How long can Russia escape default?

By Brian Killen

MOSCOW (Reuters): Russia has been let off the hook by the London Club of commercial creditors, but analysts say the threat of a sovereign debt default will linger for months.

The International Monetary Fund (IMF) may come to the rescue by reaching an agreement with the government on an economic policy program, but the Fund has deep doubts about the 1999 budget draft and a deal would require major compromises.

However, Wednesday's announcement that the London Club had decided not to demand immediate repayment of its debt to Russia because of a missed payment offered some hope that Moscow could avoid the ignominy of bankruptcy.

"The London Club are very smart people, and they are trying to make a virtue out of necessity," Alexander Babian, a partner at CentreInvest Securities, said.

"They understand that by taking this decision they have hopes of getting part of their money back in the foreseeable or unforeseeable future," he added.

"Closing the door has never led to anything good."

The London Club debt holders are still clinging to the hope that Russia might somehow escape the jaws of bankruptcy. The country, with total foreign debt of about US$145 billion, should pay $17.5 billion this year but hopes to pay only $9.5 billion.

An IMF mission on Thursday started talks in Moscow with government and central bank officials. Its conclusions will play a key role not only in securing future IMF financial support but in reaching restructuring deals with other creditors.

Mike Marrese, senior emerging markets economist at Chase Manhattan bank in London, said Russia was not in a position to pay the $23 billion total debt principal to the London Club.

In December, Russia missed a $362 million cash payment on PRINs, which represent restructured principal of ex-Soviet debt, and its offer to pay this in IANs, interest arrears notes, failed to win the required support.

"It was encouraging in the sense that PRIN holders were willing to give the Russian authorities some time to negotiate with them and come up with a strategy in which they will be able to get some part of their money back over time," Marrese said.

Russia's main priority now is to reach an agreement with the IMF. "That's going to take quite a while," Marrese said.

However, one Russian newspaper said the Fund, whose mission is expected to stay in Moscow until early February, was ready to throw a lifeline to the government of Prime Minister Yevgeny Primakov in what it called an act of "ideological heresy".

"The IMF is preparing to take an unprecedented step in its history -- give credits to the Primakov government which has communist economic views," the Nezavisimaya Gazeta daily said, adding that a loan of $1.0-$1.5 billion was being considered.

IMF officials were not immediately available for comment on this, but they have said previously that the size and timing of any new credits would be discussed after the January mission.

Marrese said Russia's next priority after the IMF was the Paris Club of country creditors, whose debt would require an IMF- agreed program in place before it could be restructured.

"Once the Paris Club has been restructured then I believe they'll try to restructure the PRIN debt, and by that time it's likely the IANs will be in default too," Marrese said.

Foreign debt forgiveness is also on Russia's agenda, with both the London and Paris Clubs.

First Deputy Prime Minister Yuri Maslyukov said debt relief could stave off bankruptcy. "Our aim at the negotiations is to agree on a restructure, or even better, a partial debt write- off," he told the Kommersant newspaper on Wednesday.

"We are counting on our partners being realistic, especially the Europeans," he said. "After all, such a big country as Russia, isolated, persecuted and driven into a corner, is not the best prospect for Europe or the USA."