54 PROBLEMS OF ECONOMIC TRANSITION

Problems of Economic Transition, vol. 45, no. 1, May 2002, pp. 54–85.
© 2002 M.E. Sharpe, Inc. All rights reserved.
ISSN 1061–1991/2002 $9.50 + 0.00.

N.A. CHEBOTAREVA

The Structure of State Debt

in Long-Term Perspective

[ABSTRACT]: For the majority of the most highly developed

economies (excluding Italy and Belgium from the countries of
Western Europe), state debt does not exceed 65 percent of GDP.
State debt denominated in foreign currency for the countries of
Western Europe that have the maximum credit ratings is insignifi-
cant. The existence of debt denominated in foreign currencies en-
tails exchange rate risks. Most European governments are plan-
ning to limit budgetary financing to euro borrowings in the next
five to ten years, while making insignificant currency borrowings
in order to preserve access to markets oriented toward the dollar
and the yen.
As of January 1, 2000, the state debt of the Russian Federation
(RF) totaled 105 percent of GDP. Ruble-denominated debt was
only 13 percent of GDP, while foreign (currency) debt was 92 per-
cent of GDP. This structure was the result of the devaluation of the
ruble in 1998, which increased the ruble equivalent of foreign debt
by a factor of 4.5, along with the inflation that devalued domestic

English translation © 2002 by M.E. Sharpe, Inc. Translated from the Russian
text © 2000, “Struktura gosudarstevennogo dolga v dolgosrochnoi perspective.”
This is a working paper of the Russian Finance Ministry’s Economic Expert
Group, available at www.eeg.ru/DOWNLOADS/PUBLICATIONS/p12a.pdf.
The author is affiliated with the Economic Expert Group of the Russian Fed-
eration Ministry of Finance.
54
 MAY 2002 55

debt following the August 1998 financial crisis. Domestic debt to-
taled 20.2 percent of GDP at the end of 1997, while foreign cur-
rency debt was 32.4 percent of GDP.
The transition from emission financing of fiscal deficits to bor-
rowing on the domestic securities market was the defining factor
for changes in the structure of Russia’s state debt. Whereas in 1993
Central Bank lending to the government made up 80 percent of
state domestic debt, this share had declined to 16 percent in 1996
as a result of the devaluation of old debt and new borrowing. In
1997 it dropped to zero as a result of the sequestration of debt
owed to the Central Bank. The proportion of securities in domes-
tic RF debt rose from 2 percent in 1993 to 90 percent in 1997, and
did not decline afterward.
The tight monetary and credit policies introduced in 1995 re-
sulted in drastic declines in inflation and sharply higher real in-
terest rates. The inefficiency of the Russian banking system and
large budget deficits also kept interest rates high level and pro-
moted short-term borrowing. Although the amount of domestic debt
was not excessive—the debt on the state short-term bonds/federal
loan bonds [GKO-OFZs] was just 17.6 percent of GDP—the ma-
turity structure of domestic debt was characterized by a concen-
tration of significant amounts of repayment in less than one year.
The payment schedule at the beginning of 1997 already envisioned
spending for servicing and repaying GKO-OFZs at levels compa-
rable to budget revenues. The forced restructuring of GKO-OFZ
debt introduced in August 1998 radically improved the maturity
structure of domestic debt and reduced interest expenses starting
in 1999, with other components of domestic debt remaining virtu-
ally unchanged.
The foreign debt of the former Soviet Union (by and large me-
dium- and short-term), which was inherited by the Russian Fed-
eration, exceeded $90 billion. In 1991–92, the Russian Federation
started negotiations with the London and Paris Clubs of lenders to
restructure these debts. The maturity structure of state foreign debt
improved markedly as a result of the restructurings that were ne-
gotiated during 1996–97. The problem in the case of Russia’s for-
56 PROBLEMS OF ECONOMIC TRANSITION

eign debt was not the payment schedule, but rather excessive
amounts of the debt. Despite the fact that Russia’s foreign cur-
rency debt was only 32 percent of GDP at the end of 1997, the
ratio of all state debt to federal budget revenues exceeded 500
percent in that year.
The share of new debt in domestic debt increased as a result of
new foreign borrowing, particularly in 1998, when the govern-
ment attempted to replace domestic debt with foreign debt owing
to the high domestic interest rates. Foreign debt rose by more than
$20 billion in 1998, due to the placement of Eurobonds on the
market, the conversion of some GKO debt into Eurobonds, and
borrowings from international financial organizations. Debts ac-
quired since the Soviet collapse were approximately one-third of
all foreign debt as of January 1, 2000, with Eurobonds accounting
for 10 percent of foreign debt.
In order to get an idea of the subsequent dynamics of RF state
debt, we made illustrative calculations using the long-term fore-
casting model developed by the Economic Expert Group [EEG] of
Russia’s Ministry of Finance. Four different borrowing strategies
were simulated—domestic borrowing alone, foreign borrowing from
international financial organizations alone, foreign borrowing on
international capital markets alone, and limited foreign borrowing
while raising the rest of the financing in the domestic market. It was
assumed that the budget would remain in balance during 2001–20
(with a surplus in the years of significant debt repayment during
2003–5). The endogenous annual GDP growth rate was assumed to
average 3.5–3.6 percent over that period. There was a gradual rise
in the real exchange rate to approximately 85–89 percent of the
1997 level by the year 2015 in all four simulations, to be followed
by a slight decline in the real exchange rate to roughly 82–83 per-
cent of the 1997 level.
These calculations showed that, if the budget remains balanced
(with a surplus in the years of peak debt repayment), and with an-
nual GDP growth of 3.5 percent, the state debt of the Russian Fed-
eration remains on a steady trajectory under any borrowing strategy.
In the next few years, state debt will decline as a percentage of
 MAY 2002 57

