In a meeting late on Thursday in London, a committee of Western banks, chaired by Germany's Deutsche Bank, sat down to discuss the restructuring of billions of roubles of Russian government debt with the Deputy Finance Minister Mikhail Kasyanov.

At issue are $40bn in rouble Treasury bills and bonds (known as GKOs and OFZs) which have effectively been in default since August.

Foreign banks are owed one-third of this debt, which has been causing a big hole in their balance sheets.

Losses in emerging markets, of which Russia was the biggest, have already led to worldwide redundancies at big investment banks like Merrill Lynch and ING Barings.

Other banks may be forced to cut back staff in New York, London and other financial centres if they cannot recover their losses.

Today Germany's biggest commercial bank, Deutsche Bank, said it barely made a profit last quarter as a result of huge trading losses on emerging markets.

Slow progress

The six banks on the panel negotiating with Russia have had a frustrating time.

They include Chase Manhattan, Credit Lyonnais, Credit Suisse First Boston, Lehman Brothers and Merrill Lynch.

Lehman Brothers has gone so far as to sue its Russian counterparties in the courts in London to recover foreign currency debts which have not been honoured since Russia devalued the rouble on August 17.

But that became more difficult when one of its Russian partners, Inkombank, was effectively closed by the Russian central bank on Thursday.

One of the bankers involved said that the talks had made little progress so far.

"I don't know if the two sides are getting any closer, but it's good to know the two sides are still talking," he said.

Main issues

The main stumbling block to any agreement is apparently the treatment of the currency contracts entered into by Russian banks.

The Russian government wants the Western banks to waive claims to these non-deliverable forward contracts in return for a comprehensive settlement.

The banks are reportedly willing to accept "any reasonable extension of maturity" of the short-term Russian government debt, which would be denominated in dollars, provided they receive higher interest rates.

But they have balked at writing off their claims against Russian banks.