IMF's $3.8bn lost defending rouble

THE RUSSIAN central bank chief, Sergei Dubinin, last night admitted that some $3.8bn of the $4.8bn (pounds 3bn) advanced by the International Monetary Fund has been blown since 20 July 20 in a futile attempt to shore up the rouble.

The admission, which underlines the increasing desperation of Russia's financial position, came as the Russians were forced to withdraw plans to restructure 278 billion roubles (pounds 25bn) of short-term government debt in the face of veiled legal threats from Western investment bankers.

These followed complaints that the proposals accompanying Monday's devaluation were grossly discriminatory to foreigners, who account for around 25 per cent of the existing stock of short-term government debt.

Credit Suisse First Boston, believed to be among the hardest-hit of Western investment banks, said foreign holders would have got only a third of what Russians were entitled to.

Western analysts warned yesterday of a very real threat now of wholesale default.

The focus of the crisis is the GKO, or Gekko, rouble government debt market. However, there is concern about a further $10bn of dollar-denominated debt known as MINFins, which are also held to a large extent by foreign investors, all of which could now be at risk.

There were allegations yesterday that MICEX, the Moscow foreign exchange market, had been taking advantage of the confusion by refusing to honour margin calls on futures contracts.

Foreign investors - mainly big investment banks and hedge funds - have been big players in the Gekko market because of the very high yields which enabled investors to more than double their money in a matter of months. But, as one trader admitted yesterday: "Western investors had factored in the risk of devaluation, but not devaluation and debt restructuring at the same time."

The CSFB warning highlights growing fears that the crisis could snowball, with catastrophic knock-on effects for other emerging markets. Russia's total sovereign debt, according to debt rating agency Fitch IBCA, is $141bn, up $11bn from the end of last year.

"In the past two weeks spreads on Brazilian Brady bonds have widened some 200 basis points due to Russian fallout," said Kasper Bartholdy at CSFB. "To refinance all its external debt at this extra cost would imply, for Brazil alone, an extra $3bn a year."

The Russian authorities together with Deutsche Bank and JP Morgan, the two institutions advising the Russians on the debt restructuring, were last night locked in meetings with the big Western investors.

As part of the latest IMF package agreed in July, Russia was to refinance part of its debt obligations through a $2bn Eurobond issue this autumn. But even if the present impasse can be resolved, the likelihood of getting such an issue away looks very slim.

Japan is dragging its heels on about $800m worth of loans committed to Russia despite a plea from Moscow to pay up.

Commentators were also expressing doubts about the next tranche of IMF money due in September. Mohamed El-Erian, head of emerging markets at Salomon Smith Barney, said key elements will have to be renegotiated. This requires tough decisions at a time when the impact on ordinary Russians is starting to bite. "The opposition will intensify its attacks on the government now the financial debacle is having an adverse impact on the average Russian," he says. "The position will get worse rather than better."