WHEN IS A DEFAULT NOT A DEFAULT?

Russia’s negotiations over the restructuring of its Soviet-era debt owed to the London Club of commercial creditors recessed on December 2 without the two sides having reached an agreement. In failing to make US$963 million in principal and interest payments which had been due on that day, Russia missed another deadline for servicing its estimated US$32 billion London Club debt (Reuters, December 2). But while this marks the third time since December 1998 that Moscow has failed to honor deadlines for meeting its London Club obligations, the consequences of these missed deadlines have been minimal. Moreover, Russian negotiators have repeatedly stated that they expect commercial creditors to agree to a large reduction in the London Club by the end of the year.

Despite regularly missing payments on a number of obligations to foreign and domestic creditors since its August 1998 financial crisis, Russia has not yet formally defaulted on any of these obligations. For one thing, Moscow has remained current on the servicing of all of its “Russian Federation” debt issued since the 1991 collapse of the Soviet Union. According to former Finance Minister Mikhail Zadornov, Russia spent US$9.0 billion during the first three quarters of 1999 covering its obligations to the IMF, World Bank, G7 governments, and private-sector creditors, including the holders of Russian eurobonds. Moreover, the accumulation of arrears on interest or principal payments due to creditors does not automatically constitute a default in the world of international finance. A default must often be invoked by creditors, and the formalities of initiating default proceedings depend on the legal specifics of the obligation in question. In the case of the London Club, these obligations are “principal arrears notes” (PRINs) and “interest arrears notes” (IANs). An invocation of default on these notes–which are bank loans owed to the Soviet Union’s creditors that in 1997 were converted into securities–requires the approval of 25 percent of their holders. And so far, those London Club creditors who favor pressing Moscow with the threat of default–a group that is led by New York-based mutual funds–have been unable to muster this critical 25 percent. Most of the London Club creditors are multinational investment banks who do not want to risk the possible consequences of a Russian default, and who want to be able to compete for business in Russia when the economic picture there improves.

A QUICK LONDON CLUB DEAL MAY NOT BE POSSIBLE…