The country has reached agreement with Western banks on Friday to restructure debts which were frozen earlier in the year.

The news came as the US announced an $885m aid package to help feed the Russian people this winter and Japan released an $800m credit to the country.

Russia also announced plans to offer its foreign creditors shares in companies instead of paying off its foreign debts.

Repayment problems

The head of the government's agency for managing foreign debt said that without the restructuring plan it was "extremely unlikely" that Russia would be able to pay the interest on the $17bn of debt that falls due next year.

Andrei Kostin, head of Vnesheconombank, said:

"My personal opinion is that over the next couple of years Russia will be unable to pay all the debt obligations..we cannot expect a queue of foreign businessmen to take over these enterprises, but some of them could be profitable under proper management."

Russia has already missed a payment of $685m owed to Western governments who lent to the former Communist regime. According to chief economics minister Yuri Maslyukov, it plans to begin negotiations soon for a restructuring of that debt.

Converting debt to equity was one of the keys to resolving the Latin American debt crisis in the l980s, with the creation of Brady bonds which are still traded today.

Russia is also currently negotiating with Western banks over repayment of private loans, and is hoping that some of them will be persuaded to take an ownership stake in Russia's bankrupt banking sector in lieu of full payment.

But Dirk Damrau, of MFK Renaissance, said the timing was all wrong.

"No one wants Russian equities at the moment," he commented.

Massive debt overhang

Russia owes a total of $160bn to foreign creditors. That includes

• $40bn in rouble-denominated Russian government bonds (GKOs), on which there was an effective default when the rouble was devalued on August 17. One-quarter is foreign owned.

• $60bn in government-to-government debt, two-thirds of which is from the former Soviet Union.

• $60bn in older private-to-government debt which is now trading at 8-10 cents on the dollar. after an earlier restructuring deal.

• $16bn in government Eurobonds, borrowed from banks and individuals.

• $23bn owed to the IMF and other international organisations.

The largest servicing obligations next year are for a $5bn repayment to the IMF, $1.6bn in Eurobonds, and $1bn in private-to-government debt.

With only $13.6bn in foreign reserves, the government is under enormous pressure not to pay its debts in full.

But any default - for example of the $500m due on November 27 in Eurobond payments - could have serious legal consequences.

Russia's central bank chief, Viktor Geraschenko, sometimes argues that as Western banks have already written off most of their exposure to Russia, much of the debt could be forgiven.

But that ignores the consequences of Russia being written out of the international financial system.