Publication: Monitor Volume: 6 Issue: 37

With the February 11 deal to restructure its debt to the London Club of commercial creditors, Russia took a big step forward toward restoring its external creditworthiness and reentering global capital markets since the August financial crisis. The London Club, which is composed mainly of commercial banks and other investment funds, held US$32.8 billion in Russian debt from the Soviet era. Since the August financial crisis in 1998, Russia has followed a strategy of only servicing debt contracted after 1991, and effectively defaulting on its Soviet era obligations. The new debt deal writes off 36.5 percent of the US$32.8 billion debt. The remainder is to be converted into a 30-year eurobond, with a seven-year grace period followed by gradually increasing coupon payments. Interest arrears accumulated since August 1998 amounting to US$2.8 billion are to be restructured into a 10-year eurobond with an 8.25 percent coupon payment. The exchange is expected to take place in the second quarter of this year (Reuters, February 13).

The deal is significant in that it raises Russia’s London Club debt to the status of sovereign eurobonds, one of the main demands of the creditors. Previously, the obligor of the debt was the government-owned Vneshekonombank rather than the government itself. The new status implicitly means that Russia is willing to acknowledge its Soviet debt and that its willingness to service this debt is now on a par with its post-1991 debt. A further element of the debt upgrade is a prospective default on these new eurobonds–which would then trigger cross default clauses on the Russian bonds–which were issued during 1996-1998.

The conclusion of the London Club agreement marks a big step towards Russia’s reentry into international capital markets. Russia, however, still faces another round of negotiations on restructuring more of its Soviet era debt, namely to the Paris Club, which is composed of official creditors. Unofficial estimates of Russia’s Paris Club debt (which comprise the bulk of the US$68 billion owed to official creditors at the end of 1998) ranged from US$38 billion to US$42 billion at the end of 1999. In August 1999 the Paris Club concluded an interim rescheduling agreement with Moscow, according to which payments on some US$8.0 billion in obligations coming due during 1998-2000 have been postponed until the second half of 2000. While Russia undoubtedly will argue for similar terms to those agreed with the London Club, the Paris Club negotiations are likely to be protracted. Germany, which holds some 70 percent of Moscow’s Paris Club obligations, has taken a particularly hard line against substantial debt relief for Russia.