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Thursday, June 24, 1999 Published at 17:36 GMT 18:36 UK


Business: The Economy

Russia's struggle with debt

President Yeltsin has tried to steer Russia away from a fresh crisis

The Russian bear is waiting with baited breath to learn its economic fate.

Faced with enormous foreign debts and with no funds on which to draw, it has done its utmost to claw back extra time in which to make payments.

If it fails to appease its creditors, the already troubled Russian economy could face total meltdown.


[ image: Russia could be forced to print more money]
Russia could be forced to print more money
The only alternatives would be to pay up - at the expense of miners, teachers and nurses - or use up remaining hard-currency reserves and watch hyper-inflation take off, as it did when the USSR collapsed in 1991. Printing more money would not help, either.

Russia owes foreign banks and governments some $140bn (£86bn), including $100bn that dates back to the Soviet era, which it has inherited. The rest has been borrowed since then.

Payments due this year already amount to $17.5bn - nearly as much as its tax revenues.

Boris Yeltsin's government says the Soviet debt is an unfair burden on the economy of the new Russia and has tried to negotiate flexible conditions on repayment.

The creditors - of old and new debt alike - include both foreign banks and foreign governments, who negotiate in different groups. And asking for favours all round is hardly a comfortable situation for a once-mighty nation.

Leaders so much wanted to be in the West's good books that they made every effort to help settle the Kosovo crisis.

The bear now finds itself caught in a chain of dependent conditions before it can make progress.

Terms of loan

At the weekend's G8 summit of industrialised nations - the old G7 plus Russia - world leaders called for a rapid agreement to reschedule Russia's repayments, once an agreement with the International Monetary Fund over a new loan to fund them was in place.


[ image: G8 leaders told Russia reforms were crucial]
G8 leaders told Russia reforms were crucial
But the IMF will pay out only after the Duma - the lower house of parliament - has enacted certain economic reforms. The fund has refused to release a £3bn tranche of loans until it implements a list of about 30 economic reforms.

The G8 leaders also took a tough line on economic reform. The West was worried when much of the first tranche of IMF help, last year, was squandered or used by banks in speculation.

Then in March, the fund agreed to reinstate an estimated $4.5bn in loans over 18 months - exactly the amount Russia is due to repay it this year.

New laws

But Yeltsin and his new Prime Minister, Sergei Stepashin, have had trouble pushing through the necessary reforms.

They had a partial success this week when the Duma voted to approve some of the measures demanded by the IMF, such as changes to the tax code to boost state revenue.


[ image: Ordinary Russians have been forced to sell belongings to raise money]
Ordinary Russians have been forced to sell belongings to raise money
Other new bills strengthen Russia's bankruptcy laws and allow the Central Bank to issue securities, which would also boost state income.

But Duma members are unwilling to allow through many more changes - with an eye on elections in the autumn - and have vetoed a crucial new law imposing tax on petrol stations.

They also voted down a new law on tax probes into election campaigning.

Buoyed by the positive votes, Russia is now optimistic of receiving IMF aid.

Gaining confidence

First Deputy Prime Minister Viktor Khristenko said they expected to receive some $630m next month under a new credit programme.

And Mr Stepashin says he is confident of striking a deal on about $69bn of the Soviet debt.

As a sign of increasing confidence in Russia's ability to make repayments, the debt price has surged by 30% this week - the highest level since the aftermath of the economic crisis last August.


[ image: Cash changes hands on the Russian black market when hyper-inflation takes off]
Cash changes hands on the Russian black market when hyper-inflation takes off
It was that crisis which led to Russia defaulting on government loans, the rouble being devalued and the debts escalating. International aid was also suspended.

Some foreign creditors were forced to settle on terms that gave them less than 10% of their money back. Since then, Russia's economy has begun to pick up, as factory goods cannot be imported because they are too expensive.

Now the reforms have begun, fingers are crossed. An IMF delegation flies to Moscow later this month and the IMF board meets in late July. If loans are not approved then, the next chance will not come until the autumn.

The $4.5bn is considered a small sum, but is valuable for its symbolism.

Russia has not helped its own chances, by missing £855m in interest payments to both governments and banks which were due on 2 June.

And banks have become increasingly impatient at having to wait for their money, while Russia put national government needs first.

Now US investors are threatening to sue. London Club creditors - a group of commercial banks involved in talks on Soviet era debt - have so far been patient.

But debt strategist Paul Dickson said: "The Paris Club [of creditor nations] said they were not going to give a large haircut to Russia's debt, so you can expect the same from the London Club."

The World Bank is also prepared to lend Russia money - $2.3bn over two years - to restructure the coal mining industry and establish a social safety net.

Doing business

Meanwhile, the Russian government and business leaders are making strenuous efforts to persuade the rest of the world that Russia is a stable place for business.

On Wednesday, top-level business leaders held discussions with UK bosses in London. Former Deputy Prime Minister Anatoly Chubais said: "The fundamental preconditions for Russia being attractive for foreign investors are already built but we need one more year to make it clear."

Finance minister Mikhail Kasyanov is travelling to the US to reassure investors who fear default on Russian bonds.

Vicki Price, chief economist at KPMG, says they have a reasonable case: "Tax collection has improved quite significantly recently and the economy has benefited from the rise in oil prices."

If the efforts are successful, the bear may yet find the chain of conditions it finds so onerous could yield rewards.



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