Russiaâs Paris Club Debt and U.S. Interests (CRS Report for Congress)
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| Release Date |
June 6, 2001 |
| Report Number |
RL30617 |
| Report Type |
Report |
| Authors |
John P. Hardt, Foreign Affairs, Defense, and Trade Division |
| Source Agency |
Congressional Research Service |
Summary:
Russia faced both fiscal and external debt crises in August 1998. Russia's external debt became
unmanageable as the servicing of the debt would have required 80% to 90% of the anticipated
federal revenue. These crises threatened Russia's ability to govern and to continue a process of
transition to a democratic market system. U.S. interests were directly involved because of the danger
posed by a potentially unstable Russian economic, political and security system and the possible
linkage by policy makers between economics, security, political interests and debt settlement. Relief
came from a new IMF program, a short-term rescheduling "framework agreement" that suspended
principal payments for Russian Paris Club debt through the year 2000, and substantial forgiveness
of the Soviet era commercial London Club debt.
Russia made debt rescheduling a key issue at the Okinawa G-8 meeting on July 21-23, 2000
and in subsequent bilateral and international meetings. When the short term framework agreement
ended, Prime Minister Kasyanov announced in January 2001 a policy of partial servicing of their
Paris Club debt. Creditor reaction was so strong President Putin reversed Kasyanov and assured
creditors that all debt obligations would be met. Later, in early 2001, Russian leadership shifted its
concern to an external debt servicing crisis expected in 2003, noting that Russia would then either
need debt relief or would face default.
Germany's position as leading Paris Club creditor is that Russia should be able to meet its debt
obligations. Germany holds about half of the $42 billion of outstanding Paris Club debts inherited
from the Soviet Union. Germany's Paris Club Russian debt rose in 2001 by inclusion of a Russian
commitment to pay an earlier debt by the Soviet Union to the German Democratic Republic. The
additional $6 billion Russian debt is being given special treatment by Germany. Russia and
Germany are discussing debt for asset swaps for this debt.
Improved Russian economic performance has generated additional currency reserves and
increased revenue that has eased the burden of servicing their debts and meeting their needs for
discretionary spending. Even with substantial reserves in the Russian Central Bank, the Ministry of
Finance must either buy the reserves or reduce budget outlays in order to meet Paris Club debt
servicing commitments. Without structural reform with changes in the incentive system, the
economic upswing may be part of a cycle rather than a new trend line of sustainable economic
growth. Reducing the debt service requirements through further rescheduling, limiting subsidies,
and containing defense spending may be necessary if Russia is to meet the budgetary needs for
implementing the structural reform.
U.S. options in Paris Club Soviet Era negotiations range from no rescheduling to deep debt
restructuring and use of debt swaps. The United States gives more explicit attention than Germany
and other Paris Club members to the linkage between Paris Club agreements and foreign and security
affairs.
