A QUICK LONDON CLUB DEAL MAY NOT BE POSSIBLE…

Since the start of Moscow’s negotiations with the London Club in September, Finance Minister Mikhail Kasyanov and other government officials have often claimed that an agreement to restructure Russia’s London Club debt would be concluded by the end of this year. And despite the two sides’ inability to reach an agreement by the December 2 deadline, a basic framework for an eventual deal seems to be in place. Creditors have apparently agreed to write off US$12 billion (38 percent) of the London Club debt principal, as well as accept lower interest payments and a longer grace period before repayment would begin. In exchange, Russia would transform the remainder of the debt into eurobonds. Because these would be issued by the federal government (as opposed to the PRINs and IANs, which are formally the obligations of the state-owned Vneshekonombank), and because Russia has faithfully serviced its existing eurobonds, creditors view these eurobonds as more attractive securities. Once completed, the restructuring of its London Club debt would remove a large obstacle to Moscow’s plans to once again borrow on international capital markets.

Optimistic prognoses about a rapid London Club debt deal could be mistaken. While both Russia and the London Club have good reasons to want to eventually conclude a deal, both sides also have reasons to wait. Its post-August 1998 experience has taught Moscow that, as long as it negotiates with at least a modicum of good faith, creditors will not risk formally invoking a default. Also, a London Club restructuring does not by itself allow Russia to return to the international capital markets. Agreements must still be concluded with the Paris Club of sovereign creditors (mostly G7 governments), to whom Moscow owes some US$38 billion, and perhaps with other creditors as well. On the other side of the table, the London Club is dominated by large multinational banks with strong capital bases and relatively small exposure to Russia. Most have already written off their post-August 1998 losses in Russia, so that the additional losses incurred by the absence of Russian debt servicing are essentially limited to the costs of conducting the negotiations.

Moreover, the London Club is far from presenting a united front. In addition to the split between the banks and the New York-based mutual funds–who want cash on the barrel head now–some banks are more interested than others in maintaining a long-term presence in Russia. But while the future prospects for underwriting Russian securities may be enough to convince some banks to accept half a loaf (or less) on the PRINs and IANs today, other banks are reportedly still miffed at Russia’s propensity to stiff its creditors, and feel that Moscow needs to be taught a lesson. The fact that since August 1998 Russia has accumulated nearly US$2.0 billion in London Club arrears may be sticking in some bankers’ craws.

…OR DESIRABLE.