Analysis: Russia as a creditor

By SAM VAKNIN, UPI Senior Business Correspondent

SKOPJE, Macedonia, March 27 (UPI) -- Russia is notorious for its casual attitude to the repayment of its debts. It has defaulted and rescheduled its obligations more times in the past decade than it has in the preceding century.

Yet, Russia is also one of the world's largest creditor nations. It is owed more than $25 billion by Cuba alone and many dozens of additional billions by other failed states. Indeed, the dismal quality of its forlorn portfolio wouldn't shame a Japanese bank. In the 18 months to May 2001, it has received only $40 million in repayments.


It is still hoping to triple this trifle amount by joining the Paris Club -- as a creditor nation. The 27 countries with Paris Club agreements owe roughly half of what Russia claims. Some of them -- Algeria in cash, Vietnam in kind -- have been paying back intermittently. Others have abstained.


Russia has spent the past two years negotiating generous package deals -- rescheduling, write-offs, grace periods measured in years -- with its most obtuse debtors. Even the likes of Yemen, Mozambique, and Madagascar started coughing up, though not Syria, which owes $12 billion for weapons purchases two decades ago. But the result of these Herculean efforts is meager. Russia expects to get back an extra $100 million a year. By comparison, in 1999 alone Russia received $800 million from India.

The sticking point is a communist-era fiction. When the Soviet Union expired it was owed well over $100 billion in terms of a fictitious accounting currency, the "transferable ruble." At an arbitrary rate of 0.6 to the dollar, protest many debtors, the debt is usuriously inflated. This is disingenuous. The debtors received inanely subsidized Russian goods and commodities for the transferable rubles they so joyously borrowed.

Russia could easily collect on some of its debts simply by turning off the natural gas tap or by emitting ominous sounds of discontent backed by the appropriate military exercises. That it chooses not to do so is telling. Russia has discovered that it could profitably leverage its portfolio of defunct financial assets to geopolitical and commercial gain.


On March 25, Russia's prime minister and erstwhile lead debt negotiator, Mikhail Kasyanov, "agreed" with his Mongolian counterpart, Nambaryn Enkhbayar, to convert Mongolia's monstrous $11.5 billion debt to Russia -- into stakes in privatized Mongolian enterprises.

Mongolia's gross domestic product is minuscule, at about $1 billion. Should the Russian behemoth, Norilsk Nickel, purchase 49 percent of Erdenet, Mongolia's copper producer, it will have bagged 20 percent of Mongolia's GDP in a single debt conversion.

A similar scheme has been concluded between Armenia and Russia. Five enterprises will change hands and thus eliminate Armenia's $94 million outstanding debt to Russia.

Identical deals have been struck with other countries such as Algeria which owes Russia about $4 billion. The Algerians gave Gazprom access to Algeria's natural gas exports.

Russia's mountainous credit often influences its foreign policies to its detriment. It has noisily resisted every American move to fortify sanctions against Iraq and make them "smarter." Russia is owed $8 billion by that shredded country and would like to recoup at least a part of it by trading with the outcast or by gaining lucrative oil-related contracts.

The sanctions regime is in its way, hence its apparent obstructionism. Its recent weapons deals with Syria are meant to compensate for its unpaid past debts to Russia -- at the cost of destabilizing the Middle East and provoking American ire.


Russia uses the profusion of loans gone bad on its tattered books to gain entry to international financial forum and institutions. Its accession to the Paris Club of official bilateral creditors is conditioned on its support for the Highly Indebted Poor Countries initiative.

This is no trifling matter. Sub-Saharan debt to Russia amounted to about $14 billion and North African debt to yet another $11 billion -- in 1994. These awesome figures will have swelled by yet another 25 percent by 2001. The U.N. Conference on Trade and Development thinks Russia intentionally under-reports these outstanding obligations and that Sub-Saharan Africa actually owed Russia $17 billion in 1994.

Russia would have to forgo at least 90 percent of the debt owed it by the likes of Angola, Ethiopia, Guinea, Mali, Mozambique, Somalia, Tanzania, and Zambia. Russian debts amount to between one-third and two-thirds of these countries' foreign debt. Moreover, its hopes to offset money owed it by countries within the framework of the Paris Club against its own debts to the Club were dashed last year -- hence its incentive to distort the data.

Other African countries have manipulated their debt to Russia to their financial gain. Nigeria is known to have repurchased, at heavily discounted prices, large chunks of its $2.2 billion debt to Russia in the secondary market through British and American intermediaries. It claims to have received a penalty waiver "from some of its creditors."


Russia has settled the $1.7 billion owed it by Vietnam last year. The original debt of $11 billion was reduced by 85 percent and spread over 23 years. Details are scarce, but observers believe that Russia has extracted trade and extraction concessions as well as equity in Vietnamese enterprises.

But Russia is less lenient with its former satellites. Two years ago, Ukraine had to supply Russia with sophisticated fighter planes and hundreds of cruise missiles incorporating proprietary technology. This was in partial payment for its overdue $1.4 billion natural gas bill. Admittedly, Ukraine is also rumored to have "diverted" gas from the Russian pipeline that runs through it.

The Russians threatened to bypass Ukraine by constructing a new, Russian-owned, pipeline to the European Union through Poland and Slovakia. Gazprom has been trying to coerce Ukraine for years to turn over control of the major transit pipelines and giant underground storage tanks to Russian safe hands. Various joint ownership schemes were floated -- the latest one, in 1999, was for a pipeline to Bulgaria and Turkey to be built at Ukrainian expense but co-owned by Gazprom.

After an initial period of acquiescence, Ukraine recoiled, citing concerns that the Russian stratagem may compromise its putative sovereignty. Already UES, Russia's heavily politicized electricity utility, has begun pursuing stakes in debtor Ukrainian power producers.


Surprisingly, Russia is much less aggressive in the "Near Abroad." It has rescheduled Kyrgyzstan's entire debt of about $60 million for a period of 15 years, including two years grace, with the sole -- and dubious -- collateral of the former's promissory notes.

Russia has no clear, overall, debt policy. It improvises -- badly -- as it goes along. Its predilections and readiness to compromise change with its geopolitical fortunes, interests, and emphases. As a result it is perceived by some as a bully, by others as a patsy. It would do well to get its act together.

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