Russia gets a shot in the arm from debt deal

Russia's economic reforms received an important boost yesterday when Western governments agreed to let Moscow repay more than $40bn (pounds 26.5bn) in debt over a 25-year period.

The deal is the largest rescheduling agreement negotiated by the so-called Paris Club of creditor governments in the club's 40-year history. It provides immediate relief by reducing the debt Russia owes this year from $8bn to $2bn.

The agreement was signed in Paris six months after a separate accord was reached between Russia and its foreign commercial bank creditors. That envisaged the rescheduling of $32.5bn of Russian commercial debt over a 25-year period, but left some technical details to be sorted out in negotiations which opened last night and could last for several months.

The agreements are a breakthrough because they should eliminate the need for future rescheduling of Russian debt and reduce uncertainty about Moscow's ability to repay its loans. They should also allow the Kremlin to concentrate on continuing Russia's transformation into a market economy and ease Russia's access to world capital markets.

Most of Russia's debts were inherited from the Soviet Union, which disintegrated in 1991. Russia agreed to take on Soviet debts, plus accumulated interest, in return for international recognition as the legal successor state to the Soviet Union.

According to Mikhail Kasyanov, the Deputy Finance Minister in charge of external assets and debts, Russia's total foreign debt stood at $120.4bn at the start of 1996. Soviet debt inherited by Russia accounted for $103bn, including $62.6bn owed to the Paris Club and other governments and $40.4bn owed to commercial banks and other financial institutions.

Russia's own borrowing since January 1992 accounted for $17.4bn. Mr Kasyanov said Russia's foreign debt was "burdensome" but it posed no threat to national economic security.

Yesterday's Paris Club agreement was announced one month after the International Monetary Fund (IMF) agreed to loan Russia more than $10bn over the next three years. This credit is conditional on Russian adherence to market reforms and to low inflation, manageable budget deficits and a steady rouble rate against the dollar.

Although Western countries have indicated they would prefer President Boris Yeltsin to be re-elected next June, one major purpose of the IMF loan is to ensure that Russian reforms will continue even if he loses to his Communist rival, Gennady Zyuganov. The Paris Club chairman, Christian Noyer, warned yesterday that the debt rescheduling deal would be invalid if Russia reneged on its commitments to the IMF.

Mr Yeltsin's government has achieved considerable success in reducing inflation, which ran last month at an annual rate of 78.8 per cent, the lowest figure since market reforms began in 1992. The government expects the annual rate to fall to 25 per cent by the end of this year.

The rouble, backed by Russia's strong export earnings, has enjoyed virtually uninterrupted stability since last July, when the Central Bank placed it in a "corridor" trading range against the dollar.

There has been no serious speculative assault on the rouble since October 1994, when the currency lost 20 per cent of its value in one day.

As for Russia's budget deficit, ministers have expressed concern that the gap between spending and revenue is growing because of failure to collect taxes efficiently. Tax revenues in the first three months of 1996 were 19 per cent below the government's target, reflecting what tax officials condemned as widespread evasion and manipulation of bank accounts by businesses and private banks.

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