Publication: Monitor Volume: 6 Issue: 217

Russia’s debt-service burden and the desire of many Russian companies and households to hold their wealth in dollars suggest that large amounts of capital will continue to leave Russia for the foreseeable future. Prospects for reducing the scale of Russian capital flight may therefore hinge on the country’s ability to attract new inflows. This need not be out of the question: Russia attracted gross inflows of US$26-38 billion annually during 1996-1998. By effectively defaulting on its Soviet-era foreign debt in August 1998, Moscow destroyed its creditworthiness with Russia’s commercial and sovereign creditors, thereby causing capital inflows to slow to a trickle.

The resumption of capital outflows may therefore depend on the rescheduling of Russia’s Soviet-era debt to the London Club of commercial creditors and to the Paris Club of sovereign (mostly G7 government) creditors. Although Russia’s US$38 billion in London Club obligations were rescheduled earlier this year, Russia remains in quasi-default on its US$43 billion Paris Club debt. Despite the dramatic improvement in Russia’s economic prospects this year, a number of factors have prevented significant progress towards a comprehensive rescheduling of these obligations. For one thing, Moscow until recently argued that the country was still suffering from the effects of the 1998 crisis, and therefore need a large amount of debt forgiveness. This claim, in light of the strong recovery in Russia’s economy and finances, did not elicit much understanding among the Paris Club. The German government–which holds the lion’s share of Russia’s Paris Club debt–has been particularly unwilling to countenance Moscow’s request for a large write-off similar to the 36.5 percent forgiveness afforded by the London Club settlement. Political tensions linked to Moscow’s pursuit of a military solution to the “Chechen problem” have also stood in the way of a rapid settlement. Russia’s failure to reach an agreement with the IMF on its economic reform program has been a third key obstacle, as Moscow has moved slowly to address key IMF concerns about reforming the banking and energy sectors. Moreover, Russia’s excellent fiscal and external position essentially obviates the need for financial support.

A solution to the “IMF problem” appears to have been found, as recent press reports (Bloomberg, November 9) indicate that Moscow and the Fund appear close to concluding an agreement under which Russia would not receive any cash, but would nonetheless promise to implement the banking and energy sector reforms which the IMF is seeking. Most of these measures are contained in the government’s economic reform program sponsored by Economics Minister German Gref, and which was approved at mid-year. These agreements could be ratified early next year, pending approval from the new U.S. administration. However, this would still leave the other obstacles to a Paris Club deal in place. Chief among these is the fact that, according to most of the G7 countries’ legislation governing Paris Club restructurings, Russia’s balance of payments position is simply too strong to permit any kind of debt write-offs. Moscow thus finds itself in the ironic position of having too many dollars to make a deal with its creditors.