Zee Beam News

On Friday, at a special meeting of the Paris Club held to handle “the Russian issue”, Sergey Storchak, the head of the international financial relations, public debt and national financial assets department of the Finance Ministry, stated that the terms discussed at the negotiations did not suit Russia, and proposed to start discussions anew.

At present, the deadline for reaching an agreement is uncertain. Some sources both in Moscow and Paris note that the negotiations will be resumed rather soon – within a few weeks. However, finance officials seem to want some political impetus.

“Judging from the standpoints that Russian and German representatives have assumed, I do not rule out the possibility that personal arrangements between Vladimir Putin and Gerhard Schroeder (the German Chancellor) will be required for a successful outcome,” a representative of a Paris Club creditor country said. In his words, it’s the Germans - Russia’s chief debt collectors (Berlin will take up over USD20bn of the aggregate sum of Russia’s debt to Paris Club creditors, which totals USD47bn) - who were tough, and thus frustrated the deal.

Meanwhile, it is namely Germany that is known to have triggered Russia’s resolution to pay its debts off to the Paris Club ahead of schedule. Last June, the German Finance Ministry sold securities, secured by Russia's sovereign debt to Germany, to investors. The securities, issued on terms highly attractive for the market, equaled EUR5bn. Berlin resorted to the transaction on account of serious budget problems, yet, having procured active money, it spoiled relations with the Russian Finance Ministry for one thing, and impaired the market situation for another.

Investors were right to expect that securities with similar parameters would also be profitable to them (loans of Russia’s big corporations could be referred to these). To avoid the risk of such operations recurring, the Russian Finance Ministry started to seriously think over the possibilities of premature debt discharge. First, Russian Finance Minister Alexey Kudrin announced Moscow’s desire to exchange non-market debt to the Paris Club for market instruments – Eurobonds. Ultimately, the terms of the German bond issue adversely affected negotiations between Moscow and the Paris Club. According to the source, all parties involved admitted at the opening of the negotiations that the terms of the transactions had to be “market” terms.

Given that, it is namely German bonds that serve as the only market benchmark. Russian officials have been contending that the terms should be similar to those of the June issue (Germany sold the securities with an approximate 10 percent discount).

Yet, the price for the German securities has changed drastically since the date of the issue. One of the bondholders stated, “If in summer, their price was 100 percent, now it’s 123 percent of the face value.” (The marginal value of securities is calculated in the same way as the nominal value, plus interest accrued throughout the whole of the circulation period). And it is this price that the German officials grounded their calculations on at the negotiations at the Paris Club. In other words, Russia was in no position to expect a discount, and going in the completely opposite direction, it was suggested that Russia should pay a sort of “bonus” to the sum of the debt retired. Naturally enough, the Finance Ministry could not agree to such terms.

Vremya Novostey’s source in a big investment bank points out that Berlin’s standpoint seems to be a cunning one. He explains that the growth in the prices for German securities is accounted for not only by poor floatation conditions, but also by how investors fancied further developments: “The market thought Germany wouldn’t make a second issue, Russia would buy back its debt to the Paris Club, and the German Eurobonds would turn into purely German liabilities, as opposed to securities secured by Russia’s debt payments.” According to all appearances, that is what Russia is counting on. However, the negotiations are being drawn out, and the Germans may not wish to wait for “active money” from Russia for a prolonged period.

Already in October 2004, German Finance Minister Hans Eichel stated that in 2005, Germany proposed to boost the sales of national assets, so as to bring down the budget deficit, which had been above the ceiling of 3 percent of GDP, set by the European Union, for the third year on end. The assets include Russia’s debt to Germany. To put it in other words, the June developments can easily be repeated. In this case, to retrieve all its debt obligations, Russia will have to pay far more than the current USD6bn. Moreover, the source says, Italy is likely to follow Germany’s suit - Russia owes the former USD5.7bn. If achieved, agreements on the principles of Russia’s debt payment to the Paris Club could sensibly improve the chance that the major rating agencies would upgrade Russia’s sovereign rating in the immediate future. This is because such a transaction would reduce the dependence of Russia’s debt repayment on macroeconomic factors like oil prices and world currency fluctuations.

Thereby, our country could maintain creditworthiness even in case the situation on commodity and currency markets worsened drastically. Simultaneously, a number of analysts observe that such a favorable course is only possible, provided that the terms of the arrangements with the creditors are fairly advantageous for Russia. Currently, Russia’s gross debt equals only 25 percent of GDP, whereas in 1999, it made up to 120 percent. It is among the world’s lowest public debt to GDP ratios. Analysts presume that in 2006, the country will manage to cut the debt to GDP ratio to 19 percent, and to 15 to 17 percent by 2008-2009. With rates reaching the above levels, experts believe the possibility of Russia encountering problems attending to its debts insignificant.

In this context, most analysts tend to regard Kudrin’s statement, that the subsidiary earnings from the stabilization fund expected above 500bn rubles are to be primarily used for foreign debt repayment, a positive one. This permits confidence in a soon repayment of Russia’s debt to Paris Club creditors to the total of some RUR20bn (about USD714m). Preliminary forecasts put the volume of Russia’s Stabilization Fund at RUR522.3bn (about USD18.65bn), as of January 1.