Page 89 - IFR Opportunities in Russian capital markets

CHAPTER04
ifrintelligence reports/Opportunities in: Russian Capital Markets
With money piling up in the coffers, the reserves in the Stabilisation Fund exceeded Russia's entire external debt of US$75.2bn in the middle of 2006 and the Kremlin made clearing this debt a priority.
Once agreement had been reached with the Paris Club, Russia had then to agree terms with each member of the Club in bilateral negotiations. Many countries pointed to Russia's extremely high oil revenues and wanted some kind of premium to the debt principal, while the Kremlin naturally wanted after a pari passu approach, assuming similar conditions for similar deals (the 2005 redemption did not include any premium).
A compromise was finally found. The debt was divided into two parts, one with a fixed rate and one with a floating rate. Russia agreed to pay a premium (US$1bn in total) to holders of debt in the first group, thus theoretically compensating these creditors for the lower cash flow of previous years (compared to the floating-rate debt). Germany was the main beneficiary of this solution; the larger creditor in the club (around 42% of the total), Germany received US$700m with the rest being divided between the UK, France and the Netherlands.
In the end, all of the Paris Club members took Russia up on the offer, including Switzerland, which had rejected the 2005 deal. On 20 August 2006 Russia's Finance Ministry transferred US$23.7bn to creditors (US$21.3bn for the principal sum, a US$1bn premium and US$1.4bn in regular redemption payments).
The early redemption of the Paris Club debt is equivalent to a saving of US$7.7bn in interest payments, most of which will be transferred to the State Investment Fund between 2007 and 2009.
At the same time, Russia reached an agreement on the redemption of Soviet-era debt to several non-Paris Club countries (among them Kuwait and Turkey), and the Finance Ministry finished another round of swaps of Soviet-era 'commercial' debt for sovereign Eurobonds. The composition of Russia’s external debt is shown in Table 4.1, and the Paris Club creditors are given in Figure 4.10.
Table 4.1: Russian external debt, 2006-08E (US$bn)
01/01/06
Paris Club 25.2 Non-Paris Club countries 3.5 Former COMECON 2.1 “Commercial” debt 1.1 IFO 5.7 Eurobonds 31.5 MinFins 7.1 Others 0.3 Total 76.5
Source: Finance Ministry, Troika Dialog estimates
01/04/06 01/07/06 01/10/06
24.4 24.3 1.9 3.5 2.9 2.9 2.0 2.0 2.0 1.1 1.1 1.1 5.6 5.5 5.4
31.2 31.2 30.9 7.1 5.7 5.7 0.3 0.2 0.2
75.2 72.9 50.1
01/01/07E 01/01/08E
– – 2.7 2.2 2.0 1.7 0.5 0.5 5.4 5.1
31.1 27.8 5.3 4.6 0.2 0.2
47.2 42.1
Figure 4.10: Russian Paris Club debt – breakdown by country, Jan 2006 (%)
12%
8% 6%
Italy Japan
US France Austria Others Germany
Source: Finance Ministry
43%
9%
8%
14%
82