Russian President Vladimir Putin gave the first hint of its readiness to make advance debt payments to the International Monetary Fund and the Paris Club on November 18, 2004. For months preceding his statement, the Russian government had been stockpiling the sum for debt repayment in the stabilization fund. It got the federal budget revenue from the export duties on oil, whose prices were beating records throughout last year. In one year the stabilization fund has accumulated about $30 billion and the size of accumulations keeps growing. In the face of opposition from top cabinet members, Finance Minister Alexei Kudrin has managed to uphold resources of the stabilization fund from being spent on budget programs and insisted on the need of advanced foreign debt payments.
The talks with the Paris Club began in 2005. Initially, the Russian side hoped not only to pay off debts early but also get an appreciable discount for the initiative. But, the hopes of the Russian negotiators have not come true because creditors, counting on the interest payments, did not only fail to agree to a discount but, according to some information, wanted a bonus for their agreement to the advance payment of the Russian debt. Things were made worse by their lack of a consolidated approach: some of them want cash more than others. However, at that time analysts believed that the Paris Club was not having a position strong enough for bargaining with Russia. Tim Ash of the investment company Bear Sterns told Reuters in February: "It seems a pretty ridiculous thing to say. The best the Paris Club can surely expect is par. The danger is that Russia walks away, looking to use its spare cash in the stabilization fund to buy back other obligations".
Initially, the Russian authorities would like to pay to the Paris Club at least two thirds of the total debt sum, or $30 billion. Debt repayment was expected to be drawn out for at least two or three years. During the recent talks the parties reached a different agreement. Unwilling to lose all the interest payments, creditors agreed to "only" $15 billion, though paid within four months till August. Finance Minister Alexei Kudrin has already told journalists that early repayment of such a big sum will let Russia effect a saving of up to $6 billion. According to him, the initial term of repaying this part of the debt was set for 2020. Saving from the payment of interest during the same period of time is the selfsame $6 billion which can be channeled as state investments into the Russian economy. In addition to the agreement on the $15 billion repayment, Russian negotiators persuaded the creditors not to convert the Russian debt into eurobonds (as Germany did last year with the part of the debt) during 1.5 years. Moreover, creditors may go for an additional agreement on the advanced repayment of another $6-10 billion of the debt.
Although an agreement on the entire sum of the debt which Russia would like to pay off has not been reached, the talks can be called a success. Russia's foreign debt has at a time been reduced by $15 billion and, in the next 2-3 years the federal budget will save $2.25 billion as interest payments. On a middle-term perspective, the saving will come up to $six billion. The 1998 financial crisis and the government-built GKO pyramid have plunged Russia into the abyss of a 40-billion default on foreign and internal debenture. However, a mere seven years later Russia is not only paying off its debts but also doing it in advance.
This great success can increase Russia's sovereign credit rating. Particularly, the Fitch Ratings agency has already announced that the agreement with the Paris Club may seriously improve Russia's rating. A case apart is the victory of Finance Minister Alexei Kudrin, who staked his political capital on using resources of the stabilization fund for writing off foreign debts. Paying off $15 billion to the Paris Club, Kudrin will reliably protect the stabilization fund from encroachments to use it for funding different governmental programs: payments will diminish the fund to almost the emergency-stock level (500 billion rubles or $18 billion). Accordingly, Kudrin can congratulate himself on not only reducing the debt burden but also protecting the Russian economy from an additional inflation pressure, which can be a result of spending resources of the stabilization fund.
