"Signing a contract marks not the end of negotiations, but the beginning." If this is not already a Russian proverb, then perhaps it soon will be. Most people doing business here have a set of horror stories about the flagrant disregard of contract law. And true to form, whereas Russia's recent deal with the Paris Club of official creditors was an "exit rescheduling" -- theoretically the last time Russia will negotiate over the money it owes to other governments -- the wranglings are likely to continue regardless.
The bulk of Russia's sovereign debt pre-dates the country's existence. The Soviet Union collapsed in 1991, like the Roman empire before it, largely because it was bankrupt. A combination of low oil prices, increased social expenditures and falling alcohol revenues meant Soviet finances were always shaky under Gorbachev. And once Reagan upped the pace of the arms race, pushing the U.S.S.R. to spend even further beyond its means, the financial illogicality of central planning was exposed irrevocably.
Subsequently, the Soviet Union left more than $100 billion in debts to be swallowed, under heavy Western pressure, by a new and even more cash-strapped country called the Russian Federation. Among Russia's official creditors, around $40 billion was owed to Western governments within the Paris Club, with $28 billion owed to countries of the former Eastern bloc. The remainder -- another $35 billion -- was commercial debt, payable to the London Club of commercial banks and firms.
Over the last five years, post-Soviet Russia has borrowed $6 billion from the Paris Club, $5 billion from international financial institutions (such as the International Monetary Fund) and no commercial money at all. The total foreign debt obligation has therefore increased by $11 billion, to $121 billion. In pursuit of an international credit rating, Russia has serviced its $11 billion of "Russian" debt promptly and in full. Yet pre-1992 liabilities have kept the credit rating prize -- Russia's ticket to borrowing money on international capital markets -- out of reach. This latest deal covers all the inherited Paris Club liabilities still to be rescheduled. Consequently, Moscow is now poised to jump onto the international superhighway of global finance.
As far as the Paris Club of governments is concerned, the deal makes good strategic sense. Initially, it gives President Boris Yeltsin a financial boost in the runup to the June election. Western leverage has also been maintained should Yeltsin lose to Gennady Zyuganov, his Communist rival: Zyuganov has been told that if Russia defaults on Paris Club interest payments, the IMF loan also gets pulled.
The London Club thinks less about high politics and more about the bottom line. Whereas Paris sees debt as a stick should Russia stray from the liberal economic fold, London views debt as an impediment to doing business. Large question marks over Russia's sovereign debt meant Moscow remained -- officially -- a financial backwater, cramping the style of more than a few Western moneymen. The fear was that Russia's stocks would boom after the election, but because Moscow was not financially "plugged-in," Westerners would be left standing.
Now that the Russian government itself appears solvent, the Paris Club has made everything possible. Only weeks after the Central Bank backed out of a long-standing placement deal with Merrill Lynch, Moscow's investment community have again been sent giddy by official talk of Eurobonds "just around the corner." Sovereign debt resolution also makes possible the listing of lucrative Russian equities on international stock markets.
In fact, the rewards -- both in terms of money and prestige -- of being a trail-blazing Russian financier mean that leading London Club members have been pushing the Paris Club into a deal with Moscow. The conflict of interest between London -- reschedule now -- and Paris -- maintain leverage as long as possible -- has been exploited by the Russians to cut the largest and arguably most generous Paris Club deal in history.
Had the London Club rescheduled first, serious eyebrows would have been raised in Paris: This is why the leading London lights, in November 1995, limited themselves to agreeing with Russia "in principle" about repayment terms on the remaining $26 billion in unresolved commercial debt. But buoyed by the Paris Club deal, London can now please themselves. Following Russian payments of $1.2 billion into a commercial creditors' trust account since the November accord, London is now talking of ratifying its deal with Moscow soon -- perhaps also before the election.
Even if visions of Russian Eurobonds come to nothing, the latest deal still increases Moscow's larger blob on the financial map, if only because Russia can now join the Paris Club as a creditor. There is widespread disagreement on the amount Russia is owed by its former satellites -- $28 billion may be over-generous -- but the sums involved are considerable. Despite the fact that the Paris deal is supposed to be closed, whoever wins the presidential election, Moscow will try and use its Soviet-era credits as bargaining chips to negotiate further reductions in its Soviet era liabilities.
Although many Western commentators are now accusing the Paris Club of being a soft touch, they did the right thing by granting Yeltsin the campaign leg-up while they still could: If Zyuganov tops the second-round poll, Russia's sovereign debt payments -- and what Western leverage remains -- might dry up altogether. Although defaulting anew would exclude communist Russia from the goodies of global finance, Zyuganov's strategy men -- whichever he listens to -- may be lured by the nationalistic capital to be gained from refusing to pay the Paris Club. In the collective mind of the masses, foreign capital conjures images more of "Western control" than it does of "wealth and prosperity."
