RUSSIA AND THE PARIS CLUB: TAKE IT TO THE LIMIT.

Russia’s inability–or refusal–to fully service its foreign debts has brought long-running tensions between Moscow and the Paris Club of sovereign creditors to new heights. If they are not resolved quickly, these tensions could have important economic and political consequences in 2001 and beyond. These include: (1) the failure of Prime Minister Mikhail Kasyanov’s efforts to restructure Russia’s Paris Club debts; (2) the destruction of the 2001 federal budget; (3) the continued absence of a deal with the IMF; (4) new additions to Moscow’s on-going tensions with G7 countries; and (5) a government reshuffle, in which Kasyanov and Finance Minister Aleksei Kudrin could face demotion or dismissal.

Moscow’s current problems with the Paris Club boiled over in late December, when President Vladimir Putin signed the 2001 federal budget into law. Many foreign creditors viewed the 2001 budget quite favorably, in part because–in contrast to past years–current operating expenditures are to be fully balanced by budget revenues. But in contrast to interest payments on public debt, the repayment of foreign (and domestic) debt principle is not generally treated in fiscal finance as a budgetary outlay. The same is true on the revenue side of the budget for the foreign credits which Russia (and many other countries) use to finance their budget deficits and foreign debt repayment. The 2001 budget anticipated that some US$2.7 billion in Russia’s Soviet-era foreign debt due to be repaid to the Paris Club this year would be refinanced by credits expected from the IMF and World Bank. But because Moscow entered 2001 without a deal with the IMF, the financing anticipated for paying Russia’s Paris Club obligations was not in place.

Paris Club creditor governments–these essentially dovetail with the G7 countries, with most of Russia’s debt being held by Germany, Italy and Canada–received a long-expected but nonetheless thoroughly unwelcome holiday present in late December, when Moscow announced that the continued absence of an IMF deal precluded full coverage of Russia’s Paris Club obligations in 2001. Jean-Pierre Jouyet, France’s treasury chairman and executive of the Paris Club, responded on January 5 by sending Russian Finance Minister Kudrin an indignant letter claiming that Russia’s refusal to pay was unacceptable. German government officials–whose country holds some 40 percent of Russia’s US$49 billion Paris Club debt–threatened to withhold further trade credits for Russia if Moscow refused to honor its obligations. Nonetheless, the Russian government decided on January 9 not to repay the principle of any of the “Soviet” (pre-1992) portion of the Paris Club debt during the first quarter of 2001.

WAS MOSCOW EXPECTING ANOTHER FREE RIDE IN 2001?