GDP due to the ruble’s real appreciation and GDP growth, pro-
vided the budget remains in balance. The importance of foreign
currency-denominated debt will decline as the ruble strengthens.
But even in the event of zero foreign borrowings from 2001 through
2015, foreign debt will not drop below 50 percent of state debt.
In the event of financing through the placement of Eurobonds,
adjusted debt service costs will be 20 percent higher than in the
event of borrowings from international financial organizations.
Finally, sweeping foreign borrowings will lead to an acceler-
ated strengthening of the ruble exchange rate through an increased
supply of foreign currency.
These calculations suggest that the optimal strategy from the
standpoint of minimizing the long-run ratio of state debt to GDP
is the refinancing of debt through domestic borrowing. But from
the standpoint of minimizing debt-service costs, refinancing the
debt through borrowing from international financial organizations
is the optimal strategy. It is obvious, however, that the second strat-
egy is hardly feasible in pure form. Moreover, these calculations
are based on favorable assumptions regarding interest rates on
the domestic securities market relative to the Eurobond market.
The best possible borrowing strategies therefore presume moder-
ate foreign borrowing (primarily from international financial
organizations), while raising the rest of the necessary funds on the
domestic debt market.
The policy of balanced budgets and domestic borrowing just to
cover cash shortfalls would increase the share of domestic secu-
rities in total debt. The shares of state guarantees, notes, and debts
of the Soviet Union and RSFSR would fall with their repayment.
The settlement of the problem of the accounts payable of the fed-
eral budget through their securitization could lead to a one-time
increase in domestic debt and a rise in the share of securities.
More borrowing on the domestic market will also lead to growth
in short-term debt, but this factor should not pose any danger given
the existing amount of domestic debt.
As a result of the repeated restructuring of debt to the London
Club and the restructuring of indebtedness on the third install-
58 PROBLEMS OF ECONOMIC TRANSITION

ment of domestic currency bonds [OVVZs], the amounts of RF

Eurobonds in circulation could double. Their share in foreign debt
could increase to 25 percent by the end of 2001, and will increase
further through new borrowings.

The state debt of developed countries

Information regarding the amounts of state debt and its breakdown

into foreign debt and domestic debt for the most developed coun-
tries can provide a point of reference when analyzing Russia’s
state debt [see Table 1]. State debt does not exceed 65 percent of
GDP for the majority of the most highly developed countries, with
Italy and Belgium the exceptions among the West European coun-
tries. The governments of the European countries have limited
state debt (of an expanded government) to 60 percent of GDP as
one of the criteria for accession to the European Monetary Union.
Nevertheless, by the beginning of 2000 there were only five coun-
tries in the euro zone that explicitly met these expanded govern-
ment debt criteria—Luxembourg, Finland, Ireland, Portugal, and
France [see Table 2].
Table 1 shows that certain countries divide state debt into for-
eign and domestic debt depending on the currency in which the
debt is denominated (national or foreign), while others do so de-
pending on who owns the debt—residents or nonresidents. Foreign
debt in this article will be understood to mean debt denominated in
foreign currency, which corresponds to the practice in the Russian
Federation.
Foreign currency-denominated debt is insignificant for West Eu-
ropean countries with a maximum credit rating (AAA according to
the Fitch-IBCA agency scale). Finland is an exception, with foreign
currency debt of the central government totaling 28 percent of GDP
in mid-1997. So is Belgium, where the foreign currency debt of the
central government totaled 9 percent of GDP in 1998.
The debt of the United States is denominated entirely in dol-
lars, which potentially allows this country to pay off any amount
of its debt through emissions. Countries like Canada, France, Ger-
Table 1

State Debt: International Comparisons

1993 1994 1995 1996 1997 1998 1999

United States
Total, billions of dollars 3,403.80 3,551.70 3,698.70 3,842.10 3,866.50 3,805.70 3,711.90
Domestic debt (held by residents) 2,753.50 2,884.40 2,863.50 2,740.00 2,624.90 2,527.00 2,443.20
Foreign debt (held by nonresidents) 650.30 667.30 835.20 1,102.10 1,241.60 1,278.70 1,268.70
GDP in billions of dollars 6,642.30 7,054.30 7,400.50 7,813.20 8,300.80 8,759.90 9,256.10
Total debt as percent of GDP 51.00 50.00 50.00 49.00 47.00 43.00 40.00
Domestic debt (held by residents) 41.00 41.00 39.00 35.00 32.00 29.00 26.00
Foreign debt (held by nonresidents) 10.00 9.00 11.00 14.00 15.00 15.00 14.00
Germany (central government)
Total, billions of marks 902.70 1,004.20 1,289.80 1,373.10 1,423.70 1,460.90 —
Domestic debt 496.94 610.53 762.27 791.26 758.67 718.44 —
Foreign debt 405.77 393.62 527.54 581.81 665.01 742.45 —
GDP in billions of marks 3,234.70 3,394.30 3,520.50 3,584.60 3,667.20 3,784.40 —
Total debt as percent of GDP 28.00 30.00 37.00 38.00 39.00 39.00 —
Domestic debt 15.00 18.00 22.00 22.00 21.00 19.00 —
Foreign debt 13.00 12.00 15.00 16.00 18.00 20.00 —
MAY 2002
59
 60

Germany (expanded government)

Total debt as percent of GDP 48.00 50.00 58.00 60.00 61.00 61.00 61.00
France (central government)
Total, billions of French francs 2,475.00 2,921.80 3,272.80 3,563.90 3,794.60 4,027.70 —
Domestic debt (in national currency) 2,417.10 2,859.20 3,214.20 3,506.80 3,738.20 3,977.90 —
Foreign debt (in foreign currency) 57.90 62.60 58.60 57.10 56.40 49.80 —
GDP in billions of French francs 7,077.10 7,389.70 7,752.40 7,951.40 8,224.90 8,564.70 —
Total debt as percent of GDP 35.00 40.00 42.00 45.00 46.00 47.00 —
Domestic debt (in national currency) 34.00 39.00 41.00 44.00 45.00 46.00 —
Foreign debt (in foreign currency) 1.00 1.00 1.00 1.00 1.00 1.00 —
France (expanded government)
Total debt as percent of GDP 45.00 49.00 53.00 57.00 59.00 59.00 59.00
PROBLEMS OF ECONOMIC TRANSITION

Belgium (central government)

Total debt in Belgian francs 9,596.00 9,973.00 10,149.00 10,311.00 10,487.00 — —
Domestic debt (in national currency) 8,075.90 8,623.70 9,063.40 9,576.70 9,702.80 — —
Foreign debt (in foreign currency) 1,519.90 1,349.50 1,085.30 734.00 784.40 — —
GDP in billions of Belgian francs 7,431.00 7,793.00 8,129.00 8,304.00 8,712.00 9,089.00 —
Total debt as percent of GDP 129.00 128.00 125.00 124.00 120.00 — —
Domestic debt (in national currency) 109.00 111.00 111.00 115.00 111.00 — —
Foreign debt (in foreign currency) 20.00 17.00 13.00 9.00 9.00 — —

Continued on next page

Table 1—Continued

1993 1994 1995 1996 1997 1998 1999

Belgium (expanded government)

