Russia to Germany: About Those Billions We Owe You...


German Finance Ministry officials were taken aback on Jan. 4 when the Russian government announced it wouldn't ante up the $1.5 billion in debt repayments it owes Western governments in the first quarter. The very next morning, German Finance Minister Hans Eichel declared nothing doing. He angrily insisted there's no reason Russia shouldn't meet all its debt obligations in full. After all, he pointed out, the Russian economy grew by 7% last year, and the country recorded a $60 billion balance-of-payments surplus. What's more, Russia's foreign-currency reserves had more than doubled, to $28 billion, last year.

"In view of the good economic situation in Russia, we expect Russia to fully meet its payment obligations," Eichel said. "A unilateral halt to payments is not acceptable." To drive home the point, senior Finance Ministry officials said Germany would suspend export-credit cover to Russia if Moscow did default.

HONORING OBLIGATIONS. The Russians quickly changed their tune. On Jan. 7, President Vladimir Putin told German Chancellor Gerhard Schr?er, who was on a visit to Moscow to celebrate Orthodox Christmas, that Russia would, after all, "honor all its financial obligations." But Putin also told reporters "that doing so might take some time." The upshot? Analysts say Putin is clearly angling for partial debt forgiveness, a major rescheduling, or some sort of debt-for-equity swap.

Germany is adamantly opposed to all three possibilities -- and especially to the notion of debt forgiveness. "We're talking about a very significant sum, and we want it to be repaid on time as agreed," says German Finance Ministry official Andrea Hermannsen. Debt forgiveness is "completely out of the question," she says.

Russia owes the so-called Paris Club of Western governments $48 billion in debt it inherited from the former Soviet Union. Of that, almost half is owed to Germany. Some $3.5 billion of Soviet-era repayments are due this year. In addition, Russia needs to repay $11.5 billion on the money it has borrowed since the Soviet Union collapsed at the end of 1991. But Finance Ministry officials in Moscow have said they've budgeted only $1.24 billion for all foreign-debt payments in 2001. "That means we can't make our first-quarter Paris Club repayments," a Russian Finance Ministry official declares.

KEEN FOR CASH.?Analysts say Russia's Jan. 4 announcement was a deliberate ploy to test Germany's attitude toward renegotiating the debt or setting up a debt-for-equity program, whereby Germany would get shares in Russian companies instead of cash repayments. Last month, Schröder and Russian Prime Minister Mikhail Kasyanov discussed the possibility of debt-for-equity swaps. But the talks were largely unsuccessful. The Russians hoped to be able to repay the bulk of Soviet-era debt with equity. The Germans, by contrast, were keen to get most of their money back in cash.

Russia also wants to reschedule its Paris Club debts. After all, Moscow did so last year with the Soviet-era debt it owes the "London Club" of Western commercial banks. And the country can easily repay the debts that fall due this year. But analysts say Kasyanov and Putin are thinking a couple of years ahead to 2003 when the debt burden will peak at around $18 billion and they may have fewer foreign-exchange reserves at their disposal. By putting pressure on Germany and other Western governments now, they believe they'll enhance their chances of securing a rescheduling of debts due in the future.

Despite the furor, the markets are taking the spat in stride. The price of Soviet-era debt has ticked upward in London over the past few days, suggesting that traders think a default is unlikely. The most likely outcome, they say, is a partial rescheduling alongside a limited debt-for-equity program. But forgiveness definitely seems out of the question. "The Germans just won't stand for it," one banker says. "They've made that absolutely clear." By David Fairlamb in Frankfurt


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