CRS Report: RS20636 - Russia's Paris Club Debt: U.S. Interests

RS20636: Russia's Paris Club Debt: U.S. Interests

John P. Hardt

Senior Specialist in Post-Soviet Economics
Foreign Affairs, Defense, and Trade Division

July 18, 2000

Summary

Russia is seeking substantial debt forgiveness from its Paris Club debt of some $42 billion. Germany holds about half this official debt; the United States share is 6%. The United States may adopt a policy of no debt relief, of rescheduling payments of principal and interest, or of debt forgiveness. The official position of creditor countries in the Paris Club is for no debt forgiveness. Many in Congress support linkage of any debt relief to an end of the Chechnya conflict and of aid to Serbia, and other foreign and security issues. H.R. 4118, "Russian-American Trust and Cooperation Act of 2000," dealing with a Russian intelligence facility in Cuba, was reported out of the U.S. House of Representatives to be debated starting Wednesday, July 19, 2000. Paris Club negotiations will be discussed at the Okinawa G-8 meeting, July 21-22, 2000. This report will not be updated.

Russia's External Debt Crisis

Russia has faced both fiscal and external debt crises since August 1998. These crises have threatened Russia's ability to govern and to continue a process of transition to a democratic market system. U.S. interests are 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.

After August 1998, Russia's external debt became unmanageable as the servicing of the debt would have required eighty to ninety percent of the anticipated federal revenue. Russia faced a double bind: either it could service the debt and have little revenue for meeting other discretionary spending, or it could default on much of the external debt inherited from the Soviet Union and be denied access to the international capital market and international financial institutions. See Table 1.

Table 1. Russian External Debt
(Billion dollars)

	1991	1992	1993	1994	1995	1996	1997	1998
Federal Government	96.8	107.7	112.7	119.9	120.4	125.0	123.5	147.1
Former USSR Debt	96.8	104.9	103.7	108.6	103.0	100.8	91.4	95.2
To Official Creditors	62.2	69.2	69.1	69.9	62.6	61.9	56.9	59.5
To Commercial Creditors	32.9	34.0	34.0	37.0	39.3	38.8	33.9	35.2
Bonds	1.7	1.7	1.6	1.7	1.1	0.1	0.1	0.0
Russian Federation	0	2.8	9.0	11.3	17.4	24.2	32.1	51.9
To Multilateral Creditors	0	1.0	3.5	5.4	11.4	15.3	18.7	26.0
To Official Creditors	0	1.8	5.5	5.9	6.0	7.9	7.6	9.7
Bonds	0	0	0	0	0	1.0	4.5	16.0
Sub-national Governments	0	0	0	0	0	0	1.1	2.2
Total	96.8	107.7	112.7	119.9	120.4	125.0	124.6	149.3

Source: OECD, Russian Federation, 1999-2000, March 2000, including data from Russian Ministry of Finance and IMF Data.

Debt Relief Provided to Date

To obtain debt relief, Russia had to first establish itself again with the IMF and agree to a new assistance program before beginning discussions with the Paris and London Clubs on debt restructuring. By agreement with Russia, the IMF, Paris Club and London Club provided some debt relief to Russia:

In July 1999 a Russian/IMF agreement was signed because Russia was in imminent default. This agreement reopened the process of servicing the $26 billion multilateral institution debt. The $4.5 billion provided by the IMF was to be used primarily to service the debt to that multilateral organization. After the first installment of $640 million was disbursed, further funding was held up until significant structural reform was undertaken as agreed to by Russia.⁽¹⁾

In August 1999, the Paris Club provided a "framework" agreement on the $42 billion debt.⁽²⁾ (See Table 2.) The terms provided for postponement of principal repayment on the debt, but continued to require servicing interest obligations. A bilateral Paris Club agreement between Russia and the United States covering Soviet era debt payments due from August 1999 to December 2000 was transmitted to the United States Congress on May 26, 2000. This bilateral agreement on debt rescheduling was put on hold by the Chairmen of the Senate Foreign Affairs and House International Relations Committees on June 16, 2000. The Administration put the agreement into force before July 1, 2000 because it felt bound by the Paris Club agreement.