Total debt as percent of GDP 135.00 133.00 132.00 128.00 123.00 117.00 114.00
Italy (central government)
Total (lire and other currencies), trillions of lire1,765.501,931.90 2,072.70 2,205.00 2,248.70 2,290.0 —
GDP in trillions of lire 1,563.30 1,653.40 1,787.30 1,896.00 1,974.60 2,057.70 —
Total debt as percent of GDP 113.00 117.00 116.00 116.00 114.00 111.00 —
Italy (expanded government)
Total debt as percent of GDP 119.00 125.00 125.00 122.00 120.00 116.00 115.00
Australia
Total, billions of Australian dollars 79.40 94.10 107.50 115.40 102.80 93.40 —
Domestic debt (in national currency) — — — 114.20 101.60 92.60 —
Foreign debt (in foreign currency) — — — 1.20 1.20 0.80 —
GDP in billions of Australian dollars 438.10 464.10 491.60 521.70 549.30 579.10 610.7
Total debt as percent of GDP 18.00 20.00 22.00 22.00 19.00 16.00 —
Domestic debt (in national currency) — — — 22.00 18.00 16.00 —
Foreign debt (in foreign currency) — — — 0.00 0.00 0.00 —
MAY 2002

Source: International Financial Statistics, May 2000.

61
62 PROBLEMS OF ECONOMIC TRANSITION

Table 2

State Debt of Expanded Government of Countries in the European

Monetary Union (as percent of GDP)

1997 1998 1999

Luxembourg 6.0 6.4 6.2

Finland 54.1 49.0 47.1
Ireland 65.3 55.6 52.4
Portugal 60.3 56.5 56.8
France 59.0 59.3 58.6
Germany 60.9 60.7 61.1
Spain 66.7 64.9 63.5
Netherlands 70.3 67.0 63.8
Austria 63.9 63.5 64.9
Belgium 123.0 117.4 114.4
Italy 119.8 116.3 114.9

Source: Merrill Lynch.

many, Luxembourg, the Netherlands, Japan, Australia, and Great

Britain also hardly ever resort to borrowing in foreign currency to
finance their budget deficits. The existence of foreign currency-
denominated debt entails exchange rate risks. Most European gov-
ernments are planning to limit budget financing to borrowings in
euros in the next five to ten years, making insignificant foreign-
currency borrowings to preserve access to markets oriented to-
ward the dollar and the yen.

The basic risks of debt management

The choice between domestic and foreign

borrowings

In general, the choice between borrowing in foreign versus do-

mestic currency is determined by the factors presented in Table 3.
After the conversion of an overwhelming number of the Euro-
 MAY 2002 63

Table 3

[Factors Determining the Choice Between Borrowings in Foreign

Versus Domestic Currency]

Borrowings in foreign currency Borrowings in national currency

Domestic conditions
Insufficiency of domestic savings and
high interest rates
Government makes foreign borrowings
so as to avoid displacing investments
Interest rates within the country are
higher than abroad
Borrowings in domestic market
make it possible to avoid inflation,
but could displace domestic
investments
The gap between domestic and
world interest rates could
undermine confidence in the
exchange rate and raise the risk
of default

Foreign conditions
The necessity of repaying debts The lack of access to world
in foreign currency capital markets to refinance
foreign debt
The necessity of augmenting currency A low level of international
reserves reserves increases the risk of
default
A low initial volume of foreign debt Significant foreign debt

Possible consequences
A significant amount of foreign debt A significant amount of domestic
threatens the country’s credit rating, debt could make it difficult to carry
creates pressure on international out monetary and credit policy,
reserves, and limits access to which could lead to a rise in
international capital markets at those interest rates, the slowing of
times when the refinancing of debt is economic growth, and the
especially necessary disruption of the intermediary
function of the financial system

pean countries to the European Monetary Union, the number of

hard currencies in which Russian debt is denominated and in which
new borrowing is possible has declined significantly. In the fu-
ture, Russia will have to consider the possibility of borrowing and
debt servicing in U.S. dollars, euros, and SDRs [currency based
on special drawing rights]. The principal portion of Russia’s for-
64 PROBLEMS OF ECONOMIC TRANSITION

eign debt falls into the first two currencies, so Russia carries basic
exchange rate risk against the dollar and the euro.
There are two approaches to managing currency risk when mak-
ing new foreign borrowings—strategic borrowings and ad hoc bor-
rowings in currencies that are “cheap” at a given moment (from
the standpoint of interest rates), with a subsequent swap into the
national currency. The practice of Germany, France, and the Neth-
erlands of borrowing only in euros (with small exceptions predi-
cated upon foreign trading requirements) is one example of a
strategic approach to currency risk. However, this approach is es-
sentially equivalent to borrowing in the national currency as dis-
cussed above.
With regard to the management of Russia’s foreign currency
debt, it would be theoretically correct to hedge the risks of a
strengthening of the currencies in which Russian foreign debt is
denominated relative to the ruble with the aid of swaps and op-
tions. However, the market for derivative instruments in opera-
tions with the Russian ruble is not sufficiently developed, either in
Russia or abroad. The sole instrument for managing the currency
structure of Russian debt and hedging currency risks is still the
choice of the currencies for new borrowing.

Nonresidents on the Russian securities market

The Russian domestic securities market has another specific risk

associated with the ruble’s less than full convertibility: the pres-
ence of nonresidents on the Russian market. Nonresidents held
more than one-third of the market portfolio of ruble securities (more
than 15 percent of domestic debt) in the first half of 2000, and
conducted about 40 percent of the operations on the domestic se-
curities market. The proportion of nonresidents before the finan-
cial crisis of 1998 was approximately the same, and nonresidents
(after the complete liberalization of the conversion terms of in-
vestments) played a leading role in the development of the August
1998 crisis on the GKO-OFZ market.
 MAY 2002 65

Experience has shown that the activities of nonresidents on the

Russian market cannot be effectively regulated over the long run.
At present, opportunities for repatriating funds by nonresidents
are limited to the placement of special issues of GKOs. Under
these conditions the presence of a significant, nonhedged portfo-
lio of nonresidents automatically stabilizes both the GKO-OFZ
and the currency markets. However, these circumstances cannot
remain indefinitely, and the government, under pressure from for-
eign investors, will eventually have to acquiesce to a liberaliza-
tion of the rules for the repatriation of GKO-OFZ investments.
Then both the refinancing and interest rate risks and the risks of a
ruble devaluation will increase many times over.

