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November 2001

Can settling debts change an image?





It is all very un-Russian. Strong growth and a burgeoning trade surplus mean Russia is flush with money, money that would have been squandered in the past. But for once the government is thinking ahead.
The Kremlin is going to pay off its IMF debt early in a move designed to smooth debt payments in the coming years and above all to try to undo Russia's image as a defaulter.
Russia owes the IMF $8.8 billion but president Vladimir Putin says he will repay $2.7 billion of the $3.3 billion due in 2003 early - over the next year.
Russia's debt service hits a spike in 2003 ($bn)
  2001 2002 2003 2004 2005
Russia debt 7.9 8.4 9.4 6.6 8.1
Multilateral 2.8 4.4 4.5 2.9 2.2
Eurobond 2.6 1.7 3.2 2.5 5
Bilateral creditors 2.4 2.2 1.6 1.1 0.8
MinFin VI-VIII 0.1 0.1 0.1 0.1 0.1
Former USSR 4.1 4.6 7.8 4.4 4.4
Paris Club 3.9 4.4 4.1 4.3 4.3
MinFin IV-V 0.2 0.2 3.7 0.1 0.1
Total 12 13 17.2 11 12.5
 
Source: Finance Ministry, Renaissance Capital

Russia's foreign debts totalled $143.3 billion at the start of this year, including $93.3 billion of former USSR debt and $39 billion of Paris Club debt. Because of recent economic good times this number has fallen steadily.
In September Russia ceased to be the IMF's biggest debtor, passing that honour to Turkey, as foreign debt as a proportion of GDP fell from over 60% to about 44%. Finance minister Alexei Kudrin believes debt will drop below 40% within three years. By comparison, many western European governments struggled to reduce debt/GDP to below 60%, which was one of the conditions for joining the European single currency.
But paying off the IMF early while Russia still has petrodollars is prudent as it is not out of the woods: there is a nasty spike in payments in 2003. During the crisis of 1998 many payments were put off for five years and will fall due in 2003; Russia's debt repayments will be $19 billion compared with the $13.6 billion due in 2002.
The Kremlin is trying to smooth out a debt repayment schedule made lumpy by the crisis. The finance ministry has also been buying back Soviet-era debt, the MinFins. Payment of these also rises in 2003, from $200 million to $3.7 billion. Putting all these savings together, the 2003 payments fall from $19 billion to about $15.3 billion.
Russia's prudent policy on its obligations is new. A year ago foreign debt payments were not included in the budget, on the assumption that creditors - in particular the Paris Club - would restructure Russia's debt.
Following prime minister Mikhail Kasyanov's disastrous attempts to force rescheduling of Paris Club payments last spring, the Kremlin has given up asking for a restructuring and decided to reduce payments instead.
"[Early repayment of the IMF debt] shows Russia's changing relations to the international financial institutions and Russia's recognition that it is important to have good relations," says Seija Lainela, chief economist at the Russian-European Centre for Economic Policy in Moscow. "Russia's decision to pay off the IMF early is more about PR than anything else."
The 2002 budget has passed two out its three readings and includes all debt payments.
Putin's announcement was also an about-turn in relations with the IMF. In March Kasyanov said Russia had "divorced" itself from the IMF, turning down an offer to sign a stand-by agreement, saying that finances were so healthy there was no need for international help.
Russia's status with the IMF is now "post-programme monitoring", which means the Fund has no commitment to Russia, but is keeping an eye on things.
In July the IMF said Russia's gains were impressive, but it remained worried about higher-than-expected inflation. "The main challenge to short-run economic policy is to manage the strong balance of payments so that it does not weaken growth prospects or ignite inflationary pressures," it said.
However, following the fall in oil prices caused by the terrorist attacks on the US the Kremlin is reviving ties with international financial institutions just in case.
Kudrin has floated the possibility that Russia will issue a $1.1 billion Eurobond. The country can get by without new debt but it's hoped that paying the IMF early will mean better rates, allowing the 2003 debts to be refinanced more cheaply. Russia has $4.1billion in Eurobonds but Kudrin said they would only issue another if coupons were less than 10%.
This is not impossible, as Russia's ratings have improved steadily. In September Moody's was the first to re-rate Russia, giving its Eurobonds a B3 rating - better than Brazil, Argentina and Turkey. Standard&Poor's followed in October, confirming its B ratings and upgrading the outlook to positive. And Fitch upgraded Russia's long-term credit ratings to B+ from B.
It is not clear if Russia needs to tap the international capital markets. Before the attacks the government expected a $5 billion budget surplus but depending on how low oil prices fall, it may end next year with a deficit.
Oil makes up a quarter of GDP and exports. The key figure in the 2002 budget is the $18.50 estimate for the average price of a barrel of oil next year. Oil is probably the most volatile of all commodities, but Moscow-based analysts are predicting that prices will remain around $20 to $22 and the budget in surplus.
Even if oil does fall to disastrous levels, with the central bank's record international reserves close to $40 billion Russia could muddle through.
"The 2003 debt is a red herring given the current healthy state of Russia's finances," says Peter Westin, an economist with brokerage Aton. "If oil falls to $20 to $22 a barrel the budget still balances."






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