In February 2000, the London Club provided for substantial forgiveness of Russian commercial debt. The London Club agreed to an exchange of the $31.8 billion of claims held by the commercial creditors for $21.0 billion in new Eurobonds. This debt reduction translates into 34.5% debt forgiveness. The full debt forgiveness was raised to 52% by providing a lower interest rate and a grace period on principal payments of eight years. This multilateral agreement of the London Club is being finalized by a lengthy process employing a bank advisory committee to reach bilateral commercial debt agreements with individual banks represented in the London Club.⁽³⁾

Russian leaders, Putin and Kasyanov, have made clear that this London Club debt relief was welcomed and necessary but not sufficient. They called for the same 50% degree of forgiveness in the comprehensive Paris Club negotiations based on the terms of the February London Club agreement.⁽⁴⁾

Russia's Economic Growth Prospects and Debt Management

Increased growth and added revenue have improved Russia's economic prospects in 2000, but this improvement in economic performance is fragile. Without structural reform and 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 or forgiveness, limiting subsidies, and containing defense spending may be necessary if Russia is to achieve the fiscal solvency needed to implement the structural reform required for sustained growth.

Western Creditor Debt Relief Options

Germany holds about half of the $42 billion of outstanding Paris Club debts inherited from the Soviet Union. Germany's share would rise even further by including in the Paris Club negotiations a Russian commitment to pay an earlier debt by the Soviet Union to the German Democratic Republic. Germany's position is that Russia should be able to meet its debt obligations; cost of debt reduction in the German budget would be onerous. (See Table 2.)

Table 2. Paris Club Debt Inherited from the Soviet Union, December 31, 1999

Creditor Countries	Debt ($ billion)	Percentage
Germany	20.2	48
Italy	7.0	17
United States	2.6	6
France	2.0	5
Japan	2.0	5
Canada	0.8	2
United Kingdom	0.6	1
Other Countries	6.8	16
Total	42.0	100

Source: "The Secretariat of the Club de Paris does not maintain an up to date data base on the debt of debtor nations. Precise figures will be gathered from each country once negotiations are to begin. Even then data can only be obtained from the creditor countries." François Perol, Office of the Secretary General of the Paris Club in response to a query from Professor Marie Lavigne of the Institute for Scientific, Mathematical and Economic Research (ISMER), Paris. These estimates, made from available official sources, were confirmed by the Department of Treasury June 9, 2000 as reasonable.

U.S. Options in Upcoming Paris Club Negotiations

The Russian Paris Club Debt to the United States is divided between agricultural and Lend Lease debt. (See Table 3.)

Table 3. United States Paris Club Soviet Era and Russian Era Debt
($ billion)

Responsible Agency	Paris Club Soviet Era	Russian Era	Total
Department of Agriculture	2.0	1.2	3.1
Export Import Bank	-	0.9	0.9
State, Lend Lease	0.6	-	0.6
Total	2.6	2.1

Source: Communication from the Department of Treasury, June 9, 2000. Paris Club debt is debt incurred prior to the debt cutoff date for rescheduling, which in the Russian case was January 1992, not long after the creation of the Russian Federation. The agricultural debt for Paris Club Soviet Era is from the Commodity Credit Corporation debts: The Russian Era debt is under Public Law 480. The Lend-Lease debt incurred in World War II was renegotiated in 1972.

The U.S. Congress may influence the Paris Club debt agreement between Russia and the United States in several ways: Congress may influence the multilateral Paris Club agreement by indirect and direct expressions of concern. In the FY1991 budget, final support for the European Bank for Reconstruction and Development was held up by the House of Representatives until the Paris Club agreed to 50% forgiveness on Poland's debt. The bilateral agreement between Russia and the United States is subject to congressional appropriations in response to Paris Club debt forgiveness in conformance with Federal Credit Reform Act of 1990. Congress in the appropriations process may also attach amendments that make funding conditional on compliance with United States policy on arms control, arms sales, and selected foreign policy issues. Congress may also indicate its concern that Russia not give budgetary support to military spending increases that reflect developments inimical to U.S. interests. Congress can make its wishes known even if debt relief in restructuring does not involve appropriations by calling for a hold on a bilateral agreement, as was the case on June 16, 2000 by the Chairmen of the Senate Foreign Affairs Committee and House International Relations Committee.