The interest rate risk

The National Bank of Denmark uses the cost-at-risk method for

managing interest rate risk. Cost-at-risk estimates “the maximum
expected increase in the cost of debt servicing of the central gov-
ernment with a prescribed probability for a certain period of time.”
This methodology estimates the likelihood that interest rates will
be higher or lower than the current market level over a certain
time period (e.g., one year). A probability distribution of interest
expenses is then created. It is compared to the existing level of ex-
penditures for debt servicing so as to assess the maximum expected
level of expenditures for debt servicing and the corresponding in-
crease in interest. Debt managers are supposed to utilize this infor-
mation, along with estimates of changes in duration, to obtain an
idea of the risk associated with a certain portfolio.
This method is used to assess the risks for debt with variable
interest rates as well as to assess the risk of a possible increase in
debt service costs with zero or fixed-rate coupons.
After its magnitude is determined, interest rate risk is hedged
using swaps (the exchange of flows in various instruments, not
affecting the principal amount of the debt). As a rule, a national
lending organization usually acts as the partner of the government
66 PROBLEMS OF ECONOMIC TRANSITION

in swap operations. This entails the appearance of a new risk—

partner risk. Governments try to reduce this risk by limiting the
circle of possible partners in debt operations to banks with a cer-
tain rating (A or AA) and by establishing limits on operations with
certain banks (for example, not more than 20 percent of the amount
of a swap).
The Russian banking system is still not efficient enough to act
as a partner to the Ministry of Finance for swap operations. The
Ministry of Finance has therefore tried to reduce interest rate risk
on the domestic market by increasing the share of bonds with fixed
interest rates (OFZ-PDs) and reducing the share of bonds with
floating interest rates and discount bonds—this policy was pur-
sued in 1997, when the most favorable conditions had taken shape
in the market. Only fixed-rate instruments are placed in the Euro-
bond market. Obviously, this strategic line will continue as confi-
dence in Russian securities is restored.

The risk of refinancing

Turnover periods of bonds are extended in order to minimize

refinancing risk. At the same time, reducing the cost of debt ser-
vicing—the interest rate—is most often the priority when borrow-
ing. The yield curve has a positive slope when there is a well-devel-
oped secondary securities market. Interest rates on short-term debt
prove much more attractive, but short-term debt is more vulner-
able to fluctuations in interest rates. Therefore, the goal of re-
ducing refinancing risk could conflict with the desire to minimize
interest expense in the short run.
According to our estimates, the duration of Russia’s foreign debt
is ten years, the duration of domestic debt (not counting the Cen-
tral Bank portfolio) is about three years, and the overall duration
of Russia’s debt is about nine years. Russia is ahead of all the
European countries in this indicator, as can be seen in the infor-
mation given in Table 4. This duration is the result of several
restructurings of various parts of state debt. In particular, the 1996
 MAY 2002 67

Table 4

Average Duration of State Debt, Years

Country Number of years

Sweden 3.50
Belgium 3.75
Denmark 3.80
Netherlands 4.40
Germany 5.50
Spain 5.50
France 6.30
Great Britain 7.30

Source: Merrill Lynch.

restructuring of Russia’s Paris Club debt made it possible to stretch

out the repayment of debts to official lenders to the former Soviet
Union up to the year 2020. The 2000 restructuring of Russia’s
London Club debt increased the maximum maturity for the repay-
ment of that portion of the debt to 2030. The novation of the GKO-
OFZs, and the reformulation of the government debt to the Central
Bank into long-term OFZs that preceded it in 1997 significantly
increased the duration of domestic debt. Had Russia’s debt been
refinanced through market borrowing, such long durations of the
payment schedule would not have been possible. The maximum
borrowing term in the domestic market was three years and the
maximum term of borrowing in the Eurobond market was twenty
years, but only $500 million was placed in Eurobonds on such
terms. In general, the average term of the Eurobonds that were
placed was about seven years.

The creation of new instruments

Aside from traditional coupon and zero coupon bonds, two other
types of instruments are widespread in the European financial
68 PROBLEMS OF ECONOMIC TRANSITION

markets—strips and indexed bonds. Neither has been used in

Russia.
Strips are bonds that separate the coupons from the debt princi-
pal. Bonds of this type expand the spectrum of possible interest
rate parameters (maturity date, minimum amounts) and increase
market liquidity. The governments of Germany and Great Britain
provide incentives for the separation of state bonds into coupon
payments and debt principal by combining the coupon periods. At
the same time, these bonds have limited dissemination compared
to traditional discount and coupon bonds.
Indexed bonds have become widespread and are even used in
countries with low inflation. The terms of issue of these bonds can
index the coupons and/or debt principal according to the rate of
inflation, the exchange rate of a foreign currency, or the price of
some good. Corporate bonds that are indexed to the dollar have
been issued in Russia since 1999, and indexed state bonds (state
nonmarket loan bonds) even earlier, although they were placed
and continue to be placed privately. The advantage of this type of
bonds from the standpoint of the issuer is in the determination of
the real cost of borrowing, while from the standpoint of the holder,
it is the absence of inflation or exchange rate risk.
Possible increases in the issuance of indexed bonds have been
discussed in Russia for many years. Potential holders of indexed
state bonds include both households and corporate entities that
prefer reliability and long duration for their investments, such as
insurance companies and pension funds. The issuance of state bonds
indexed to consumer prices could stimulate the development of
nonstate pension funds, since their development has been held back
by the lack of long-term low-risk investments. While the issuance
of indexed bonds can promote the structural development of non-
bank financial organizations, from the standpoint of the issuer they
are inferior to traditional domestic-currency bonds in that the en-
tire inflation or exchange rate risk lies with the issuer. In this sense,
indexed bonds can be equated to foreign currency debt, and should
likewise be taken into account when determining the risk of a credit
portfolio.
 MAY 2002 69

State debt and the pension system

Many Western economists have expressed concern about the ag-

ing of the Russian population as reflected in the increased per-
centage of retirees among the population. This accordingly means
growing obligations of the pension system, declines in savings,
and falling labor productivity on a national scale. Therefore a re-
view of state debt along with the obligations of the pension sys-
tem is proposed quite often, because both are cumulative obliga-
tions. The principal risk lies in the possibility that the peaks of
pension payment expenditures and debt refinancing could coin-
cide, causing a sharp rise in interest rates. State debt and pension
obligations should be considered together in order to devise an
even schedule for the repayment of these obligations and to avoid
short-term borrowings where possible.

