A Roadmap to Collecting on Soviet Debt

By Woody, Kathleen J. | American Banker, February 18, 1992 | Go to article overview

A Roadmap to Collecting on Soviet Debt


Woody, Kathleen J., American Banker


After the Union of Soviet Socialist Republics gave way in December to the Commonwealth of Independent States, debt repayment emerged as a problem that needed quick action.

The main questions are: Who can Western creditors deal with to secure repayment? And to which entities can a lender safely extend new credits?

Such entities are those with sufficient power and taxing authority to guarantee credit repayment. And any entity that's to receive foreign aid would have to know how to put it to proper use.

Power with Former Republics

With the breakup of the Soviet Union, the strongest entities are those operating within each of the new independent states, the former republics.

The Commonwealth of Independent States, formed by some of these republics, is very new and its eventual strength and viability is yet to be determined.

That does nto preclude, however, requests that the Commonwealth guarantee Soviet debt and the debt of former republics as a condition of further aid and credit.

Some Positive Steps

Russia declared that within its borders it was going to take over the banking system, the currency, and foreign trade.

Russia also declared it would allow enterprises to deal in foreign trade more freely by loosening up the USSER export licensing system.

That system required a license from designated government ministries before a good or commodity could be exported. Russia's actions indicated the country was poised to move toward a freer market economy, one capable of eventual debt repayment.

In Pacts with Creditors

Russia and other former Soviet republics have agreements with Western nations that allow them to forgo principal payments this year. A similar deal with major banks expires on March 31, but negotiations continue.

Under the agreements, the former republics agreed to accept joitn and individual responsibility for the debt. Thus if any state should fail to make payments, the others would be liable.

Arguably the new Commonwealth would continue the commitment to paying Soviet debts.

Debt moratorium and further credits should be conditioned upon such commitment. The question of what of debt will be acknowledged by Russia and the other new states will continue to an issue of intense negotiation.

Toward a Market Economy

The chances for maximum repayment depend largely on the extent to which the states of the Commonwealth change over to hard currency, allow ownership of land with the right to freely buy it and sell it, and lift wage and price controls.

These and other changes must be made in order to move from the Communist centralized system to market orientation, to make foreign aid effective, and to make investment and loans a safe and sound credit risk.

In late December, Boris Yeltsin began privatization, including the privatization of collective and state farms, to increase private plots in time for the spring food planting season. Many of the details are still to be worked out.

Enjoyed a High Credit Rating

For years before the precipitous rise in its debt in the late 1980s and early 1990s, the Soviet Union enjoyed a high credit rating in world markets.

Although it was considered a hard and doctrinaire bargainer, the USSR had gained a reputation for repayment of credits on a timely basis.

Some creditors saw the Soviet Union as a particularly secure debtor because of its presumed ability to marshal resources for repayment through its highly centralized economic system.

The Soviet government tightly controlled funds entering and leaving the country and Western creditors thought the government was stable.

Smaller Profit Margin

Consequently, many Western creditors and government officials regulating them felt the Soviet Union's market rate could support credits below the general world-market rates and below the traditional 1% profit margin. …

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