Outlook: Russian bonds

THE RETURNS once available on Russian GKO bonds - fabulous - might have been enough to make even the most naive of investors suspicious, but that sort of thing has never stood between the trader and his destiny, and once they got to hear about it, foreign bankers piled in like there was no tomorrow.

When Russia finally and inevitably defaulted last summer, foreigners were left holding around $40bn worth of the wretched things. Ever since, they have been desperately trying to salvage something from the wreckage. Now CSFB has come up with a plan that offers a ray of hope - though not much of one.

Russia's total external debt stands at about $100bn. It has around $8bn in foreign currency reserves. The national budget plans for payment of only about half the interest due this year. Fresh inflows of private capital, which had been helping the government to keep up payments, have shrunk from $15bn a year to zero. The economy is contracting, lower oil prices are cutting into export earnings, and the government's already poor ability to collect taxes has deteriorated to the point of near collapse.

The bottom line is that foreign creditors are not going to get much of their money back - even if, as rumoured, a new deal with the IMF is close. Small wonder, then, that the banks on the negotiating committee have differed over tactics. Deutsche Bank, which formerly chaired the committee, was generally condemned when it accepted terms that offered a mere 5 cents in the dollar, maximum.

Deutsche was nevertheless followed by Chase and Credit Lyonnais. CSFB has now struck out on its own with a proposed debt-for-assets swap, inviting other investors to join it. The plan comes with a stiff success fee of course; this is investment banking, after all.

Even so, CSFB expects the return on its new fund to be higher than the 5 cents on offer from the Russian government. Given Russia's fundamental inability to repay its debts, the asset swap approach may be the right one. Russia's vast oil reserves provide a ready source of dollar-denominated earnings which might be earmarked for investors. Still, they would be wise not to count on it. The basic arithmetic, combined with the country's unstable political and social situation, does not leave much room for optimism.