Russia made a breakthrough on Monday in its drive to slash its foreign debt by winning German support for a proposal which would also help Berlin out of a budget squeeze. Finance Minister Alexei Kudrin said Russia, with cash piling up in an oil-funded budget stabilisation fund, could repay up to $10 billion next year, mainly to the Paris Club of sovereign lenders. "If we use our entire stabilisation fund surplus to repay debt, then it could be between $7 and $10 billion," Kudrin told a news conference in Moscow.
His comments were quickly followed by a German government source, who confirmed a deal could be struck as soon as January. Russia's offer could net Germany, its largest creditor, $5-$6 billion in 2005, the source told Reuters in Berlin.
"Russia has officially offered ... to repay its Paris Club debt within three years," the official told Reuters in Berlin on condition of anonymity.
German Finance Minister Hans Eichel needs all the cash he can get for his 2005 budget to make his fiscal sums add up.
Estimates of Russia's former-Soviet debt to the 19-member Paris Club vary, with Moscow saying it will be worth $46 billion at the start of 2005. Berlin puts the figure at $25-$30 billion.
Earlier, a Finance Ministry source said Russia would also repay its entire $3.5 billion debt to the International Monetary Fund next year.
Russian Premier Mikhail Fradkov has not yet endorsed Kudrin's debt strategy, however, and the announcement seemed designed to forestall a rearguard action by ministers who would rather spend Russia's growing cash mountain on pet projects.
But President Vladimir Putin strongly backs Kudrin, whose fiscal conservatism has helped Russia recover from its 1998 domestic default and will turn the country into a net creditor this year.
Russia's cabinet will this week discuss how to use the stabilisation fund, which Kudrin said was would top an earlier forecast of 574 billion roubles ($20.3 billion) by the end of the year.
The fund has a floor of 500 billion roubles which can only be spent to cover a budget deficit, and Kudrin wants future surpluses to be spent exclusively on debt redemption.
Investors welcomed the news, especially as Russia has now settled on step-by-step cash repayment of debt, rather than launching a one-off swap into Eurobonds which would have boosted market supply of tradable debt.
Nevertheless Russian Eurobonds were weaker, hurt by the political crisis in neighbouring Ukraine, where mass protests continued in the wake of an inconclusive presidential election.
"The market likes it," said Tim Ash, an emerging markets economist at Bear Stearns in London. "We would have been up but for the Ukraine background."
Talks were continuing on the potential "haircut", or discount for early repayment, that Russia might obtain from the Paris Club in return for early repayment of Soviet-era debts assumed by Moscow, the Russian Finance Ministry source said. Russia would in all probability repay debts in proportion to the amount owed to each Paris Club creditor country, he added.
"We hope to complete talks in January on the principles of a step-by-step early repayment of our debts," the source said.