Russia’s contradictory debt policies

Russia has pre-paid its debts to its major creditor – the Paris Club of creditor nations. It’s a huge sum: $22.3 billion. Duma Speaker Boris Gryzlov described this as nothing less than “an indisputable victory for the national economy.” But many others see no reason for euphoria.

Russia has pre-paid its debts to its major creditor – the Paris Club of creditor nations. It’s a huge sum: $22.3 billion. Duma Speaker Boris Gryzlov described this as nothing less than “an indisputable victory for the national economy.” But many others see no reason for euphoria.

For some reason, none of our national leaders are asking one simple question: has the money we borrow so easily and repay so readily done Russia any good? How was it spent? This is no idle question.

In 1991, the Cabinet of Ministers of the USSR approved a ministry’s proposal to borrow 212.5 million marks from the AKA consortium of German banks for the purpose of producing buses at the Golitsyn Bus Factory. The loan was delivered to a company called Avtrokon. An Auditing Chamber inspection later found that the company’s documents didn’t say that it was obliged to repay the foreign loan. Avtrokon’s founding capital amounted 100 denominated rubles. Its warehouses contained imported machinery which had not been cleared by customs or even mentioned in any documentation, but had been bought with money from the loan.

Here’s another example. The Fisheries Ministry of the USSR decided to borrow from foreign banks to buy some foreign-built vessels for the Soviet fishing fleet. Using a loan of $1.4 billion, the specially-established Rybkomflot company (registered in Liberia) and more than five offshore companies based in Cyprus built 72 fishing vessels and acquired 15 transport vessels. It took Russian officials until 2000 to discover that all the vessels built at the state’s expense had been sold. And only one of the offshore companies still existed: Bergen Industrials and Fishing Corporation. The rest had vanished. The Russian government was forced to keep repaying their debts for a long time. According to the Auditing Chamber, the state lost up to $700 million from this plan to “modernize the fishing fleet.”

There were many such loans after the break-up of the USSR as well. Remember the famous vanishing $4.8 billion credit from the IMF? It was granted to Russia for the purpose of “stabilizing the financial situation” before the default of 1998. But most of the money ended up in private pockets – including the pockets of some of Russia’s most senior officials.

Now we’re being told that Russia will save about $7.7 billion in interest payments by paying off its debts ahead of schedule. We’re told that the money being paid to the Paris Club consists of petrodollars, which must not be spent within the Russian economy, or inflation will get even worse. We’re told that this responsible behavior will enhance Russia’s credibility abroad.

Yes, the state officials are right: if Russia repays its debts early, it will save money on interest. But why did these loans have such high interest rates (7-8% per annum) in the first place? Why did we agree to such unfavorable terms? The usual interest rates worldwide are 3-4%. The USSR was able to borrow at 2% per annum.

While Russia is pre-paying its debts to the Paris Club, the state’s overall external debt is actually increasing. How can this be? It turns out that Russian banks and enterprises (including some fully or partially state-owned companies) are borrowing abroad. And the federal budget will have to repay their debts.

Dmitri Lvov, researcher: “State officials seem to be unaware that while the state is repaying debts, Russian private companies are borrowing from Western banks at very high interest rates – up to twice as high as the rates at which we’re repaying debts to other countries at the state level. So we’re repaying debts with one hand, while borrowing more money, at a higher cost, with the other hand.”

What’s more, we are too ready to write off debts owned to us by other economies. Count the write-offs: $10 billion for Syria, $4.7 billion for Algeria, $10 billion for Iraq, and potentially $10 billion for Afghanistan. The government announced last month that it will write off a further $700 million owed to Russia by some of the world’s poorest nations. What’s more, the debt write-off mechanisms seem very strange.

Sergei Glaziev, co-chairman of the Motherland (Rodina) faction in the Duma: “In the past, the Russian government made every effort to retrieve money from debtors – but Russia’s present leaders have come up with a completely incredible method of having Algeria repay its debts to Russia with Russian-made goods. Instead of taking money from Algeria, we’ll deliver more goods there, in the hope that this time the Algerian financial authorities will pay. This seems quite absurd. Let’s not forget that Algeria’s debt essentially resulted from deliveries of machine-building sector products, primarily from the Soviet Union. Under the circumstances, the correct policy would be to make Algeria repay its Soviet-era debt – especially since it isn’t a poor country. It’s the leading supplier of natural gas to Europe, so there aren’t even any theoretical grounds for writing off Algeria’s debts. Similarly, we recently wrote off almost $10 billion in debt for the occupation government in Iraq, although that country had never refused to repay its debts. On the contrary, Saddam Hussein always had a policy of repaying Soviet-era debts to Russia in full and with interest. Iraq, a major oil producer, was capable of repaying those debts. We made a similar gift to Syria, with a similar sum written off, although Syria has always been considered a good debtor and has a fairly good financial reputation.”

What is all this: stupidity or deliberate sabotage? Don’t we care about our national wealth? Don’t we care about our children, who will have to live with these new debts? Who’s going to write off debts for them?


The current pre-payments apply to debts of the former USSR. After the Soviet Union collapsed, Russia light-mindedly took on the obligation to repay most of the Soviet Union’s debts (then amounting to $93 billion). In exchange, the other former Soviet republics abandoned any claims to Soviet property abroad, primarily real estate. It was agreed that Russia would repay those billions, with interest, over 20 years.