WAS RUSSIA’S LONDON CLUB RESTRUCTURING A GOOD DEAL?…

Assuming it is ratified, the preliminary accord to restructure US$32 billion in Soviet-era debts reached on February 11 with Russia’s London Club creditors marks a major step in restoring the external creditworthiness that was destroyed by the August 1998 financial crisis. This deal should help restore Russia’s access to global capital markets and improve prospects for the capital inflows needed to restructure Russian industry and sustain long-term growth. The deal in itself, however, is unlikely to mean quick improvement in Russia’s external position. It has also raised some difficult questions, both in Moscow and abroad.

From the viewpoint of the London Club–the commercial creditors who agreed to forgive some US$12.0 billion in Russia’s pre-1992 debts–the deal is advantageous in that it raises Russia’s London Club debt to the status of sovereign Eurobonds. The debt’s new status implies that Russia has acknowledged that its Soviet-era debt is on par with its post-1991 obligations–which Moscow has faithfully serviced since August 1998. A prospective default on these new eurobonds could trigger cross-default clauses on Russia’s other sovereign eurobonds, which were issued during 1996-1998. This increases the likelihood that Moscow will in fact honor its Soviet-era obligations–something it only did for a short period during 1997-1998, following years of arduous negotiations that led up to the first rescheduling of Russia’s pre-1992 debt in 1997.

From Russia’s perspective, the agreement goes a long way toward removing the opprobrium of the August 1998 financial crisis. If ratified, the deal is likely to lead to ratings upgrades: Standard and Poor’s on February 15 raised its assessment of Russia’s senior unsecured foreign debt from triple-C to triple-C+. Improved creditworthiness in turn could help boost foreign investment in Russia: Economics Minister Andrei Shapovalyants on February 9 predicted that Russia would attract US$5.0 billion in foreign direct investment in 2000. This would be nearly triple the estimated US$2 billion in inward FDI that Russia received in 1999 (Bloomberg, February 9). And some of Russia’s more creditworthy borrowers are already showing a desire to return to the international capital markets: Alfa Bank, one of the few Moscow-based commercial banks to survive the August 1998 financial crisis, has announced a planned US$150-200 million Eurobond emission in the second half of 2001 (Reuters, February 23).

…OR WILL IT MERELY POSTPONE ANOTHER DEBT CRISIS?