Publication: Monitor Volume: 7 Issue: 18

Should it continue, the stalemate over Russia’s 2001 Paris Club obligations will do little to defuse Moscow’s growing economic and political tensions with G7 governments, and especially Washington. Moreover, Aleksei Mozhin, Russia’s executive director at the IMF, affirmed on January 12 that the Fund will not lend to Russia as long as Moscow and the Paris Club remain at odds (Bloomberg, January 12). Without a new IMF agreement, the federal and regional governments, as well as Russia’s most creditworthy companies and banks, will not regain access to international bank loans and capital markets. This would deprive private-sector borrowers of the resources needed to boost competitiveness and make the economic growth of 1999-2000 more sustainable. For the federal government, continued isolation from the capital markets will mean growing problems in servicing its debts to other creditors, particularly the London Club and Russian Eurobond holders. These problems are will sharpen in 2003, when the federal government’s foreign debt payments are expected to jump to US$18 billion, nearly double the US$9.5 billion paid in 2000. Stiffing the Paris Club in 2001 could therefore mean defaulting on other obligations two years hence.

For these reasons, many observers expect Moscow to ultimately change its mind and try to cover most of its 2001 foreign debts. Such a course would be consistent with President Putin’s rhetoric, which has consistently painted Russia as a state which will honor its debts. Presidential advisor Andrei Illarionov spent much of January publicly lambasting the government’s refusal to do so. “Debt repayment is a sign of a civilized state,” the colorful Illarionov told the press on January 17. “Nonpayment resembles petty hooliganism, like ripping away cords in telephone booths, breaking windows, or relieving oneself in a doorway” (Reuters, January 17).

But paying up could also mean submitting a revised budget to parliament. While the Duma during 1999-2000 was generally willing to accommodate Putin’s fiscal wishes, its leaders on January 16 strongly supported the government’s hard line on the Paris Club. Moreover, attempts to push a revised budget–with higher foreign debt payments, lower domestic spending, and/or higher taxes–through parliament could backfire and produce a more deficit-prone budget than it now has. The decision to admit defeat on Russia’s hardball strategy with the Paris Club could also be a major political defeat for Kasyanov and Kudrin, the strategy’s key authors, and could precipitate their departure from Putin’s cabinet.