INSIDE FINANCE: The Conventional Wisdom Was Wrong: Russia Can't Pay

Russia has quietly crossed yet another boundary that forces us to reconsider the conventional wisdom. At issue is whether Russia can service and pay off its sovereign debt.


Beginning with the bankruptcy of the Soviet Union in 1991 and right up to the middle of 1997, the dominant opinion was that Russia was in good shape to pay off all of the debts of the former Soviet Union and also to assume new obligations of its own. Of course, the terms and deadlines for the Soviet debt had to be softened, but the ultimate ability of Russia to assume them was never put in doubt.


From the middle of 1997, the situation in the economy took a turn for the worse, and at the year's end, former Soviet debt was trading on world markets at prices associated with near-default levels. That meant that the financial community did not believe in Russia's ability to meet all of its Soviet-era debts in their entirety. But even so, no one then questioned that new Russian obligations - on Eurobonds and other types of credit - would be fulfilled.


As summer of 1998 approached, financial markets began to worry about a default on new Russian debts. Unfortunately, the inevitability of such a default is more and more obvious. Of the nearly $160 billion in sovereign debt, only about half is Soviet debt. The rest is money borrowed by Russian governments from 1992 to 1998. The annual sums to be paid on servicing the principal and the interest of Russia's sovereign debts are about equal in proportion. Even if we imagine that Russia does not service its Soviet debts at all, payments on newly assumed Russian debts will be too burdensome for the economy this year and next year.


This is the premise from which the Russian government is likely to approach its Western creditors. There's no point in talking only of writing off Soviet debts. And there are no real grounds to talk about writing off Russian debts. But without such a write-off, there is no hope of Russia becoming a careful and reliable debtor.


The current situation can be explained by the clumsiness of previous Russian governments. Unlike the weather, it's not difficult to predict what has to be paid on sovereign debt. It's enough to simply take a calculator and add up all of the debts for each year as they come due. And then you can compare those sums either with the gross domestic product or the budget revenues and determine when to stop borrowing. Perhaps they don't have enough calculators at the Finance Ministry, or maybe the ministry leadership wasn't reading the prognoses.


But what's also surprising is the position of the international creditors. They knew how much and what kind of new loans Russia was taking out, and what it still owed from the Soviet era. At some point, they must have realized that new loans were too much for Russia. But they continued to offer credits.


Perhaps they were relying on the aid of the International Monetary Fund? That in case of a crisis, the IMF would give Russia enough money to pay off its debts to private creditors? That is indeed what happened, with the emergency July bailout package, which ultimately failed.


In any case, default is in the air. So it's natural that Russia's Western creditors would be nervous to hear of the prosecutor general's investigation into the Central Bank's decision to let an offshore company manage the gold and hard currency reserves of Russia starting in 1993. After all, problems between Russia and its creditors could revive again soon, and this time around the Russians will be more cunning than ever when it comes to hiding assets - you will be able to look for them in every offshore firm without success.


By the way, the behavior of the Central Bank in using this offshore management is also quite natural. The national reserves could have been arrested under a d ebtor's lawsuit. They were worth trying to keep. Wherever they could, the Bank fought in the courts to prove its assets could not be seized under suits against the government. And in some places they gave the assets to daughter companies to manage. In the financial world it's always thus - he who is quickest and bravest gets to eat.


The only thing that looks unnatural is the behavior of the prosecutor general.


It's even a bit scary to write this: If the Federation Council refuses to accept Yury Skuratov's resignation, then we will have him back as prosecutor and with a grudge against me.


But here goes: A prosecutor who works against the interests of his country and for the interests of foreign creditors - by opening to them that which in any other nation would be considered a state secret - is probably right to offer his resignation.


Irina Yasina was a spokeswoman for the Central Bank under former chairman Sergei Dubinin.