…OR DESIRABLE.

Perhaps the most surprising aspect of the current negotiations is the Russian side’s apparent interest in a quick agreement. The first negotiations on rescheduling Russia’s Soviet-era debts–which lasted from 1992 to 1997–did not really get off the ground until after 1995, when Russian inflation rates came down and the ruble’s exchange rate strengthened. In addition to improving Moscow’s negotiating position, this progress in financial stabilization cleared up many uncertainties about how much debt Russia could, in fact, afford to service. This time around, however, Russian Finance Minister Mikhail Kasyanov seems to be pushing for a deal during the depth of the ruble’s weakness. Despite its industrial recovery and large trade surpluses in 1999, massive capital flight continues to decimate Russia’s foreign exchange reserves and keep the ruble at historic lows against the dollar. For these reasons, former Finance Minister Zadornov told an NTV audience last month that Russia needs to have at least 50 percent of its debt written off (Bloomberg, November 16).

In fact, a premature debt deal could do Russia more harm than good. Only US$25 billion in overall federal budget revenues are expected in 2000, and this figure is unlikely to increase significantly in the coming years. The US$3.2 billion difference between a 38 and 50 percent London Club debt write-off could therefore loom quite large for Russia’s growth prospects. Kasyanov’s apparent haste to conclude a restructuring deal could leave Russia saddled with debt-service payments high enough to choke off future economic growth. Without growth, an escape from Russia’s debt trap is unlikely, raising the prospect of Moscow having to reschedule its foreign debt for a third time.

Such an outcome could be more than just humiliating. When Russia assumed virtually all of the Soviet Union’s foreign debt in 1992, it did so in order to win the international community’s support for its claim to most of the USSR’s foreign assets–including the Soviet gold stock and its military hardware. Some Soviet successor states, including Ukraine and Georgia, never formally recognized this claim, but since their economic weaknesses made these countries unable to service the Soviet debt themselves, their objections had little practical significance. However, Russia itself was only able to service the USSR’s debts for a brief period during 1997-1998. The more time that passes without the Soviet-era debt being serviced, the more tenuous Moscow’s claim to the USSR’s foreign assets could become.

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