Oil Profits Help Russia Pay Off Soviet-Era Debt

By Peter Finn
Washington Post Foreign Service
Tuesday, August 22, 2006

MOSCOW, Aug. 21 Eight years after it defaulted on more than $40 billion in debt and slid into financial chaos, Russia transferred $23.7 billion to the Paris Club of creditors Monday, wiping out the last of its Soviet-era debts and underlining the extent to which oil and gas revenue has transformed the country's finances.

The state-owned bank Vnesheconombank transferred the money, including a $1 billion early payment fee. The debt clearance, plus a repayment in 2005, will save the country more than $12 billion in interest payments on debt that was not due until 2020, the Finance Ministry said in a statement.

"The early settlement with creditor countries was possible thanks to the Russian Federation's growing financial and economic might," the ministry said, adding that the payment "would strengthen Russia's international authority."

In May 2005, Russia paid back $15 billion and began negotiating to clear the rest of its debt to the creditor group.

Russia said it was prepared to become one of the 19-member Paris Club's lenders. "We are ready to extend credits to other countries," said Sergei Storchak, deputy finance minister.

In 1998, with oil selling at $14 a barrel, the country defaulted on debts and devalued the ruble. In 1999, Russia's public debt amounted to 96 percent of its gross domestic product. Following Monday's payment, it will fall to 9 percent, officials said.

Russia is now the world's largest exporter of natural gas and the world's second-largest exporter of oil. With prices at historic highs, the country is swimming in cash.

"We used to live with our hand held out for many years," President Vladimir Putin said in an Internet question-and-answer session with Russians last month. "But now the Russian economy can not only repay debts but do so ahead of time."

The ministry statement said the repayment would improve Russia's reputation as an honest borrower and help improve the country's investment climate.

Foreign currency and gold reserves stand at nearly $280 billion, the third largest in the world, and the economy is growing at around 6 percent annually. The government projects a $55 billion budget surplus next year.

The new wealth is particularly visible in Moscow, a veritable boomtown, although large parts of the provinces remain mired in poverty. The government is accelerating its capital and social spending while trying to keep a check on inflation; it has placed $82 billion in a rainy-day account known as the Stabilization Fund.

But some analysts fear that, because the Kremlin is so buoyed by the influx of petrodollars, it has little incentive to foster the kind of political competition and economic diversity that can sustain the country's boom over the long haul should oil prices, or demand for Russian energy, falter.

© 2006 The Washington Post Company