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Thursday, December 10, 1998 Published at 16:32 GMT

Business: The Economy

Debt problems cloud Russia's budget

Russian bank debts are still a problem

The Russian government has approved its 1999 budget, calling for significant help from foreign creditors, just as a key committee of foreign banks rejected the latest debt restructuring plan.

Prime Minister Yevgeny Primakov said the budget was "tough but fair" and said Russia "was dropping the old pattern when we were dependent on taking loans to mend the hole in wages and pensions payments."

The budget forecasts a deficit of just 2.5% of GDP, much lower than in previous years, but admits that the target will only be met if the government pays back only half the money it owes to foreign banks and governments.

It also assumes that foreign loans of around $7bn a year will be forthcoming. But the IMF, which suspended lending to Russia in August, has said it has no plans to resume lending in the near future.

US Deputy Secretary of State Strobe Talbott is visiting Russia this week to discuss the economic situation.

Talks breakdown

Meanwhile, talks with foreign banks on restructuring much of the government's debt have broken down.

Credit Suisse First Boston (CSFB), which is leading the negotiations on behalf of Western banks, has said that Russia's offer to repay part of the debt it defaulted on when the rouble was devalued in August, was unacceptable.

At issue are short-term government bonds, called GKOs, which are worth much less now that the rouble is trading at 19 to the dollar, as opposed to six in August. The banks are worried that foreign creditors will get a worse deal than domestic lenders.

CSFB says Russia will be shunned by international investors if it unilaterally imposes its own deal.

"The committee believes that Russia will aggravate its financial isolation if it unilaterally imposes unfair restructuring terms on foreign investors," it said.

Russia is trying to negotiate other reductions in its foreign debts, some incurred in the Soviet era, with Western governments and banks.

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