INSIDE FINANCE: Economic Future Hinges on Terms of Debt Restructuring

The problem of Russia's foreign debt is becoming increasingly acute. It is being discussed in various layers of society. And if from the left is heard "The democrats sold Russia to the International Monetary Fund!" the right is pondering with increasing seriousness the issue of how and under what circumstances Russia will be able to pay back its debts.


This issue was recently taken up by the Economic Club, which unites liberal economists, many of whom were in power in previous years.


One of their biggest mistakes was that they did not mark the boundary between the collapse under the Communists and the ludicrously timid reforms of the Gorbachev period, on the one hand, and the liberal reforms, on the other. Who remembers the lines, the absence of food in stores? Who among citizens knows two-thirds of our nightmarishly large foreign debt was accumulated in the second half of the 1980s? Who remembers that the current leader of Narodovlastiye, or Popular Rule, the former Soviet prime minister, Nikolai Ryzhkov, publicly shed tears out of shame for the condition his government brought the country to?


This was not done, and now it is too late. The citizens are weary of reforms and are not in a condition to distinguish one period from another. But this can and must be done in analyzing the questions concerning the foreign debt. Creditors are taking separate approaches to the debts of the Soviet and the post-Soviet period.


Russia owes $150.8 billion to foreign creditors (including overdue interest payments, but excluding what is owed to foreign GKO/OFZ holders). Given an exchange rate of 20 rubles to the dollar, this is about 65 percent of GDP.


At the end of 1997, the foreign debt was $123.5 billion, of which $91.4 was the Soviet Union's debt and $32.1 billion was the Russian Federation's. In 1998, the Russian debt practically doubled. This was connected to the attempt to avoid a default on domestic debt. But it happened, and along with it disappeared hopes of refinancing the foreign debt through new loans.


What happens now? The only sources of payment remain either the country's small gold and hard-currency reserves or the constantly falling tax revenues. It will not be possible to make payments using the reserves. They are insufficient, and what is more, one country, Romania, already tried to do this. And everyone remembers how this ended for that country's leader, Comrade Nicolae Ceausescu. The problem is further complicated by the fact that under current credit agreements, payments for servicing and paying off the state's foreign debts in the period from 1999 through 2010 will come to $14 billion to $19 billion a year. Taking into account the payments postponed at the end of 1998, 70 percent of the principal of the foreign debt, along with interest on that amount, will have to be paid in the coming 12 years - totalling around $180 billion. It is important to note that Russia must make interest payments at the rates of 1998, when the conditionof the market for Russia was catastrophic.


The conclusion is discouraging. Russia's future, its economic growth, will be defined by the conditions that are agreed upon for restructuring of its foreign debt. One can understand the desire of the creditors to discuss these questions. The unstable condition of the political situation, the confrontation between the branches of power, the Communist-dominated State Duma, the flow of capital out of the country - all of this works against the negotiations on Russia's debts.


Besides that, according to formal criteria, Russia does not belong to those poorest countries of the world that are granted the most favorable conditions for settling debt problems. Nor is there a serious basis to expect concessions from the West out of political considerations. This should have been done in 1991, after the defeat of the August coup and the breakup of the Soviet Union. Maybe we could convince them to write off our debts by banning the Communist Party? But that is just my personal idea, and frankly I think that even within Russia, more people oppose the party than support it.


The real course of events will likely be as follows. Negotiations for writing off part or all of the Soviet-era debt and restructuring the Russian debt will begin. But the conditions will not please Russia. The threat of a partial default will be a Sword of Damocles hanging over it. It means there will be no new credits, and part of the creditors can begin court cases. The country will begin to be isolated from world society. In this sad state, we will float up to the presidential elections. At that point - as always, in the Russian tradition - we will either sink or swim.


This will happen if the government continues its thievery and vapid statements about calm and well-being. But the idea that Prime Minister Yevgeny Primakov's government will change is even less believable than, for example, the idea that former First Deputy Prime Minister Anatoly Chubais will win presidential elections.