After spending the first part of January trying to stare down its foreign creditors, the Russian government blinked on January 19. Prime Minister Mikhail Kasyanov and Finance Minister Aleksei Kudrin had claimed for weeks that Russia was too poor to repay the principal coming due on its obligations to the Paris Club of sovereign creditors during the first quarter of the year. On January 19, however, President Vladimir Putin ordered the cabinet to find the necessary funds “within two or three weeks.” This decision—should it be implemented—could have important political and economic implications.
In February 2000, by pleading poverty and letting arrears accumulate, then Finance Minister Kasyanov negotiated a 37 percent reduction in Russia’s sovereign debts to the London Club of commercial creditors. As was apparent in the 2001 budget–which makes no provision for the repayment of some US$2.7 billion in Paris Club principal which falls due this year–the government hoped to rack up a similar success with the Paris Club this year. In contrast to the London Club, however, the Paris Club—and Russia’s chief sovereign creditor, Germany–decided to play hardball. In early January, Paris and Berlin let Moscow know that the failure to fully service the Paris Club debt falling due in 2001 would preclude a general rescheduling similar to the February 2000 arrangement with the London Club.
The strong economic recovery Russia is now enjoying–the State Statistical Committee on January 29 estimated that GDP grew by 7.7 percent in 2000 (Reuters, January 29)–also make Russia’s cries of poverty less credible. The government’s negotiating position was further undermined by Andrei Illarionov, Putin’s economic advisor, who on January 17 declared that “debt repayment is a sign of a civilized state” (Reuters, January 17). “Nonpayment resembles petty hooliganism, like ripping away cords in telephone booths, breaking windows or relieving oneself in a doorway.”
With its negotiating position having blown up in its face, the Russian government beat a hasty retreat. On January 29, speaking at the Davos Economic Forum in Switzerland, Finance Minister Kudrin confirmed that Russia would indeed find the money to cover all of its foreign debts this year. If so, 2001 will mark the first year since 1997–and only the second year since 1990–in which Moscow will fully honor its sovereign debt obligations.
PAYING ITS DEBTS: AN ECONOMIC PLUS, BUT A POLITICAL MINUS?