remarks to Interfax, that Zadornov had in his day sought a 70 percent write-off of London Club debt. Kasyanov brought back a roughly 35 percent write-off, but according to Yabloko's Ivanenko, even a 50 percent write-off would have been "a step back."

Soviet debt has been securitized into two major financial instruments PRINs, the rolled-over principle, and IANs, the rolled-over interest. Then there are also promised payments missed since August 1998.

Kasyanov and the London Club tentatively agreed to write off 36.5 percent of $22.2 billion in PRINs and 33 percent of $6.8 billion in IANs. The remainder is to be restructured into Eurobonds at interest rates from 5 percent to 7.5 percent.

They also agreed to swap the post-August 1998 payments of $2.8 billion into 10-year bonds at 8.25 percent interest.

News that PRINs and IANs would indeed be honored in some form pushed up their value. PRINs and IANs trading on Friday at $19.6 and $22.1 respectively were by Tuesday at $24 and $25.25.

Duma Deputy and former Cabinet minister Shokhin and Communist leader Gennady Zyuganov are among others who have argued that Russia could have cajoled more out of the London Club.

But as Zyuganov has noted, it is difficult to judge the deal because the negotiation process which will effect Russia for generations has been non-transparent.

On Monday, Zyuganov complained that the government should have consulted with the State Duma on the deal. But in fact, Zyuganov's Communists in the last Duma helped bury a Yabloko legislative proposal to mandate just that.

Viktor Gitin, a debt expert with the Yabloko Party, had suggested an amendment to the budget law that would have required State Duma approval for any London Club agreement. The Communists voted it down.

ei Stepashin on Grigory Yavlinsky's proposals