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Friday, February 12, 1999 Published at 16:05 GMT

Business: The Economy

Shadow over Russian debt

Russians beseiged the banks as they began to default

The future of Russia's $150bn of foreign debt looks at risk following the default of one of the country's once-powerful commercial banks.

Uneximbank, part of a major group owned by media tycoon Vladimir Potanin, told its European creditors that it was unable to meet payments on $250m of eurobonds. There has never before been a default on such debt.

Bondholders now fear that Russia may consider repudiating its commitments to maintain payments on a variety of government debts, including those from the Soviet era.

[ image: The devalaution of the rouble made it more expensive to pay back debt]
The devalaution of the rouble made it more expensive to pay back debt
"If the sovereign defaults, the show is really over," said one European banker. "It is worrying when one entity from a country adopts a different stance to the country itself. That's why we're watching Uneximbank."

Huge debts

Russia faces being excluded from international credit markets for years if it cannot reach agreement with its creditors on restructuring some of the $17.5bn of borrowings and interest that fall due this year.

The government could be unable to pay the $4.5bn owed to the World Bank and International Monetary Fund. and has already said it faces difficulties in paying around $8bn in Soviet-era debt.

So far eurobonds have been considered sacrosanct and the Russian government pledged in August that they would be the last of its obligations on which it would possibly default.

Now the British investment bank Robert Fleming, who is acting for Uneximbank, has told creditors that bondholders will not be given any priority in restructuring the $2bn debt owed by the bank.

"This is a commercial issue. If eurobonds lose their senior status, it could set a dangerous precedent and make investors more reluctant to buy debt," said one bondholder.

Russia's eurobond debt is now trading at only 30% of its face value, and the eurobonds of other big Russian banks, like SBS-Agro and Rossiisky Kredit, are now trading at only 10% of their face value, indicating that the market expects a general default.

Eurobond committee

Eurobonds are fixed income instruments held by a wide variety of investors, from large banks to private individuals. Legally, bondholders do not have a higher claim to debt repayments, but because of their fragmented status, the assumption in international financial markets has been that they would take precedence.

"Eurobonds don't usually have a higher ranking in legal terms, it is more a question of market expectations," said Helen Style, a lawyer with the International Primary Market Association.

In a sign of the difficulties with getting bondholders to agree anything, nearly half of all Uneximbank's bondholders were not represented at the creditors meeting this week, including the lead underwriter for the issue, Merrill Lynch.

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