The amount and structure of state debt of the

Russian Federation

The state debt of the RF government as of January 1, 2000, was

105 percent of GDP, of which domestic (ruble) debt was just 13
percent of GDP, while foreign currency debt was 92 percent of
GDP [see Figure 1]. The ratio of foreign state debt to GDP in-
creased sharply, owing to the real devaluation of the ruble and the
contraction of the GDP as well as extensive foreign borrowing.
The domestic debt (not counting OVVZs) totaled 20.2 percent of
GDP at the end of 1997, while debt in foreign currency was 32.4
percent of GDP.

The evolution of the structure of state domestic

(ruble) debt

The two historically largest components of domestic RF debt are

indebtedness to the RF Central Bank and securities [see Figure 2].
Indebtedness—this category includes the indebtedness of enter-
prises to banks on centralized credit that has not been restructured
70 PROBLEMS OF ECONOMIC TRANSITION

Figure 1. Structure of State Debt as of the End of 1999

Ruble debt

Currency debt

Figure 2. Structure of Domestic Debt

100%
80%
60%
40%
20%
0%
1992 1993 1994 1995 1996 1997 1998 1999

Securities Debt of Soviet Union and RSFSR

Notes Guarantees
Indebtedness

into notes. However, the bulk of this category in 1992–96 was

made up of the indebtedness of the RF government on Central
Bank credit to cover the budget deficits sustained in 1991–94.
Securities—these are the GKOs, OFZs, savings loan bonds,
nonmarket loan bonds, state lottery loan of 1992, and gold certifi-
cates and treasury obligations.
The debt of the Soviet Union and RSFSR includes all ruble loans
placed before 1992.
Guarantees are state guarantees on bank credit to enterprises
and organizations.
 MAY 2002 71

Notes are notes of the RF Ministry of Finance issued as a re-

sult of the restructuring into state obligations of the indebted-
ness of enterprises on centralized credit for the support of the
agro-industrial complex and the Northern Plant, indebtedness
on the formation of a mobilization reserve, and other types of
indebtedness. They have thus been relegated to a separate cat-
egory, rather than being included among securities. These obli-
gations were included in domestic debt when this indebtedness
was restructured.
The change in Russia’s domestic debt structure reflects the
colossal change in the policy for financing the state budget and
monetary and credit policy that occurred in 1994–97. Before
1994, the budget deficit was financed by and large through Cen-
tral Bank credit. Before 1995, government indebtedness to the
Central Bank constituted a large portion of state debt, and the
percentage of indebtedness on Central Bank credit for the fi-
nancing of the budget deficit dropped from 80 percent of state
domestic debt in 1992 to 67 percent in 1994. A further decrease
in this component of state domestic debt also resulted from the
devaluation of the old debt as a result of inflation, and from an
increase in borrowing in the GKO-OFZ market and the reformu-
lation of the remaining Central Bank debt into federal loan bonds
in 1997.
New instruments were introduced concurrently with the restruc-
turing and retiring of the old credit indebtedness. In 1994, the
Ministry of Finance started to issue ruble bonds for the public, and
in 1995, coupon bonds were issued with a variable coupon. The
indebtedness to the Pension Fund to compensate for expenditures
on pension and benefit payments was paid off in 1995, and the
indebtedness on the KamAZ joint-stock company was reformu-
lated into Ministry of Finance notes in 1996. By 1997, the Minis-
try of Finance had essentially gone to normal borrowing practices,
relying on market instruments.
The tight monetary and credit policies introduced in 1995 led to
drastic declines in inflation and sharply higher real interest rates.
72 PROBLEMS OF ECONOMIC TRANSITION

The inefficiency of the Russian banking system also helped keep

interest rates high on short-term borrowing. Borrowing at real in-
terest rates in 1995–97 led to a rapid increase in domestic debt.
Increased state spending in 1996, on the eve of the presidential
elections, played a particularly ruinous role. As a result, even though
the domestic debt was not excessive even by the standards of the
European Monetary Union (the GKO-OFZ debt totaled only 17.6
percent of GDP), the maturity structure of domestic debt was char-
acterized by a concentration of significant amounts of repayment
within one year. The payment schedule at the beginning of 1997
already envisioned the servicing and repayment of the GKO-OFZ
at a level comparable to budget revenues.
The Ministry of Finance realized the threats associated with the
short-term nature of domestic debt, and in 1997 attempted to ex-
tend the terms of borrowing. The market placement of two- and
three-year bonds with fixed interest rates began in July 1997. The
average term of the ruble securities (OFZs) that were placed in
1997 lengthened from eight months in December 1996 to 16 months
in July 1997. Interest rates in the GKO-OFZ market declined to an
absolute minimum in July–September 1997, with the average yields
of ruble obligations during this period at less than 19 percent.
The start of the world financial crisis significantly reduced
Russia’s freedom to maneuver in managing domestic debt. De-
mand for GKOs and OFZs declined, while the volumes of repay-
ment per month remained comparable to budget revenues. The
government and Central Bank initially responded to the changed
market conditions by reducing the maturities and amounts of bor-
rowing in the market, by increasing the placement of long-term
securities to Sberbank [the Savings Bank] and the Central Bank,
and by replacing domestic with foreign borrowing. These mea-
sures helped postpone a default on domestic debt until the sum-
mer of 1998, when interest rates in the domestic market reached
60 percent and continued to rise.
In order to ease the payment schedule on GKOs in July 1998,
the Ministry of Finance came out with an offer for the holders of
 MAY 2002 73

short-term GKOs and OFZs to exchange these securities for Euro-

bonds with maturities in 2005 and 2018. As a result of this opera-
tion, GKOs with a nominal value of 27.5 billion rubles were
exchanged for Eurobonds with a nominal value of $5.9 billion.
There were GKO issues in circulation as of July 1, 1998, totaling
282 billion rubles at nominal value; that is, investors had exchanged
less than 10 percent of the GKOs on hand for Eurobonds. About
half of the operations went to Sberbank.
The logic of exchanging GKOs for Eurobonds is clear—in July
1998, the government and the Bank of Russia still believed it would
be possible to avoid a ruble devaluation by reducing the short-
term debt burden and obtaining a large foreign currency credit
from the International Monetary Fund [IMF]. This can also ex-
plain the high price that was paid to exchange the short-term GKO
debt for Eurobonds. This also means that a devaluation was not
considered to be even remotely possible when the exchange was
conducted.
As a result of the exchange, the amount and structure of domes-
tic debt changed insignificantly—debt declined (from this opera-
tion) by 5 percent, and the share of GKOs in domestic debt dropped
from 50 percent to 45 percent. Foreign debt also increased by ap-
proximately 5 percent, but the amount of Eurobonds in circulation
increased immediately by 70 percent.
The decline in payments on domestic debt in August and Sep-
tember was insignificant, and the suspension of payments on GKO-
OFZs with maturities through December 31, 1999, was announced
on August 17, 1998. This decision was driven by the drop in the
Central Bank’s reserves resulting from the conversion of funds
from the weekly redemption of GKOs and OFZs into foreign ex-
change by both residents and nonresidents. The secondary auc-
tions on GKOs and OFZs were halted by the Central Bank.
Much has been written regarding the restructuring (novation)
of the GKOs and OFZs with maturities through December 31, 1999
[see Figure 3]. This measure radically improved the time structure
of RF domestic debt and reduced interest expenditures starting in
74 PROBLEMS OF ECONOMIC TRANSITION

