European creditors do not welcome Russia's intention to pay the debt early

Official spokesmen for the Russian government have already said that the club's requirement was “politically unacceptable”

The initiative with Russia's prescheduled return of the foreign debt has been unexpectedly blocked. Russian negotiators have failed to come to agreement with the Paris Club of Creditors about debt-clearing terms.

Russia's foreign debt to the countries of the Paris Club is estimated at about $44.4 billion, which is the biggest sum of the nation's entire debt. The average rate to serve the debt makes up 7-13 percent: Russia's debt payments reach up to $7 billion a year. When the favorable situation with world prices on oil brought “excessive money” to the state, governmental officials decided to use the extra profit for clearing the foreign debt.

Andrei Illarionov, the economic adviser of the president, was one of the first politicians, who brought up the issue of prescheduled foreign debt payment in 2000. “The idea seemed absolutely unbelievable back then. It seemed strange and abnormal. However, it became the official stance of the Russian government four years later,” Illarionov said.

In December of 2004, the Russian Finance Ministry suggested a program to clear the debt to Paris Club members. The program was made for the period of three years. Russia's budget for 2005 contains $15 billion for the purpose. Russian negotiators suggested the creditors could write off 10% of the entire sum of the debt for such efforts. Russian officials directed their attention to this number on the base of the previous experience. Germany lost about the same amount of money when it transformed the Russian 5-billion-euro debt in Aries bonds that were subsequently sold to private investors.

There are other reasons, according to which Russia could ask for concessions. Russia wrote off about 90 percent of the debt to Iraq in November of the last year within the framework of the Paris Club. Club members also offered Russia to support the temporal debt payment moratorium for the countries of Southeast Asia, which suffered in the tsunami disaster.

Nevertheless, while Russia was asking for a discount to pay the debt of the former Soviet Union ahead of the scheduled time, the creditors put forward a counterclaim. Paris Club members said that Russia should make a bonus payment for the deal, the Vedomosti newspaper wrote. An anonymous source told the newspaper that Germany – Russia's major creditor – insists on the 2.5-percent bonus to the face-value of the debt. Germany's position is clear. Germany's previous concession to Russia with the “privatization” of a part of the Russian debt (it was transformed into bonds) was a necessary measure for Germany to replenish the national treasury. The deficit of the German budget has increased three percent of the GDP for several years already, although the stability treaty prohibits it for all members of the European community.

Three leading rating agencies have recently raised Russia's rating to the investment level, which could also become a reason for Paris Club members to take the current position. Moody's raised Russia's sovereign rating to the investment level in 2003. Fitch rating agency moved Russia from the BB+ level up to BBB- (the initial investment level) in November of 2004. Standard&Poor's raised Russia's rating in January of the current year too.

Russia cannot ask for indulgence with such a rating, like Somalia or Iraq do, for example. Furthermore, the prescheduled debt service is the last thing that the Paris Club wants. The interest rate that Russia has to pay on the debt has been bringing rather stable profit to the creditors.

Russian proponents of the prescheduled debt payment need to hurry with their decision: there are a lot of other ideas on how to use the above-mentioned “excessive money.” The increase of the social spending is one of the most probable directions at this point, taking into consideration the failure of the reform with welfare benefit cutoffs. According to the plan of the budget-2005, a part of the money will be spent to liquidate mistakes of the pension reform.

Russian officials and experts fear that the prescheduled debt payment process might come across serious obstacles. Several official spokesmen for the Russian government have already said that the club's requirement was “politically unacceptable.” To crown it all, there are no reasons to say that the State Duma will accept the terms of the Paris Club.