Russia's credibility hangs on debt restructuring deal

THE RUSSIAN financial crisis deepened last night after President Boris Yeltsin sacked the entire cabinet, casting new doubt on a crucial debt restructuring plan which was to have been announced today.

The new government moved last night to quell Western concern of a full or partial default by putting its Deputy Prime Minister, Boris Fyodorov, directly in charge of working out the details of the restructuring. A spokesman for Mr Fyodorov said he still hoped a resolution could be announced today.

The deal affects some $40bn (pounds 25bn) of short-term debt caught by the 90-day moratorium which accompanied the devaluation of the rouble last week.

Western banks were locked in crisis meetings with officials from the Russian government when the news of the change of government broke, fighting to ensure that new terms would not discriminate against foreigners.

The initial plan announced last week but withdrawn after storms of protest from Western investors was seen as highly discriminatory against foreigners and tantamount to a partial default.

Critics led by Credit Suisse First Boston, which faces potentially huge losses, said last week's plan would have resulted in foreigners ending up with one-third of what domestic investors would receive.

The beleaguered government called the moratorium in the hope of cutting the huge amounts it is having to shell out to service its debt. Bankers say the government was still intending to swap short-dated rouble bonds known as GKOs and OFZ, for four to five-year bonds with the same face value but with much lower yields.

However, bankers feared the Russians were still trying to include in any package a write-off of at least part of the accumulated debt, which is opposed in principle by Western bankers.

CSFB warned that for the Russians to persist with a deal which discriminated against foreigners would result in their being locked out of global capital markets altogether at a time when Russia is desperate for foreign investment.

There are also subsidiary concerns about developments in the Moscow foreign exchange market, MICEX. Foreign bankers claim that the exchange has taken advantage of the confusion of the past week to seek to get out of paying margin calls on futures contracts. It is estimated that around $1bn of trades could be affected.

The new government will be pressed for help in resolving this issue as a way of sending the right signals to a highly sceptical market.

The sacked prime minister, Sergei Kiriyenko, had only been in office for four months, having been brought in to replace Viktor Chernomyrdin, ostensibly as new blood to speed up the space of financial reform. Mr Chernomyrdin returns as acting Prime Minister.

Under Mr Kiriyenko the Russian economy continued to deteriorate to the point where last week's devaluation became unavoidable. The debt moratorium fiasco was seen as bearing Mr Kiriyenko's stamp.

However, the decision to remove Mr Kiriyenko appears to be motivated less by a need to placate irate Western bankers than by Mr Yeltsin's instinct for self-preservation. It followed a strongly-worded weekend resolution in the Duma, Russia's parliament, calling on the President to resign.

Analysts said the big business clique which effectively calls the shots in Russia had been prepared to dump Mr Yeltsin. Mr Chernomyrdin, 60,has a reputation for backing the interests of traditional heavy industry against the newer entrepreneurial class.

Analysts fear that without the deal which investors were expecting today, the markets could react badly to the news.

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