Figure 3. Graph of Repayment of State Short-Term Bonds and Federal

Loan Bonds Before and After Novation

40
[billions of dollars]

30
20
10
0
August 1998

December 1998

April 1999

August 1999

December 1999

April 2000

August 2000

December 2000

April 2001

August 2001

December 2001

April 2002

August 2002

December 2002

April 2003

August 2003

December 2003
Before novation After novation

1999, while leaving the ratio of securities and other components

of domestic debt virtually unchanged. Debt with an average matu-
rity of less than six months was restructured into three- to five-
year bonds.
Figure 3 does not reflect payments in cash in the course of the
novation, while the repayment of securities issued within the con-
text of restructuring the Central Bank portfolio pertained to later
terms.

The structure of foreign (currency) debt

After the breakup of the Soviet Union, the Russian Federation as

its legal successor assumed the foreign debt of the former Soviet
Union abroad and the debts of the other countries of the Soviet
Union [see Figure 4]. The foreign debt of the former Soviet Union
exceeded $90 billion at the end of 1991. Although obligations of
Soviet debtors—primarily poor developing countries—on paper
exceeded this figure, in practice, most of these debts were unre-
coverable, and the Russian Federation entered the phase of eco-
 MAY 2002 75

Figure 4. Dynamic of State Debt in Foreign Currency

160
[billions of dollars]

140
120
100
80
60
40
20
0
1991 1992 1993 1994 1995 1996 1997 1998 1999

Debt of former Soviet Union, total Debt of Russian

Federation, total

nomic reforms burdened by significant foreign debt. In 1992,

RF foreign debt, including the debt of the former Soviet Union,
totaled more than 200 percent of GDP, including Soviet debt that
was, by and large, medium- and short-term. Such a foreign debt
could not be serviced. The Russian Federation began restructur-
ing negotiations in 1991–92 with commercial and official credi-
tors of the former Soviet Union, the London and Paris Clubs.
Negotiations with the London Club concluded in October 1997
with the signing of a set of documents regarding a long-term
restructuring by Vneshekonombank [the Foreign Economic Bank]
and the Banking Consultative Committee of the London Club.
Russia’s London Club debt principal was restructured into PRIN
debt instruments, which were issued in the amount of $22.1 bil-
lion with maturities up to December 2, 2020. The repayment of
principal was to have been made twice a year starting in 2002.
Russia’s London Club interest obligations were restructured into
IAN bonds worth $6.1 billion with maturities up to December 2,
2015. Payments on the debt principal also started in 2002. Over-
due interest payments to the London Club in the amount of $3
billion were repaid after the deal was completed.
The other significant portion of the debt of the former Soviet
Union—the indebtedness to the Paris Club—was restructured in
April 1996. According to the terms of the restructuring, the re-
payment of the principal, which totaled about $42 billion, was
76 PROBLEMS OF ECONOMIC TRANSITION

stretched out to 2020, making the repayments falling due in 1996–

98 insignificant. This restructuring of the greater portion of Russia’s
former Soviet debt radically improved the time structure of state
foreign debt [see Table 5].
The problem in the case of Russia’s foreign debt is not the pay-
ment schedule (which was valid for domestic debt), but rather the
excessive amount of debt. Despite the fact that the RF foreign
currency debt had not declined in nominal terms before 1999, its
ratio to GDP had declined to 74 percent by the end of 1994, 39
percent by the end of 1995, and 32 percent by the end of 1997 as a
result of the ruble’s real effective appreciation. Russia’s state debt
was close to the criterion for countries of the European Monetary
Union at the end of 1997. The debt of the federal government was
52.5 percent of GDP (while the Maastricht criterion is no more
than 60 percent of GDP for expanded government debt), of which
32.4 percent of GDP fell to foreign debt. The twofold real devalu-
ation of the ruble in 1998 threw Russia back to the 1993 level for
this indicator. Before the crisis, the ratio of foreign debt to exports
was also average by world standards—about 150 percent in 1997.
(By way of comparison, the analogous indicator for developing
markets is about 170 percent on average.) At the same time, the
ratio of state debt to federal budget revenues for 1997 exceeded
500 percent. It may now seem obvious that the full servicing of
such debt was impossible. But in 1997 both investors and govern-
ment representatives expected GDP growth to accelerate tax col-
lection to improve, and they did not consider the debt burden to be
excessive.
The share of debts of the former Soviet Union in the RF foreign
debt has declined consistently as a result of new borrowings by
the Russian Federation. The share of RF debt and all foreign debt
increased especially sharply in 1998, when the government was
pursuing a policy of replacing domestic debt with foreign debt
due to high domestic interest rates. Foreign debt rose by more
than $20 billion over 1998, including by $11.3 billion from the
placement of Eurobonds in the market and the conversion of some
Table 5

Forecast of Foreign Debt Servicing Broken Down by Lenders as of March 1998 (billions of dollars)

March
1998 1999 2000 2001 2002 2003 2004 2005

Debt principal 3.11 7.38 5.86 5.46 4.71 8.21 5.31 4.59
Foreign debt of the RF government 2.77 4.44 4.32 4.30 2.92 2.53 2.80 1.46
Multilateral lenders 1.00 3.42 3.19 1.43 1.54 1.67 1.35 1.23
Bonds — — — 1.00 — — 1.11 —
Official lenders 0.89 0.92 1.12 1.61 1.38 0.86 0.34 0.23
Commercial lenders 0.88 0.10 0.01 0.26 — — — —
Foreign debt of former Soviet Union
assumed by RF government 0.34 2.94 1.54 1.16 1.79 5.68 2.51 3.13
Multilateral lenders — — — — — — — —
Bonds 0.07 1.32 — — — 3.46 — —
Official lenders 0.27 1.62 1.54 1.16 1.42 1.48 1.77 1.93
Commercial lenders — — — — 0.37 0.74 0.74 1.20
MAY 2002
77
 78

