World

Russia's Debt Dilemma

By CBSNews.com staff CBSNews.com staff

January 9, 2001 / 4:48 PM EST / CBS

Prime Minister Mikhail Kasyanov said Tuesday that Russia cannot make full payment on its Soviet-era debt without endangering the welfare of its citizens and told the finance minister to begin negotiations with creditor nations.

Kasyanov made the statement just hours after Russia announced it had made a $10 million payment to the creditor nations, known collectively as the Paris Club, even though it had said last week that it planned to skip first-quarter payments in 2001.

The $10 million payment is just a small fraction of the total $1.5 billion that Russia was to pay the Paris Club in the first three months of the year. In total, Russia owes $48 billion in Soviet-era debt.

The announcement that Russia would miss some first-quarter payments raised questions about whether the country's economic recovery is really as strong as the Kremlin has claimed and could potentially darken President Vladimir Putin's attempts to encourage foreign investment and cultivate better relations with the West.

On Sunday, at the end of a two-day visit by Chancellor Gerhard Schroeder of Germany, Russia's largest foreign creditor, Putin declared that Russia would meet all its Soviet-era debts, but suggested that Russia would seek new terms.

It was not immediately clear what arrangements Finance Minister Alexei Kudrin would be likely to seek in the talks with the Paris Club ordered by Kasyanov.

"I don't know what the outcome of the negotiation is going to be…but it's very clear that Russia will apply a high degree of pressure to get something," EBRD President Jean Lemierre, who used to head the Paris Club, said during a visit to Tokyo.

Russia last Thursday said it planned to skip repayment of some $1.5 billion it owes the Paris Club in the first quarter of 2001. Germany, which is owed some 40 percent of the debts, responded by threatening to suspend export credit guarantees.

The Paris Club, a group of 19 sovereign lenders, sent a stern letter to the Russian authorities on Monday warning against default and saying it expected Moscow to honor its debt commitments in full.

As well as pressing for full repayment of the debts Russia inherited from the Soviet Union, Berlin is urging Moscow to swap some of the debts it assumed from communist East Germany after reunification in 1990 into equity holdings in Russian companies.

According to a study by the National Council for Science and the Environment, Germany holds about half of Russia's debt. The next largest creditor is United States, whose share is 6 percent. France, Japan, Canada, the United Kingdom and other countries hold the rest.

Recent statements by Russian officials have indicated the Kremlin is placing substantial hope on working out an arrangement for a standby loan from the International Monetary Fund. Approval of such a measure would be seen as endorsement of Russia's economic policies and could give officials leverage in working out new debt payment terms.

But Kasyanv on Tuesday admitted economic difficulties.

The budget for this year does not envisage payment of the Paris Club debt in full and such payment could be made only if additional budget revenue is received this spring, he said, according to Russian news agencies.

"Uncertainty concerning the sources of additional revenue is growing," Kasyanov noted, according to the news agency Interfax.

The report also cited Kasyanov as saying the full payments could not be made without risking payments linked to Russians' needs. Putin and his government have made full payment of pensions and salaries a policy keystone.