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25 Jan, 2010 16:38

Russia settles $1 million London Club debt

The Finance Ministry has announced the settlement of Russia's remaining $1 million Soviet-era debt to the London Club of Creditors, accumulated by the Soviet Union from the banks of Europe, the US and Japan before 1991.

At the end of 2009, the Finance Ministry arrived at buy-sell agreements with creditors that had accepted settlement proposals and transferred funds amounting to roughly $1 million in exchange for PRINs (Principal Notes) and IANs (Interest Arrears Notes).

Russia and the London Club first restructured the former USSR's debt in 1997, when the largest debt was transformed into PRINs bonds and interest was converted into IANs, with Vnesheconombank being the bonds' issuer.

Following the crisis in 1998, servicing the debt became problematic. So, in February 2000, Russia and the London Club agreed on a second restructuring, with the holders of over 99% of the PRINs and IANs issues agreeing to exchange these bonds for Russian Eurobonds set to mature in 2010 and 2030.

The exchange of $31.7 billion in London Club debt for Eurobonds operations in 2000-2001, interest included, represented an issue of $21.2 billion in highly liquid market instruments and a very advantageous 36.5% write-off for Russia of $10.5 billion of the overall debt amount.

So, Vladimir Savov, a head of the analytical department at Otkrytie FC, sees the final settlement as a mere convention, as the sum is too little.

“Talking in terms of the world economy, the sum of $1 million is miscellaneous and this final settlement was mainly technical. It was obvious for everybody that Russia would soon pay its debt, as such economic indicators as Gold and Forex reserves, the country’s GDP showed all necessary precondition for that. So, I think, this will change almost nothing, with Russia’s investment ratings remaining the same.”

However, Anton Struchenevsky, a senior economist at Troika Dialog, is upbeat about the move, saying it will positively influence Russia’s private sector.

“In fact, any reduction of a debt is positive for a country’s future borrowings. This year we expect a small budget deficit, which the country will easily cover with the funds from its Reserve Fund. This will significantly reduce competition for the private sector in the market of foreign borrowings, thus stimulating the development of domestic economy.”

Vladimir Osakovsky, chief economist at UniCredit Bank said that the $30 billion overall debt that Russia still has is marginal when compared with GDP.

“Relative to the $1.2 trillion GDP, Russia’s debt is really negligible and only 2% of GDP. And relative to other countries like some in Europe, Russia is among the countries with the least public debt around.”

This, he says, makes it easier to raise funds in times of crisis.

“Governments do borrow for anti-crisis measures. Russia so far does not need to borrow at the moment, but if they do need to on a large scale for social projects its easy for Russia to raise a significant amount of money in a short time.”

However while Osakovsky believes that the ability to borrow allows the financial system to become more robust as it receives money, it also will raises overall debt.

“In 2010, this low level of public debt is a minimum and this level is due to rise.”