Forgive and forget, decides London club

In an attempt to take advantage of Russia's improved credit rating following the successful restructuring of its Soviet-era debt, the country's largest privately owned bank has announced plans to raise $200m in international capital markets. This would make Alfa-Bank the first Russian entity to tap international capital markets since the Russian government's domestic debt default plunged the country into a financial crisis in August 1998. The bank, which has not specified whether the debt will be issued via a syndicated loan or a Eurobond issue, announced its plans just days after the Russian government successfully negotiated the restructuring of its $32bn Soviet-era debt to the London Club creditors. The deal, negotiated by Russia's finance and first deputy minister Mikhail Kasyanov, is estimated to have saved the government $17bn. As a result of the 18-month negotiations, the London Club agreed to forgive Russia 35% of the principal and one-third of the debt servicing costs. Kasyanov has also negotiated a seven-year grace period on all repayments. The London Club agreement brings the total outstanding Russian external debt down by $10bn from $155bn and reduces the chances of Russia's default. The increased creditworthiness has been acknowledged by international rating agency Standard & Poor's, which has raised Russia's credit rating on international bond one notch from CCC to CCC+. However, the government will have to borrow heavily internationally in order avoid default. According to Sergey Prudnik, fixed income analyst at the Russian brokerage Troika Dialog, the government will have to raise between $2bn and $4bn per annum to cover the costs of external debt. Despite the slight improvement in Russia's rating the government is not planning a return to international capital markets this year, as it is hoping to secure cheaper financing from official lenders. The government is hoping to borrow about $2bn from the World Bank and Eximbank of Japan. “The government is going to seek alternative finance this year,' says Prudnik. “It's just too expensive to go to international debt markets this year. They couldn't borrow any cheaper than at 1200 basis points (bps) and 1400bps over US Treasuries.” The better-than-expected terms of the London Club deal have left the Russian government to negotiate a similar deal for the $42bn owed to the Paris Club of sovereign debtors which is due for a re-negotiation. But analysts think that Russia is unlikely to achieve anything more than a repayment grace period. “Unlike commercial creditors, official creditors are not inclined towards debt forgiveness,” says Prudnik. “They see it as a useful tool for political leverage.”