The USSR is not in debt

The government has given the go-ahead for full settlement with the Paris Club

Yesterday it became finally clear that already in August Russia will fully pay off the debt of the former USSR to the Paris Club of creditors (the volume of debt at the beginning of last year was more than $40 billion). Moreover, he will pay ahead of schedule and, as experts admit, on the most favorable terms possible. Yesterday, the government gave the Finance Ministry the green light to repay the remaining debt, approving the repayment terms worked out by the Russian delegation led by Deputy Finance Minister Sergei Storchak at talks in Paris last week.

According to the head of the Ministry of Finance, Alexei Kudrin, Russia will pay a total of $23 billion, of which $700 million will be the planned payment, and $1 billion will be compensation to creditor countries for lost interest payments. The prize will be awarded to Germany, France, the Netherlands and the UK. Most of the bonuses will go to Germany ($700 million), to which Russia owes the most. According to the minister, the debt will be repaid by August 21 (August 20 is the traditional date for Russia's payments on external debts). The payment is planned to be made in one tranche to each country.

It was the issue of compensation that became key in the discussion in recent days about the profitability of the deal for Russia, since the first early payment - $15 billion - was made in 2005 at par. Doubts about the obligation of compensation expressed by the White House even made some observers unsure that the deal would be approved.

However, as one of the officials close to the negotiations explained to Vremya Novostey, no one in the government opposed approval. The only thing that caused some irritation on Krasnopresnenskaya embankment was that detailed information about the Paris agreements (and as final ones) was disseminated even before the completion of the process of agreeing on the terms of the deal in the Russian government structures.

This is indirectly confirmed by the fact that yesterday, when discussing the issue of early repayment of the debt to the Paris Club, the proposed scheme, as Alexei Kudrin told reporters, was supported by all members of the government, including Mikhail Fradkov. “We achieved the best that we could have achieved,” said Vremya Novostey’s source.

Alexey Kudrin clarified that it is planned to sign a government decree on debt repayment soon. After this, the conclusion of bilateral agreements with creditor countries will begin. Moreover, their representatives, the head of the Ministry of Finance noted, are ready to come to Moscow for signing.

Independent experts have also been talking about the benefits of early repayment of debt to the Paris Club, even with a premium, in recent days. Compensation of $1 billion cannot be compared with the financial benefits that Russia will receive in the event of early repayment of debt and exemption from interest payments. According to Mr. Kudrin, in 2007 savings will amount to $7.7 billion: $1.2 billion in 2007, $1.1 billion in 2008, $1 billion in in 2009, etc. The money saved on interest payments, according to a previously adopted government decision, will be directed to the investment fund.

Meanwhile, back in the spring, no one imagined that already this year Russia would be able to fully pay off its debts to the Paris Club. Initially, it was planned to repay “only” $12 billion ahead of schedule. In April, Prime Minister Fradkov signed an order to negotiate early repayment for exactly this amount.

Full repayment was prevented by Germany, whose finance ministry in 2004 distributed bonds (dubbed Aries) worth 5 billion euros ($6 billion) to private investors, tying their repayment to the original payment schedule for Russian debt under the Paris Club. Repaying Russian debt for this amount at par, as last year, would be an extremely unfavorable deal for Germany, since it would have to pay extra with its own funds to buy out Aries.

And Russia, fully understanding Germany’s difficulties and wanting to repay the debt at par, did not insist on repaying the entire amount of the debt. But suddenly, at the end of April in Tomsk, at a Russian-German forum with the participation of German Chancellor Angela Merkel, President Vladimir Putin said that Russia would like to repay the $6 billion for which Aries was issued. It was immediately clear that the Germans would have to pay extra for this. And since the conditions for debt repayment within the Paris Club should be equal for all creditor countries, other states could also count on the bonus. Their calculations ultimately came true. At par, approximately half of the debt will be repaid - 52.1%, and the premium for the creditors’ agreement to accept the debt ahead of schedule will, as the minister noted, “below the market.” According to the terms of repayment, which Alexey Kudrin announced on Monday, giving a lecture at the Higher School of Economics, the debt that is serviced at a “floating rate” of interest will be repaid at par, and the part with a fixed interest rate will be repaid with a premium. Now, the minister said, the rates on this part of the debt are 7-8% per annum. The premium that creditors will receive is determined at the rate of 4.8%.

The history of Russia's relationship with the Paris Club of creditor countries is replete with sharp turns. The debt itself, as is known, was inherited from the Soviet Union under the so-called “zero option” of divorce between the republics - Russia received both the foreign assets of the USSR and debts to foreign creditors. By the time Russia defaulted in August 1998, the debt had already been restructured four times.

By the beginning of 1999, then-Deputy Minister of Finance Mikhail Kasyanov had already brilliantly negotiated with the London Club of private creditors, convincing them to agree to a global debt restructuring with a large volume of write-offs. But things stalled with the creditor states - they, it was believed, needed to formulate a general political approach to Russia's debt problems.

The chance to get rid of debts to the Paris Club presented itself in June 1999. It was provided to Moscow by the G8 leaders who met in Cologne (Russia was represented at the summit by Prime Minister Sergei Stepashin). The summit communiqué stated in black and white: “To support Russia’s efforts to ensure macroeconomic stability and sustainable growth, we will encourage the Paris Club to continue to address the problem of Russian debt arising from Soviet-era debt obligations, with a view to its comprehensive solution at a subsequent stage, when conditions will be created in Russia that will allow the implementation of a program of deeper economic reforms.”

