Russia vows to honour $150bn debts

Central bank head says there will be no default
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The Independent Online
RUSSIA'S CENTRAL bank chairman, Sergei Dubinin, yesterday sought to reassure City bankers that Russia's $150bn (pounds 90bn) in foreign-owned sovereign debt will not follow the $45bn in short-term treasury bonds into default.

"The government of Russia sticks to all previous commitments with respect of its debt," he declared in an exclusive interview with The Independent on Sunday. Mr Dubinin said Russia was counting on continued support from the IMF, but acknowledged that the negotiations currently taking place with the Fund "were not easy - were quite complicated".

Even if the IMF breaks off its loan programme as a result of the country's new economic policies, Russia regarded its foreign debt as sacrosanct and would "do its best" to meet its obligations to all foreign creditors, he said.

After a weekend of frantic behind-the-scenes deal-making, the Communist- dominated lower house of parliament, the Duma, is due to vote tomorrow on President Boris Yeltsin's nomination of Viktor Chernomyrdin as head of the new government.

The vote could resolve Russia's political crisis. But there is an even chance that the Duma will hold off on a final decision about Mr Chernomyrdin for another week.

Last week, Barclays Bank wrote off 90 per cent of all its outstanding exposure to Russia. Other Western bankers are adopting a similarly pessimistic view of the chances of repayment.

In a speech to Russia's upper house of parliament on Friday, Mr Chernomyrdin outlined a programme he termed "economic dictatorship" designed to tread a path midway between a reversion to Communism and the collapsed reform programme.

If the Duma approves Mr Chernomyrdin, he will print roubles in the short term to calm Russians fearful of a harsh winter without food, but then push through tough tax-collection measures and, with the help of former Argentinian finance minister, Domingo Cavallo, set up a currency board tightly pegging the rouble to the dollar.

"If Russia is to avoid a default on its sovereign loans, there must be a resolution of the political crisis and there must be official assistance to the country," said Arnab Das, a London-based Russia specialist for JP Morgan who is visiting Moscow for talks with officials and bankers.

Western bankers endorsed Mr Chernomyrdin's attempts to find a pragmatic middle ground between the discredited reformers and the Duma's Communist leader Gennady Zyuganov. But, they warned, Mr Chernomyrdin's appointment as Prime Minister remains highly uncertain.

A senior official in Moscow calculates that the servicing of Russia's foreign debt will cost the government $1bn a month between now and next May when a large repayment of restructured Soviet loans is due.

"We can fulfil this obligation," the official declared. "But, quite frankly, we are counting on the IMF money to do so."

On 15 September, the IMF is scheduled to disburse $4.3bn of the $22.6bn in funds committed to Russia.

Yesterday, the IMF's managing director, Michel Camdessus, harshly criticised Mr Chernomyrdin's plan to print roubles to pay the $11bn in back wages owed to Russian state employees.

Western banks exposed to Russia suffered heavy falls in their shares last week, many to 52-week lows. British banks with a total exposure of $600m in Russia, compared with $30bn for German banks, got off relatively lightly. But German and American banks took a pounding.

In response, financial institutions sought to wash the bad Russian news out of their share prices by giving details of potential losses. Deutsche Bank, Europe's second largest lender, disclosed that it was close to raising its loan-loss provisions on $751.3m in Russian loans to about a third of that total, while Credit Suisse declared a loss of at least $250m in Russia since 30 June.

The Russian official said the government was seeking to improve its cash flow by unlocking tax receipts frozen in the country's banking system, which has seized up since Russian banks stopped dealing with each other in the inter-bank market.

But he signalled the country was going to play tough on the restructuring of the approximately $20bn borrowed from foreign creditors by Russian corporate and private bank loans. "We have retained the law firm Cleary Gottlieb Steen & Hamilton to represent us", he said.