Russian debt settlement

Russian Prime Minister Mikhail Kasyanov visited Prague this week to sign an agreement on the settlement of Russia's outstanding debts to the Czech Republic. Mr. Kasyanov told a news conference after meeting Czech Prime Minister Milos Zeman that the Czech Republic would forgive Russia part of the 3.6 billion-USD debt. Under the deal, Russia agreed to repay 2.5 billion USD, which is about two thirds of the total debt. The remaining part of the debt will be paid between now and 2020 in cash, goods, and will be partly used for a guarantee fund for Czech exports to Russia.

In Moscow, the deal has been presented as an important precedent for the settlement of Russia's debts to other former COMECON countries, amounting to a total of 14 billion USD. Czech government officials describe the deal as a success. However, economic analysts are not convinced that the arrangement is a great achievement. Juergen Odenaus is the global head of emerging markets strategy of Commerzbank in London:

"Because Russia has successfully rescheduled Soviet debts with various kinds of creditors, one expected that it would also do so with other bilateral creditors, such as the Czech Republic. Nevertheless, Russia's economic circumstances at this point do no longer necessarily warrant a rescheduling."

At the same time, the Czech government agreed to sell about two-thirds of the debt - 2.5 billion USD - to a private company, Falkon Capital, for slightly over 500 million USD, which is some 23 percent of the debts' face value. Falkon Capital is supposed to pay its dues to the Czech government by the end of this year. Observers say the arrangement with Falkon Capital is on the verge of profitability or outright disadvantageous, although government officials deny that. Juergen Odenaus again:

"It is unusual and raises a question mark as to why the Czech is now selling its claim on Russia for a low amount, such as 20 percent that has been reported. In particular, it is questionable because Russian government is fully solvent and there are no question marks over its ability to repay its debts in the future. Furthermore, market prices do not suggest that Russian debt should be sold at 20 percent of face value and hence the sell-off is at a major discount to current market prices."

The truth is that the Czech government inked 20 billion CZK from the Russian debt repayment into the 2002 state budget draft. Given the fact that the cabinet promised to cut the budget deficit and the budget already contains some uncertain revenues, such as proceeds from privatisation of the remaining state-owned companies, observers say it seems that the cabinet agreed to an unfavourable compromise to get some cash immediately instead of a long-term arrangement exceeding its term in office.