Interest payments 6.62 6.49 6.68 6.90 6.98 6.71 6.33 5.84
Foreign debt of the RF government 1.97 1.78 1.55 1.36 1.08 0.94 0.83 0.63
Multilateral lenders 0.96 0.87 0.70 0.57 0.49 0.42 0.34 0.26
Bonds 0.54 0.54 0.54 0.54 0.45 0.45 0.45 0.35
Official lenders 0.40 0.35 0.29 0.23 0.14 0.07 0.04 0.02
Commercial lenders 0.07 0.02 0.02 0.02 — — — —
Foreign debt of former Soviet Union
assumed by RF government 4.66 4.72 5.14 5.55 5.91 5.78 5.51 5.22
Multilateral lenders — — — — — — — —
PROBLEMS OF ECONOMIC TRANSITION

Bonds 0.23 0.23 0.19 0.19 0.19 0.19 0.09 0.09

Official lenders 2.64 2.61 2.84 2.78 2.72 2.63 2.52 2.41
Commercial lenders 1.79 1.88 2.11 2.58 3.00 2.96 2.90 2.72

Total 9.73 13.88 12.54 12.36 11.69 14.93 11.64 10.43

Source: Prospectus for the Issue of Eurobonds, April 27, 1998.

Note: This forecast is not a payment schedule, in that it includes assumptions regarding new borrowings.
 MAY 2002 79

of the GKOs into Eurobonds, while borrowings from the IMF were
$6.7 billion.
The borrowings of the Russian Federation in 1993–98 were in
the medium- and long-term categories. Maturities for most types
of IMF credit were no more than five years, with the average cir-
culation of the Eurobonds placed in 1996–98 at about eight years.
The share of Eurobonds in state foreign debt exceeded 10 percent
at the beginning of 1999. The Eurobond debt has higher status
than other types of foreign debt. Eurobond operations are gov-
erned by international legislation, and the possibility of a cross-
default—the presentation of all issues of Eurobonds for repayment
in the event of a delay in payments on one of them—does exist.
Moreover, interest rates on Eurobonds are higher than on the IMF
credits and the restructured debt of the former Soviet Union.
The twofold real devaluation of the ruble, drop in production,
and decline in tax collection in 1998 and early 1999 made the full
servicing of Russia’s foreign debt impossible. The government
selected the course of attempting to restructure the foreign debt of
the former Soviet Union. The reasons for such a choice are ana-
lyzed in the Survey of Economic Policy in Russia for 1999, in the
chapter “Foreign Debt” written by EEG experts O. Dynnikova
and E. Gurvich. Negotiations with the London and Paris Clubs led
to the achievement of a final agreement with the London Club and
an interim one with the Paris Club. Under the latter, the 1999–
2000 payments (by and large interest) totaling $8 billion were re-
duced to $620 million. The final restructuring of Russia’s obligation
to the Paris Club was postponed.
The terms of the secondary restructuring to the London Club,
made public on February 27 of this year [2000], have already been
discussed repeatedly, for example, in a publication by the Bureau
of Economic Analysis and in an article by E. Mitrofanova [et al.]1
in the journal The Securities Market [Rynok tsennykh bumag].
The PRIN and IAN bonds were exchanged for thirty-year Euro-
bonds with discounts of 37.5 percent and 33 percent. The volume
of the bond issue was $18.4 billion, with a nominal average
80 PROBLEMS OF ECONOMIC TRANSITION

weighted circulation period of 17.5 years and a nominal average

weighted interest rate of 6.4 percent. The discounted value of pay-
ments on the debt to the London Club decreased by 51 percent (in
the estimation of E. Mitrofanova), which is being provided not
only through the writeoff of 36.5 percent of the debt, but also
through a significant reduction in payments in 2001–5 and the
shifting of a large portion of the payments on the debt principal to
2015–24.
Almost simultaneously with the signing of the agreement with
the London Club, the Ministry of Finance published the terms of a
restructuring of the third installment of the OVVZ. These bonds,
at the option of the owner, were exchanged at face value for 1999
state currency loan bonds [OVGVZ] with an average maturity of
eight years and a coupon rate of 3 percent, and/or for federal loan
bonds with a circulation period of four years and annual coupon
rates of 15 percent the first year and 10 percent subsequently. The
nominal value of the foreign currency bonds in an exchange of the
bonds from the third installation of the OVVZ for OFZ-FDs was
converted at the average official exchange rate of the U.S. dollar
for the first work week in November 1999, which was 26.2 rubles
to the dollar.
The Ministry of Finance received applications totaling $470 mil-
lion for the restructuring of the third installment of OVVZs by the
end of the first quarter of 2000. About 94 percent of the third-in-
stallment OVGVZs that were accepted for the novation were ex-
changed for 1999 state currency loan bonds, and 6 percent were
exchanged for federal loan bonds with fixed coupon yields.

Results of modeling the dynamic of state debt in the

long term

Conclusions concerning the structure of state debt and the policy

of state borrowing were set forth in the first two sections. Fore-
casting these trends and giving recommendations for the future is
much more complicated. In order to get an idea of the further evo-
 MAY 2002 81

lution of the structure of RF state debt, we have done some sce-

nario calculations using a model developed by the EEG.
Four variants of borrowing strategy were made—domestic bor-
rowing alone, foreign borrowing from international financial or-
ganizations alone, foreign borrowing in international capital
markets alone, and limited foreign borrowing while raising the
rest of the financing in the domestic market [see Table 6]. It was
assumed in all variations that the budget would remain balanced
in 2001–20 (and be in surplus during the years of significant debt
repayment burdens in 2003–5). The average annual (endogenous)
GDP growth rate in all variants was projected at 3.5–3.6 percent
during this period. In all variants, the real exchange rate rose to
85–89 percent of the 1997 level by 2015, and then declined slightly
to approximately 82–83 percent of the 1997 level. In all variants,
as a source of financing revenues from privatization of $1 billion
annually (nondebt financing) were assumed. Also of no small im-
portance is the fact that, in all of the computational variants, an
average world oil price of about $19 per barrel is assumed.
Calculations show that, under such conditions, RF state debt
remains on a steady trajectory (sustainable path) under any bor-
rowing strategy. True, the model seriously fails to take into ac-
count interactions between the amounts of borrowing and domestic
interest rates, which biases the calculations somewhat toward a fa-
vorable outcome. The following conclusions can nonetheless be
drawn from these hypothetical results.
In the next few years, state debt to GDP will decline in percent-
age terms thanks to the real strengthening of the ruble and GDP
growth. This conclusion seems quite well-founded as long as the
government follows a balanced budget policy. This finding remains
valid as long as annual GDP growth is at 3 percent. Higher domes-
tic interest rates in the next five years do not change the results,
although debt as a percentage of GDP declines more slowly therein.
The share of state debt in foreign currency will decline as a
result of the increased strength of the ruble and the possible bor-
rowing strategy. Given a balanced budget, the refinancing of for-
 82

