WAS MOSCOW EXPECTING ANOTHER FREE RIDE IN 2001?

Despite their howls of protest, Russia’s creditors should not have been particularly surprised by these developments. This is because Russia to date has serviced precious little of the Paris Club debt it inherited from the Soviet Union’s collapse in 1991. Five years of torturous negotiations with the Paris Club and other Soviet successor states concluded in 1996 in Russia’s first Paris Club debt rescheduling. Under this agreement the Soviet Unions sovereign creditors wrote off much of the old Soviet foreign debt. Moscow assumed responsibility for the US$38.7 billion remainder–in exchange for which Russia also received all of the Soviet Union’s foreign assets. While these consisted in part of unrecoverable loans made to Soviet client states like Cuba and Libya, they also included much of the Soviet military infrastructure, as well as gold reserves and overseas property holdings. But Russia only managed to fully honor its commitments for a few months before the August 1998 financial crisis hit. Russia’s outstanding Paris Club obligations for 1998 and 1999 then went essentially unregulated for 12 months. The conclusion of an interim Paris Club agreement in August 1999 then essentially gave Russia a free pass on debt servicing until 2001. The compounding of unpaid interest on to the outstanding principal–as well adjustment for new lending by Paris Club governments–had by 2001 brought Russia’s total Paris Club debt to some US$48.6 billion.

In light of this track record, Moscow can perhaps be forgiven for assuming that its creditors would once again look the other way in 2001. This seems to be the view held by Prime Minister Kasyanov, who in early 2000 negotiated a 33 percent write-off of Russia’s Soviet-era debts to the London Club of commercial creditors. This strategy is also evident in the 2001 budget, which includes repayment of Paris Club debt amassed since 1992, as well as for interest on the entirety of Russia’s Paris Club obligations in 2001. (The 2001 budget also includes financing for interest and principal repayment of all the federal government’s debts to its Eurobond holders, as well as to the IMF and World Bank.) But the repayment of principal on pre-1992 Paris Club debt is instead to be financed by new credits issued by the IMF and World Bank.

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