Zyuganov has even given hints to this effect. Commenting from the campaign trail on the news that Russia's debts with Western governments had been rescheduled, he said: "I am in favor of repaying debts in time, but the question remains how the debts were accumulated in the first place." A communist president may find reason enough to object to the bulk of Russia's Paris Club obligations. After all, the debts represent nothing less than the Western rope by which the Soviet Union hung itself.
The bulk of Russia's sovereign debt pre-dates the country's existence. The Soviet Union collapsed in 1991, like the Roman empire before it, largely because it was bankrupt. A combination of low oil prices, increased social expenditures and falling alcohol revenues meant Soviet finances were always shaky under Gorbachev. And once Reagan upped the pace of the arms race, pushing the U.S.S.R. to spend even further beyond its means, the financial illogicality of central planning was exposed irrevocably.
Subsequently, the Soviet Union left more than $100 billion in debts to be swallowed, under heavy Western pressure, by a new and even more cash-strapped country called the Russian Federation. Among Russia's official creditors, around $40 billion was owed to Western governments within the Paris Club, with $28 billion owed to countries of the former Eastern bloc. The remainder -- another $35 billion -- was commercial debt, payable to the London Club of commercial banks and firms.
Over the last five years, post-Soviet Russia has borrowed $6 billion from the Paris Club, $5 billion from international financial institutions (such as the International Monetary Fund) and no commercial money at all. The total foreign debt obligation has therefore increased by $11 billion, to $121 billion. In pursuit of an international credit rating, Russia has serviced its $11 billion of "Russian" debt promptly and in full. Yet pre-1992 liabilities have kept the credit rating prize -- Russia's ticket to borrowing money on international capital markets -- out of reach. This latest deal covers all the inherited Paris Club liabilities still to be rescheduled. Consequently, Moscow is now poised to jump onto the international superhighway of global finance.
As far as the Paris Club of governments is concerned, the deal makes good strategic sense. Initially, it gives President Boris Yeltsin a financial boost in the runup to the June election. Western leverage has also been maintained should Yeltsin lose to Gennady Zyuganov, his Communist rival: Zyuganov has been told that if Russia defaults on Paris Club interest payments, the IMF loan also gets pulled.
The London Club thinks less about high politics and more about the bottom line. Whereas Paris sees debt as a stick should Russia stray from the liberal economic fold, London views debt as an impediment to doing business. Large question marks over Russia's sovereign debt meant Moscow remained -- officially -- a financial backwater, cramping the style of more than a few Western moneymen. The fear was that Russia's stocks would boom after the election, but because Moscow was not financially "plugged-in," Westerners would be left standing.
Now that the Russian government itself appears solvent, the Paris Club has made everything possible. Only weeks after the Central Bank backed out of a long-standing placement deal with Merrill Lynch, Moscow's investment community have again been sent giddy by official talk of Eurobonds "just around the corner." Sovereign debt resolution also makes possible the listing of lucrative Russian equities on international stock markets.
In fact, the rewards -- both in terms of money and prestige -- of being a trail-blazing Russian financier mean that leading London Club members have been pushing the Paris Club into a deal with Moscow. The conflict of interest between London -- reschedule now -- and Paris -- maintain leverage as long as possible -- has been exploited by the Russians to cut the largest and arguably most generous Paris Club deal in history.
Had the London Club rescheduled first, serious eyebrows would have been raised in Paris: This is why the leading London lights, in November 1995, limited themselves to agreeing with Russia "in principle" about repayment terms on the remaining $26 billion in unresolved commercial debt. But buoyed by the Paris Club deal, London can now please themselves. Following Russian payments of $1.2 billion into a commercial creditors' trust account since the November accord, London is now talking of ratifying its deal with Moscow soon -- perhaps also before the election.
Even if visions of Russian Eurobonds come to nothing, the latest deal still increases Moscow's larger blob on the financial map, if only because Russia can now join the Paris Club as a creditor. There is widespread disagreement on the amount Russia is owed by its former satellites -- $28 billion may be over-generous -- but the sums involved are considerable. Despite the fact that the Paris deal is supposed to be closed, whoever wins the presidential election, Moscow will try and use its Soviet-era credits as bargaining chips to negotiate further reductions in its Soviet era liabilities.
Although many Western commentators are now accusing the Paris Club of being a soft touch, they did the right thing by granting Yeltsin the campaign leg-up while they still could: If Zyuganov tops the second-round poll, Russia's sovereign debt payments -- and what Western leverage remains -- might dry up altogether. Although defaulting anew would exclude communist Russia from the goodies of global finance, Zyuganov's strategy men -- whichever he listens to -- may be lured by the nationalistic capital to be gained from refusing to pay the Paris Club. In the collective mind of the masses, foreign capital conjures images more of "Western control" than it does of "wealth and prosperity."
Zyuganov has even given hints to this effect. Commenting from the campaign trail on the news that Russia's debts with Western governments had been rescheduled, he said: "I am in favor of repaying debts in time, but the question remains how the debts were accumulated in the first place." A communist president may find reason enough to object to the bulk of Russia's Paris Club obligations. After all, the debts represent nothing less than the Western rope by which the Soviet Union hung itself.
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