Table 6

Results of Modeling Various Borrowing Strategies

Foreign and Foreign borrowing from

domestic international financial Placement of Domestic
borrowing organizations Eurobonds borrowing alone

Average growth rate of GDP, percent 3.5 3.6 3.6 3.5

Average real exchange rate of
ruble as percent of 1997 72.1 79.0 76.3 71.9
Adjusted payments for debt servicing
PROBLEMS OF ECONOMIC TRANSITION

(millions of dolars) 2,824.0 2,364.0 2,775.0 2,708.0

State debt in 2020 as percent of GDP 29.0 34.0 34.0 26.0
foreign 16.0 34.0 35.0 13.0
domestic 13.0 0.0 0.0 13.0
Average gross foreign borrowings,
billions of dollars per year 2.7 15.3 15.3 0.0
Average gross domestic borrowings,
as percent of GDP 5.3 1.0 1.0 5.3
 MAY 2002 83

eign and domestic debt through external sources alone is theoreti-

cally possible. But this scenario will require annual gross foreign
borrowings on average equal to $15.3 billion per year in the period
2001–15. In the course of the entire period, the volumes of borrow-
ing will rise. Such a level of borrowing does not seem possible for
Russia, and it significantly increases the refinancing risk. There-
fore, we consider as possible scenarios only those with limited or
zero foreign financing. However, even in the case of zero foreign
borrowing from 2001 through 2015, foreign debt does not drop
below 50 percent of state debt.
Scenarios for foreign borrowing from international financial
organizations and international capital markets alone were calcu-
lated for comparison of the value of debt servicing. In the event of
financing through the placement of Eurobonds, the discounted
value of the debt servicing proves to be 20 percent higher than in
the case of borrowing from the IMF. This is quite a big difference,
which illustrates the fact that we should not forgo financial credit
from the IMF voluntarily.
Finally, the calculations show that large foreign borrowings will
accelerate the ruble’s appreciation by increasing the supply of for-
eign currency. Thus, in the scenario with zero domestic borrow-
ing, the average real ruble exchange rate for 2001–15 ranges from
76 percent to 79 percent of the 1997 level, while with zero for-
eign borrowing the exchange rate is approximately 72 percent of
the 1997 level. This is a rather large difference from the stand-
point of the competitiveness of domestic industry. In fairness, it
should also be noted that the model practically ignores the impact
of displaced investments through state borrowings in the domes-
tic market.
The calculations suggest that the optimal strategy from the stand-
point of minimizing the ratio of state debt to GDP in the long run
is the refinancing of debt through domestic borrowing. But from
the standpoint of minimizing debt service costs, refinancing the
debt through borrowing from international financial organizations
is the optimal strategy. The second strategy obviously is hardly
84 PROBLEMS OF ECONOMIC TRANSITION

feasible in its pure form. Moreover, these calculations were based

on assumptions regarding interest rates on the domestic securities
market and the market for Eurobonds. Therefore, the better of the
possible borrowing strategies presumes moderate foreign borrow-
ing, primarily from international financial organizations, while
raising the rest of the funds necessary to refinance the debt on the
domestic market.
In the medium term, the RF government intends to maintain
balanced budgets and borrow on the domestic market only to cover
cash gaps. This will lead to an increase in the proportion of securi-
ties, while the role of state guarantees, notes, and debts of the Soviet
Union and RSFSR will be reduced with their repayment. Two fac-
tors that could affect the structure of domestic debt in the future
are a resumption of borrowing on the domestic market and a reso-
lution of the problem of the federal budget’s accounts payable.
In 2000, the Ministry of Finance did not need to borrow on the
domestic market for budget financing—the significant surplus, a
result of the high oil prices, growth in the monetization of the
economy, and improved tax collection covered the requirements
for refinancing domestic and foreign debt. The placements of
GKOs in 2000 were aimed at absorbing excess liquidity in the
banking system. The most long-term GKO issues for residents
that were placed at auction in the first half of 2000 had maturi-
ties of four months. Before the placement of medium-term ruble
securities becomes possible, the stages of placing semi-annual,
ten-month, and annual GKO issues are inevitable. This will in-
crease the proportion of short-term debt. The duration of the al-
ready existing debt will decline with time. Thus, by the time the
large domestic borrowing starts for financing the budget, the
maturity breakdown of domestic debt will again be character-
ized by a large share of short-term debt, although, given the ex-
isting amounts of domestic debt, this factor will not pose any
danger.
As of today, a significant portion of the government’s accounts
payable remains unsettled. Until recently, the government’s ac-
 MAY 2002 85

counts payable were included in state debt only at the moment of

official recognition or restructuring (we included them either in
the category of notes or the category of indebtedness). In the fu-
ture, if the problem of accounts payable of the federal budget is
resolved through their securitization, it will change both the struc-
ture of domestic debt and its amount. The indicator of domestic
debt itself considered apart from accounts payable is somewhat
hypothetical.
The supply of RF Eurobonds is likely to increase significantly
as a result of the repeated restructuring of London Club debt and
the restructuring of indebtedness on the third installment of the
OVVZ. The cost of servicing will be 7.5 percent and 8.25 percent
for Eurobonds issued to reformulate the debts to the London Club,
and 3 percent for Eurobonds issued in exchange for the third in-
stallment of the OVVZ. The terms of the restructuring suggest
that the amounts of RF Eurobonds in circulation could double,
and their share in foreign debt will increase to 25 percent by the
end of 2001. According to statements of representatives of the
government, Russia will gain access to the Eurobond market no
later than the end of 2001. Taking into account the increased share
of Eurobonds in the foreign debt of the RF as a result of the restruc-
turing and the results of the modeling, additional borrowings in the
Eurobond market seem to pose more risk than do domestic financ-
ing and borrowing from international organizations.

Note

1. E. Mitrofanova, B. Nazdratenko, and A. Kuz’menko, “Pereoformlenie

zadolzhennosti RF Londonskomu klubu kreditorov v tsifrakh” [The Reformula-
tion of the Indebtedness of the RF to the London Club of Lenders in Figures],
Rynok tsennykh bumag, no. 11, 2000.