How to save billions in foreign debt

If Russia reneges on debts incurred by the Soviet Union, can it claim Indian dues contracted in Soviet times, says Swaminathan S Aiyar.

Russia has refused to pay its Soviet-era debts to the Paris Club of government creditors and London Club of commercial creditors. But if Russia reneges on debts incurred by the Soviet Union, can it claim Indian dues contracted in Soviet times? What are the rights of the London and Paris Clubs in this matter? We urgently need a debate on these questions before the proposed visit of President Yeltsin.

Russia is not defaulting in entirety, but what it offers is derisory. Last August it froze payments on bonds maturing before end l999. It now says the holders of frozen” bonds can exchange these for a cocktail of new Russian securities. However, London Club has rejected the offer as too low (it is worth hardly 5 per cent of the debt). In such circumstances, what should India do? Offer Russia a cocktail of Indian securities worth 5 per cent of the original debt? Strike a favourable deal with the London Club?

In a commercial deal, the path ahead would be obvious. A company unable to service its debts can negotiate a deal with creditors on reducing payments. If this fails, creditors can move the courts to seize and liquidate the company’s assets, which include sums owed to the company by others.

If India’s debt to Moscow is viewed as a pure commercial transaction, then India is obliged to repay Russia in full. However, if Russia is unable to negotiate a debt-reduction deal with its creditors, the latter India to make payments to them not to Moscow. Note two debt is not purely commercial: Soviet loans had a definite political component Second, the debt is paid not in cash, but in the form of Indian goods, on condition that they are not diverted by Russia to any other destination. This complicates normal processes in bankruptcy: the London Club wants cash, not Indian tea or spices that can be sold only to Russia.

I think India must renegotiate its debt to Moscow. It cannot do so on purely commercial grounds, but can on political ones. Simultaneously, India should talk to the London Club about the possibility of settling the debt at a fraction of the original sum. India should play off Moscow against the London Club to minimise its own liabilities.

Starting in the 1950s, Soviet credits were designated in roubles, but were repayable in goods exported by India, and trade was designated in rupees. At the time, all exchange rates (including the rupee-rouble rate) were expressed in grammes of old. However, when the world abandoned the gold exchange standard in 1971, India was able depreciate the rupee against other currencies without formally depreciating against gold too. Moscow cried foul. India agreed to a new deal linking the rouble to a basket of western currencies. So whenever the rupee depreciated against western currencies, India’s rupee repayment liability went up correspondingly.

In 1991 the Soviet Union collapsed, and so did the rouble. Suddenly, it became clear that the rupee-rouble agreement was extremely unfair to India. If the rupee depreciated, Moscow gained; but if the rouble depreciated, New Delhi gained nothing.

In my view India should have declared that it would repay .the debt in roubles, the value of which was depreciating fast. Instead, Indian officials negotiated a deal converting the rouble debt into rupee debt What next? I suggest Indian officials should start talking to London Club creditors. Russia has offered them barely 5 cents per dollar owed. If India offers them 15 cents per dollar owed, many western creditors will happy settle, and that will save India billions of dollars. An international legal battle may ensue, in which India needs to play off Russia against the London Club.

This will be opposed by diplomats willing to sacrifice billions to buy friendship. In fact, it is ridiculous for a poor country to try to buy off a former superpower. India needs good relations with Russia; the two countries have mutual interests in arms deals and joint action in the UN. But that is no reason to be soft on Russia on commercial matters.

The US is allied with Japan, the European Union and Canada, yet has constant commercial quarrels with them. Right now the US, is threatening a banana war wml Europe. The US has the most trade disputes of all with Canada, which is part of the North American Free Trade Area. That carries a lesson: commercial disputes reflect the depth of the commercial engagement, not strategic quarrels.

In socialist nations where the state controls trade, trade quarrels are seen as foreign policy quarrels. But not in market economies. So India can strive for a strong Russian relationship and yet be tough in demanding a debt renegotiation.

This will be opposed by many orphans of the cold war who indulge in wishful thinking that bankrupt Russia is a strategic substitute for the extinct USSR. Some confuse paying the Soviet era debt with paying respect to an old ally.

In fact, the Soviet Union is dead, and you cannot pay respect to a corpse. The attitude of some diplomats reminds me of Yogi Berra’s famous non sequitur — “You must go and pay your respects at other people’s funerals, otherwise they won’t come and pay their respect at yours.”

What do you think?