Vladimir Shlyomyn

There are quite a few myths about Russia’s financial problems and these myths are not only exploited in the domestic political struggle. Unfortunately, they also influence potential partners interested in making investments on Russian markets. But, as a matter of fact, things are not as bad as they are portrayed.

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ne of the long-standing myths is the so-called "problem – 2003". Let us recall what it is all about.
According to the Russian Ministry of Finance, as of July 1, 2002, Russia’s foreign national debt amounted to $132B. This amount is divided into debts of the former USSR and debts of Russia accumulated after 1991 (as of January 1, 2002, they are $63.2 billion and $66.9 billion respectively). Russia was particularly intense on borrowing in the period that immediately preceded its default (August 17, 1998). According to Andrei Illarionov, the current economic advisor to the president of the Russian Federation, just in 7 months of 1998 the Russian government increased the country’s foreign national debt by $23B, thus, making the financial collapse unavoidable.
The effects of the risky financial policy will still be felt for a long time. From 2002 to 2008 Russia’s expenses on settling and servicing its foreign debt will amount to between $14B and $18B a year. What is more, the major portion of repayments falls on the new Russian debt (eurobonds and payments to international financial institutions) that cannot be restructured. During this post-crisis period the so-called peaks of repayments will take place in 2003, 2005 and 2008.
So, the first major repayments are to be made this year. They should exceed $17B. Repayments on the foreign national debt will equal $10.8 billion or exceed by $4B the amount of repayments on the principal debt in 2001. Bigger repayments are called for by the need to redeem eurobond loans as well as the series 4 bonds of the domestic currency loan. All in all, they amount to about 30% of the federal budget expenditures or 7% of Russia’s annual GDP or 25% of the national savings.
Analysts, who are in opposition to the present authorities, insist that Russia does not possess financial resources for meeting liabilities to creditors and, thus, there is no way to avoid new massive borrowings. Even worse, credits to settle debts will have to be taken on unfavorable terms, i.e. in foreign currency with up to 15% interest per annum (today Russia obtains credits with interest rates of 9% to 10% per annum). As a result, analysts predict, inflation will soar and, finally, a financial and economic crisis exceeding the default of August 1998 by its scope will erupt.
However, in the opinion of the country’s leadership, the "problem – 2003" is far-fetched. Just in 2002 Russia’s national debt was already reduced by 9% and amounted to about 40% of the GDP, says the Ministry of Finance in its annual report. Expenses on servicing the debt went down to 2.3% of the GDP as compared with 2.6% of the GDP in 2001. Altogether, in 2002 Russia repaid $14B on the foreign national debt including $6.8 billion on the principal debt and $7.2 billion on the interest payment.
The law on the 2003 budget passed by the parliament sets the following basic parameters. The budget revenues are planned at $71,111,5 million and expenditures should come to $68,989,4 million. In 2003 the GDP should equal $407,812,5 million and inflation rates are not to exceed 10% to12 %. The volume of borrowed external credits will amount to about $670M and the major portion of them will be obtained through the previously agreed-upon tied credit lines. There are no plans to use new tied credits.
The government assumed an obligation to accomplish two other important tasks: first, to reduce budget expenditures and, second, to form a financial reserve for payments on the foreign national debt. As the Ministry of Finance reported, on the eve of 2003 this reserve has already had $6B. The main sources of its further replenishment will be a federal budget surplus and receipts from privatization, which are expected to increase up to $1.6 billion in 2003 (their amount in 2002 equaled $1B). There are expectations that the biggest receipts will come from selling government-owned stakes in three joint stock companies Svyazinvest, Slavneft and Magnitogorsk Iron & Steel Mill. Besides, the State will sell precious stones and metals from its reserves for approximately $310M.
In the coming six years Russia will have to pay out over $100B. As a result, about 40% or $50B of the principal debt will be liquidated. Payments to service the foreign national debt will equal the same amount.

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	The International rating agency Standard & Poor’s raised Russia’s long-term sovereign rating from OO- to OO By estimates of this agency, the rating of Russia’s ruble, its national currency, rose at once by two points: from BB- to BB+. In this connection Erik Nielson of New European markets economics stated: "Russia is really moving toward the goal of enhancing its attractiveness to a new class of investors." In S&P’s view, the political support of the tax policy and expansion of the taxable basis are sufficient reasons to believe that in the mid-term perspective the country’s return to any tangible budget deficit is unlikely.