Publication: Monitor Volume: 4 Issue: 172

A group of twenty-five leading world banks met in London on Thursday and sent a strongly worded letter to the Russian government both condemning the default on GKO payments and insisting on equal treatment with Russian banks when it comes to repayment. The banks are thought to hold US$11 billion in frozen Russian GKOs and perhaps another US$19 billion in loans to Russian banks and corporations. The Western banks have been offered securities that mature in three to eight years’ time in lieu of the frozen bonds: They complain that these are worth only 10-30 percent of the bonds’ original value. Initially the banks had until September 18 to decide whether to accept the replacement bonds: On Thursday the government pushed back the deadline until September 25.

There are some suggestions that the banks may take legal action against Russian assets abroad in retaliation for the default (Nezavisimaya gazeta, September 19). The Western bankers’ ultimatum arrived the same day that First Deputy Prime Minister Aleksandr Shokhin hinted that the government may try to undo the default announced on August 17. In a TV interview on September 19 Prime Minister Yevgeny Primakov was even more conciliatory. He admitted that the August 17 decision to freeze trading in GKOs was a mistake, in that it led to the collapse of the financial system. He emphasized that Russia cannot survive in isolation from the global economy, and asserted that “Russia is fully ready to meet its international obligations” (Russian TV, September 19). It could be that Primakov’s conciliatory tone was aimed at trying to secure the next US$4.3 billion loan tranche from the IMF. It is unlikely that the IMF will release that money, but the Western bankers may still be interested in cutting a deal. A debt rescheduling would win them more of their lost cash than a declaration of war on Moscow. Private credits could start flowing again if, for example, repayments were guaranteed by channeling export earnings into an offshore fund (Wall Street Journal, September 17).

Primakov declared his intention to use “economic” rather than “administrative” methods to maintain the stability of the ruble against the dollar–although in the next breath he stated that some administrative controls over capital flows will be introduced. He also stated that the government will boost tax revenues by introducing a state monopoly on alcohol and tobacco, without explaining exactly what this entails. At least three times since 1991 Russian governments have pledged to introduce strict state control over alcohol revenues. Primakov’s intentions are clear: He would like to pursue a moderate economic strategy, and return to the status quo ante bellum. His aim seems to be to refloat the main commercial banks, rather than, say, nationalize the banking system. On the other side, radical Western proposals to introduce a currency board seem to have virtually no support, either in the government nor in the State Duma. However, it is not clear whether the banking system can be revived. The government is flying blind. No one quite knows what the Central Bank is doing in its debt swap, or whether it will work.