…OR WILL IT MERELY POSTPONE ANOTHER DEBT CRISIS?

In some other respects, however, the London Club deal raises more questions than answers. The 36.5 percent debt forgiveness granted by the London Club was at the low end of Russian estimates concerning the minimum write-off necessary to restore Russia’s creditworthiness. PRIN and IAN bonds–the instruments into which Russia’s London Club debt was securitized in 1997–have generally traded at around 10 cents on the dollar since August 1998. This suggests that anything up to a 90 percent debt write-off would have in some sense been consistent with market expectations. Moreover, the agreement’s immediate payoff is quite limited. Significant improvements in Russia’s creditworthiness await negotiations to restructure its debt to the Paris Club of sovereign creditors, which have not really begun yet. They may also require significant progress on such market reform initiatives as bank restructuring and bankruptcy reform that Moscow has thus far been unwilling or unable to introduce. Moreover, while the accumulation of arrears on its Soviet-era debt may be an embarrassment, Moscow’s post-1998 experience shows that neither the London Club nor the Paris Club is likely to formally invoke default proceedings.

These considerations suggest that Russia could have afforded to wait for a better deal. This argument has been made by former Russian Finance Ministers and debt negotiators Mikhail Zadornov and Aleksandr Shokhin, who criticized acting Prime Minister Mikhail Kasyanov for concluding a “hasty” deal on what they see as less than favorable terms. According to Zadornov, anything less than a 70% London Club write-off would still leave Russia with an unmanageable debt burden. And Shokhin was quoted as arguing that the terms of the deal make another “default” likely by 2015 (Moscow Times, February 16). Furthermore, other Russian press reports have charged that the deal reflects official desires to further boost Putin’s standing in the polls leading up to the first round of the presidential election on March 26. And Moscow Times columnist Yulia Latynina even claimed that “Kremlin insiders” had taken large positions in PRINs and IANs–and therefore profited handsomely when these securities’ market prices rose sharply in the wake of the deal’s announcement (Moscow Times, February 23). If correct, these arguments suggest that the London Club deal may reflect short-term political and economic expediency, rather than the cold calculation of Moscow’s long-run economic interests.

For the moment, however, Russia’s external finances are no danger of undergoing another meltdown a la August 1998. Central Bank of Russia (CBR) data show that Russian exports surged during the fourth quarter of 1999, rising to US$23.4 billion from US$18.6 billion in the third quarter. This export surge helped boost the CBR’s foreign exchange reserves to US$12.9 billion in January, and to US$13.4 billion as of mid-February (Central Bank of Russia). This war chest is now the largest it has been since October 1998. On the other hand, Moscow remains quite unwilling to tackle many of the structural problems that led to the August 1998 financial collapse in the first place. Russia’s moribund commercial banking system remains unrestructured, and little has been done to repair the highly negative perceptions of Russia’s investment climate held by foreign investors. These problems suggest that it is only a matter of time until unfavorable movements in world commodity prices once again decimate Russia’s external position–as occurred when the world oil price collapsed in 1998.

SPOTLIGHT NOW SHIFTS TO THE PARIS CLUB.