The U.S. House of Representatives begins debate on Wednesday, July 19, 2000 on the "Russian-American Trust and Cooperation Act of 2000" sponsored by Representative Ros-Lehtinen with a purpose and specific provisions that are intended to affect Russian-U.S. debt negotiations,

To prohibit the rescheduling or forgiveness of any outstanding bilateral debt owed to the United States by the Government of the Russian Federation until the President certifies to the Congress that the Government of the Russian Federation has ceased all its operations at, removed all personnel from, and permanently closed the intelligence facility at Lourdes, Cuba.

...

(a) ... Notwithstanding any other provision of law, the President-(1) shall not reschedule or forgive any outstanding bilateral debt owed to the United States by the Government of the Russian Federation, and (2) shall instruct the United States representative of the Paris Club of official creditors to use the voice and vote of the United States to oppose rescheduling or forgiveness of any outstanding bilateral debt owed by the Government of the Russian Federation, until the President certifies to the Congress that the Government of the Russian Federation has ceased all its operations at, removed all personnel from, and permanently closed the intelligence facility at Lourdes, Cuba.

(b)(1) ... The president may waive the application of subsection (a)(1) with respect to rescheduling of outstanding bilateral debt if, not less than 10 days before the waiver is to take effect, the President determines and certifies in writing to the Committee on International Relations of the House of Representatives and the Committee on Foreign Relations of the Senate that-(A) such waiver is necessary to the national interests of the United States; and (B) the Government of the Russian Federation is substantially in compliance with multilateral and bilateral nonproliferation and arms limitation agreements. ...

(b)(2) ... If the President waives the application of subsection (a)(1) pursuant to paragraph (1), the President shall include in the written certification under paragraph (1) a detailed description of the facts that support the determination to waive the application of subsection (a)(1).

... If the President considers it appropriate, the written certification under paragraph (1), or appropriate parts thereof, may be submitted in classified form.

... The President shall, every 180 days after the transmission of the written certification under subsection (b)(1), prepare and transmit to the Committee on International Relations of the House of Representatives and the Committee on Foreign Relations of the Senate a report that contains a description of the extent to which the requirements of subparagraphs (A) and (B) of subsection (b)(1) are being met.

The United States's choice between debt rescheduling or forgiveness on Paris Club debt may turn on whether it is perceived as an economic or political decision, or both. In either case, Russian progress toward a democratic government with a functioning market economy will be crucial. Economically, the United States may decide that Russia, with the current economic upsurge and serious steps toward structural reform, will accumulate enough foreign exchange reserves to sustain the current or restructured levels of debt servicing without debt forgiveness. Or the United States may decide that structural reform to be successful may require more expenditures for introducing market reform, meeting needs of social welfare, and managing appropriate military expenditures that require debt forgiveness to reduce the debt burden. Politically, the United States may decide that current progress on arms control in START II and START III, cooperation in Kosovo and elsewhere is managed sufficiently well without any debt forgiveness. Or, the United States may decide that each criteria controlling our assistance in arms control, arms sales, foreign policy issues such as Russian trade and investment with rogue states all require special legislation and agreement that must be monitored to accompany or bar debt relief. In addition to the specific linkages, the United States may tie debt relief to an over-arching agreement on missile policy possibly including acceptance of U.S. National Missile Defense (NMD) and a revised Antiballistic Missile (ADM) treaty. The United States could even look for a "grand compromise" as a part of a debt forgiveness process with no debt relief for Russia from either forgiveness or restructuring as an outcome if negotiations fail.

Glossary

PARIS CLUB is an ad hoc group of creditor nations that meets in Paris with debtor countries that are in a condition of default or imminent default to negotiate rescheduling of outstanding debt and that have approved programs with the International Monetary Fund. There are currently eighteen countries in the Club including all members of the G-8. Staff is provided to the Club by the French Ministry of Finance. The Paris Club Advisory Committee makes recommendations for a multilateral policy on bilateral debt settlements. Debt relief is formally provided by bilateral agreements between each creditor and debtor country.

LONDON CLUB is a parallel group of commercial banks that meets in London to negotiate rescheduling of outstanding commercial debt of countries in a condition of imminent default. After agreement on the multilateral rescheduling, each creditor bank may enter a bilateral agreement with the principal obligator bank in the debtor country.

Footnotes

1. ^(back)Russia-IMF Agreement, July 1999.

2. ^(back) Michael Marrese, International Fixed Income Research Report of Chase Manhattan Bank, London, December 1998. (Hereafter cited as Chase Report.)

3. ^(back)Chase Report, March 2000.

4. ^(back)ITAR-TASS, February 15, 2000

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