WILL THE PARIS CLUB “ACCELERATE” RUSSIA’S DEBT?

A number of economic and political factors stiffened international creditor resolve toward Russia in 2000. In contrast to late 1998 and early 1999, Moscow was unable to convincingly plead poverty. GDP rose by some 7 percent. The federal budget surplus was reported at nearly US$7 billion. Thanks to high oil prices and a weak ruble, exports rose by nearly a third, to some US$100 billion. The Central Bank of Russia’s (CBR) foreign exchange reserves by the end of the year had risen to US$28 billion, compared to a previous high of US$17 billion in mid-1997. But rather than use this windfall to tackle the structural causes of the August 1998 crisis, Moscow instead chose to vigorously pursue the military solution to its “Chechen problem,” to crack down on the independent media and NGOs, and to strengthen traditional Soviet ties to countries like Iran, Iraq and Cuba. As well as causing consternation in Washington and Brussels, these factors kept Moscow from reaching a deal with the IMF, which the Paris Club considers a prerequisite for a general debt rescheduling agreement.

Should present trends continue, Russia could default on its Paris Club debt. But such an outcome is by no means automatic. Instead, the Paris Club has to formally declare Russia to be in default on its obligations, in a process known as foreign debt “acceleration.” While the details are hazy, a prospective Paris Club acceleration apparently cannot begin until Russia is formally in arrears on its obligations for at least ninety days. Even then, according to the Russian Finance Ministry, it cannot begin as long as Moscow continues to “negotiate in good faith.” Moreover, examples of sovereign defaults in the annals of international finance are few and far between, and almost never end well for creditors. These circumstances have no doubt helped Prime Minister Kasyanov to take a hard line with the Paris Club. Russia’s creditors once again seem anxious to avoid a showdown: The German government has yet to follow through on its threat made in early January to cancel financing for German exports to Russia, for example.

Viewed from this perspective, Kasyanov’s gambit could yet turn out to be well played. This does not mean, however, that Moscow is likely to emerge Scot-free from this confrontation with its creditors. Instead, if a formal accommodation is not reached quickly, Moscow’s efforts at parlaying the economic progress of 1999-2000 into lasting improvements in Russia’s external creditworthiness could be set back for years (Russian and international agencies, January 2-15).

IS RUSSIA FACING AN INDEFINITE STAY IN THE INTERNATIONAL FINANCIAL WILDERNESS?