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Wednesday, December 16, 1998 Published at 19:42 GMT

Business: The Economy

Russia restructures frozen debt

The debt has been frozen since the Russian market crashed in August

Russia has announced plans to restructure its frozen rouble debt.

However, some key terms for foreign investors have still to be ironed out.

The restructuring of the debt, known as GKO treasury bills and OFZ bonds, was launched on Tuesday, when Prime Minister Yevgeny Primakov signed a resolution on the deal, but the terms were not announced then.

The debt was worth some $40bn when it was frozen in mid-August after a crisis of confidence on the part of investors led to a stock market crash and the effective devaluation of the rouble.

Payment on the short term commercial debt and Russian government domestic debt was suspended pending restructuring, which has itself become a difficult issue as foreign investors battled to agree suitable terms.

Under the plan, just 10% of the debt is to be exchanged for cash roubles, while 20% will be exchanged for three-year interest-free OFZ investment bonds and 70% for new four- to five-year variable interest rate OFZ bonds.

The four-to five-year OFZs will have a sliding interest rate, starting at 30% in the first year and falling five percentage points in each subsequent year to 10% in year five.

Investors will will able to use the interest-free bonds to buy shares in Russian banks and to pay taxes which were overdue before 1 July 1998.

Investors unhappy

Frustrated investors, who will only get back a fraction of their initial outlays, want more details.

Parvoleta Shtereva, fixed income strategist at MFK Renaissance, said investors wanted to know the exact terms for each new bond.

Foreign investors, who hold about 30% of the debt to be restructured, are particularly unhappy.

They want to be able to buy shares in Russian firms as well as banks.

A Russian delegation headed by Deputy Finance Minister Mikhail Kasyanov and First Central Bank Deputy Chairman Andrei Kozlov is heading for London to talk to foreign investors..

Mr Zadornov said Russia was unlikely to agree to the requests.

"The widening of investment possibilities will not cover (acquisition of) shares of state-owned companies," he said.

Foreign investors are also unhappy about plans for converting the revenue into cash and repatriating it.

Mr Zadornov said the cash would be paid in three equal instalments, with the last two having 30% annual interest added.

The central bank plans to hold two auctions in December and January with $100m of bonds on offer and an auction each month until the end of 1999 with $50m for sale.

The central bank will fix the rouble-dollar rate for the auctions.

Officials said they did not think the debt conversion would depress the weakening rouble further.

"Not all cash will go to the auctions," Mr Zadornov said.

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