According to Kommersant, Russia made the last payment of its $15 billion early debt redemption to the Paris Club of Creditor Nations just a week ago (it intends to prepay another $6 billion in loans). The minister's new proposal is particularly addressed to the London Club of Commercial Creditors. Kudrin promised to clarify the figures involved by the end of 2005.
On July 1, 2005, Russia's foreign debt stood at $107.6 billion. Debt servicing is very expensive and the 2005 budget set aside about $8.5 billion for interest payments.
Under the 2000 debt restructuring agreement secured by former Russian premier Mikhail Kasyanov with the London Club, commercial creditors wrote 36.5% off the $25 billion principal debt and 6.8% off the interest, and extended the payment term of the remaining $20.4 billion to 30 years. Russia agreed to pay 2.26% in interest on principal for the first seven-year period, which expires in 2006, instead of the previous 7.5%. But from 2007, Russia will pay 5% in annual interest. Therefore, Russia will have to return $40 billion instead of $25 billion to the Western banks.
The current situation favors Russia's paying off its debt to the London club as soon as possible and saving on interest. The Finance Ministry is considering what to do with a windfall from oil revenues and does not want to inject extra money into the economy for fear of encouraging inflation. According to Finance Ministry forecasts, the Stabilization Fund of Russia, which receives revenue from petrodollars, will total $50 billion at the end of 2005 and $80 billion at the end for 2006.
A source in the Finance Ministry told Kommersant that it was not a problem for Russia to pay its debt early. The problem was that creditors were not enthusiastic about being paid back because they would lose the interest owed by a top class sovereign borrower.
A similar situation emerged in early 2005, when creditors also demanded extra payments from Russia for early debt redemption on the eve of talks with the Paris Club.