However, hot on the heels of the Cologne summit, it was not possible to repeat the success of negotiations with the London Club. On August 1, 1999, members of the Paris Club approved only the restructuring of payments due for 1999-2000.

Moscow, of course, hoped that after this period the matter with subsequent payments would be resolved in a similar way. However, economic growth and a gradual improvement in the oil market increasingly convinced creditors that Russia was able to pay. The most implacable opponent of write-offs was the main debt holder - Berlin.

And it was German Chancellor Gerhard Schröder in December 2000 who came up with the idea, in his own words, “full of fantasy.” Fantasy suggested to Mr. Schroeder that Russia could pay not with money, but with something else. “We have a chance to convert debts into equity participation of German companies in Russian enterprises,” he said, meeting on December 1, 2000 with Russian Prime Minister Kasyanov. The chancellor's idea was immediately seized upon. “Schroeder’s initiative is to turn the debt problem from a problem into a benefit, so that it can serve the investment process,” reacted Mikhail Kasyanov.

The parties were not afraid of the difficulties of how to turn interstate obligations into private investments. It was immediately decided to create a working group that would turn Mr. Schroeder’s fantasy into an effective mechanism and began to look for specific projects for its implementation.

Meanwhile, 2001 was approaching and at the same time the most scandalous page in the history of Moscow’s relations with the club of creditor countries. Counting on the fact that the Paris Club will carry out the will of the Cologne G8 summit, the Russian government has included payments to creditors in the new year budget not in full, but by analogy with previous years. Of the $3.5 billion in “original” payments to the Paris Club countries, only $1.24 billion was provided for in the federal budget. The government intended to make unplanned payments only after receiving additional budget revenues. Statements by anonymous government sources about Russia's refusal to service the Soviet debt to the Paris Club, which followed in the first days of January, caused a shock in both Russia and the West. A week later, Prime Minister Kasyanov spoke. He confirmed that he had instructed Finance Minister Alexei Kudrin to “immediately begin consultations with the Paris Club and with the leadership of the International Monetary Fund” in order to achieve a deferment of payments.

In principle, the economic logic of the White House was clear - the rise in oil prices had not yet become a stable trend (at that time the price of Russian oil reached $22-23 per barrel), and the “2003 problem” with the peak of debt payments loomed ahead. “Uncertainty about sources of additional income is growing,” Mikhail Kasyanov said then.

However, the government lost sight of the fact that in the political situation that had developed at that time, such economic logic did not work. The prime minister himself was forced to admit that Russia is “at a very unpleasant stage of relations” with the club of creditor countries. “In January, we will not be able to fully make payments to the Paris Club; some of the payments will be paid by us, and some will not. We are forced to sacrifice our reputation to some extent, but maintain the basic foundations for moving forward the entire Russian economy. We say that we cannot expose the social situation in the country to risks,” Mr. Kasyanov said then.

The government has tried to argue that the growing economy is not yet strong enough to bear the full debt burden, and that increasing oil revenues are needed to implement an ambitious reform plan. But these arguments could no longer be accepted by anyone.

The finance ministers of the G7 countries were preparing a special statement that Russia, from their point of view, is able to pay. And State Secretary of the German Ministry of Finance Caio Koch-Weser said in a newspaper interview that Moscow’s position regarding payments to the club calls into question the legitimacy of Russia’s membership in the G8. During the entire presidency of Vladimir Putin, this was the only case when a country’s membership in the G8 was questioned by a current high-ranking official of one of the club countries. As for the arguments about the need for reforms, Koch-Weser snapped: “The West does not buy reforms. This is a very dangerous game." (Note that in all previous years the West, in fact, did just that).

And Andrei Illarionov, who then held the post of presidential adviser, gave one of his loudest press conferences. “To the almost Hamlet-like question “to pay or not to pay?” There is only one answer - to pay, because it is necessary, possible and profitable to pay,” he said. “Arguments that these payments are not included in the budget do not stand up to criticism and cannot be uttered in decent society.” He called the three weeks that the government proved the validity of its position a “bad dream.”

Eventually the president intervened. “Russia has never refused and does not refuse to fulfill its financial obligations to creditors,” he said (which, of course, sounded quite strange two and a half years after the default) and demanded that the government and the Duma change the budget, providing for payments to the Paris the club in full.

Since then, questions about the implementation of the decisions of the Cologne G8 summit have not arisen: oil prices have skyrocketed, Russia has formed not only a huge budget surplus, but also a stabilization fund, and then also an investment fund, and the “2003 problem” has resolved as if she never existed. Gerhard Schröder's fantasy of exchanging debts for investments died quietly, although several projects (in particular, within the framework of debt to Italy and Finland) were still built into it. But the volume of these projects turned out to be incomparable either with the volume of debt or with the scale of administrative torment for putting this idea into practice.

After the debts to the Paris Club are fully repaid, the debt of the former USSR will practically cease to exist. All that will remain is a debt of $3-4 billion, which, according to Mr. Kudrin, has been largely restructured and is being repaid by export supplies. “In this part, the debt of the former USSR has been preserved, but to support Russian exports,” the head of the Ministry of Finance noted yesterday, which, undoubtedly, will go down in history as a result of the deal with the Paris Club.

Mikhail VOROBYEV, Andrey DENISOV