Vladimir Shlyomin

I

n 2004 Russia intends to completely solve the problem of the former USSR’s debts. As Alexei Ulyukaev, Russia’s first deputy minister of finance, said, "there are all necessary conditions for that now". In his words, as of mid-2003, the "Soviet debts" amounted to $5 billion accounting for just 5% in the total structure of Russia’s external indebtedness. There are only 7 creditor nations. In the last few months agreements on debt settlement have been reached with South Korea, Thailand and Oman. The intense negotiations have been started with Kuwait, Turkey, Yugoslavia and Malta that are the other four remaining creditors of the former Soviet Union.

he history of Russia’s "Soviet debts" began four days before signing the so-called Belovezhskoe agreement in December 1991, under which the USSR officially ceased to exist. That time eight of fifteen Soviet republics signed the Treaty on Succession with respect to the state external debts and assets of the Soviet Union. According to this document, Russia’s share was set at 61.34%.
"It was planned that the external debts of the Soviet Union would be serviced proportionally by all former Soviet republics", reminds Andrei Kostin, the chairman of Vnesheconombank. "But soon it became clear that, except Russia, no republic was capable of doing that. That is why their leaders unanimously decided that Russia would inherit both debts (liabilities) and assets (resources) of the former USSR", he says.
As of January 1, 1992 Soviet debts equaled $98 billion. With all this the share of the short-term debts turned out to be very large. And the time of redemption was as follows. Approximately two thirds of the debts were to be repaid between 1992 and 1995, with more than 50% of this amount having to be shelled out in 1992 and 1993. Payments for these credits should have reached $20 billion in those two years and $13 billion in 1994. The country failed to observe this tough schedule due to the lack of sufficient currency reserves. Thus, the government had to state the default with respect to these debts of the former USSR.
As far as the Soviet assets were concerned, they turned out to be of low liquidity. By experts’ estimates, even in the best of circumstances Russia would be able to repay just $30 billion of those assets totaling $150 billion inherited by the country and it would be capable of doing that no sooner than within 25 to 40 years.
"I do not think that during that time the Russian side thought it over well enough, when it committed itself to start repaying debts of the former USSR", concluded Russia’s president Vladimir Putin when assessing the decision of the previous team.
And only a few years later the Russian government began making efforts to restructure the Soviet debts. The main task was to put relations with creditors in order and work out new schedules of payments.
As of July 1, 2001 the amount of debts of the former USSR to members of the Paris Club was estimated at $42.9 billion, $29.2 billion of which were restructured under multilateral memoranda. Efforts to restructure debts were practically completed on August 1, 1999, when the memorandum with the Paris Club was signed. As a result, Russia and the Paris Club agreed on the question of repaying the debts that amounted to $38 billion. Of this amount 45% will be repaid during the period of 25 years and the remaining 55%, including short-terms debts to the Paris Club, will be repaid in 21 years. The capital amount of debts that has not been restructured has been paid out annually from early 2002 by constantly increasing portions.
The talks with the London Club on the debt settlement started in December 1991, when the mechanism of six-month delays was agreed upon. In 1995 the Russian government and members of the London Club’s banking consultative committee signed the memorandum on the agreed-upon principles of global restructuring of the former USSR’s debts. Vnesheconombank was chosen as a debt respondent. The sides decided to restructure all the debts, notwithstanding the date of debt repayment, and to develop a layout of redemption rates: separately for 1991 and 1992, for 1993 and 1995 as well as for 1996 and 1997.
The main result of their work may be summed up the following way. The major portion of the debts, $24 billion, was restructured as a syndicated credit for 25 years with the Bank of America being its agent. Debt instruments (PRIN) were issued against this credit that would have December 2, 2020 as the final date for repayment. The participants decided that the amortization of the major amount and interest payments would take place twice a year (in June and December), but not in the first seven years (the grace period), when only interest payments were provided for. In order to settle the interest indebtedness to the London Club, interest bonds (IAN) for over $6 billion were issued. Vnesheconombank was the emitter and the Chase Manhattan Bank became the servicing agent. The period of redeeming bonds was set at 20 years with making the amortization of the major amount and interest payments twice a year (in June and December), excluding the first seven years (the grace period), when only interest payments were to be made.
Restructuring and partial write-off of debts are quiet widely used when settling debt problems. Besides, the status of promissory notes (commitments assumed by the third country, i.e. the USSR) and a membership in the creditor club give Russia a hope to count on a successful restructuring of the indebtedness, which is still being worked on.
For example, Italy, which is Russia’s largest creditor nation in the Paris Club, agreed to convert a portion of the former USSR’s debts into investments. As Russia’s vice prime minister and minister of finance Alexei Kudrin reported, Italy agreed to transfer debts of about $500 million to investments. Kudrin called this agreement unique. "There will be a thorough bidding selection of projects for investing these funds in", the minister said. Russia and Italy will jointly form a special working group so as to subsequently revise selected projects.
A different way was proposed to repay debts to Germany. At the bilateral consultations in Weimar Vladimir Putin said that the problem was, mainly, connected with debts of the former USSR to the German Democratic Republic. As Russia’s president noted, "this is not an ordinary problem of credits; it is a summing up of results of the economic activities between the USSR and the GDR". The discussed amount, which, in his words, could not be called a debt in the full sense of the word, was "a trade surplus" that emerged in the last months before the collapse of the USSR. As a result of these consultations, both sides reached an agreement, under which Russia would pay 500 million euros within three years as the Soviet debt to the former GDR.
Andrei Illarionov, the advisor to the Russian president, believes that in the foreseeable future Russia will be able to completely repay all its external debts. In his opinion, in order to accomplish this task it will be sufficient to adhere to the economic policy that has been pursued in the last years. "If the Russian authorities continue to stick to the same policy further on, then, I will dare to predict: in the nearest 10 years the problem of Russian debts can be completely solved", he says with confidence. And Andrei Illarionov stresses: the country will find itself in a unique situation, when its debts are reduced to zero. In this case Russia will get qualitatively new opportunities for the country’s economic and political development, its positioning on the international scene.
Russia’s credit history dates as far back as 1769, when Catherine II obtained the first loan in Holland. During the 19th century and in the early 20th century the Russian empire’s expenditures steadily exceeded its earnings. At the same time, the Russian government managed to build up a reputation of a reliable borrower that was operating on the market with prudence and without abusing its state status. Even short-term interests in the financial stability were of primary importance. This allowed the country to follow a thoroughly worked-out economic policy without changing its course.
The government of Soviet Russia refused to repay debts to both Russian and foreign citizens after the October revolution. Thus, it laid the foundation of the different financial culture, which still has an influence on the country’s position in the market of credits.