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Sun 27 Aug 2006 04:00 AM

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Putin pays off debt as economic clout rises

Russia has finally paid off its Soviet-era debts to the Paris Club of wealthy nations in a dramatic display of the country’s new-found economic clout.

Russia has finally paid off its Soviet-era debts to the Paris Club of wealthy nations in a dramatic display of the country’s new-found economic clout.

The repayment of US$22.5bn that Russia’s Vnesheconombank made last Monday was the largest-ever repayment to the Paris Club of 17 creditor countries.

Analysts said that ratings agencies would upgrade Russia’s sovereign rating after the clearest sign yet of President Putin’s determination to use the soaring value of Russian oil to clean up his country’s reputation on the financial markets.

The move knocked about a third off the country’s foreign debts, which previously stood at US$70bn.

Russia had been due to pay off the debts by 2020, but the sharp rise in the price of oil has engineered a dramatic improvement in the country’s fortunes. That enabled it to bring the repayment forward, at an estimated saving of US$12bn.

Under the terms of a deal agreed in June, Russia also agreed to pay a premium of US$1bn to compensate the creditors for lost interest.

In its budget provisions, Germany, the biggest creditor, had allowed for the debt to be unpaid until 2015.

Mr Putin said: “We used to live with our hand held out for many years ... but now the Russian economy cannot only repay debts but do so ahead of time.”

The Finance Ministry said that the repayment would reduce Russia’s foreign debts as a share of GDP to just 9%. “The early repayment to creditor nations was made possible by growth in the economic and financial might of Russia,” it said.

“Repaying the entire sum . . . will facilitate a strengthening of Russia’s international authority as a state with significant financial reserves and stable borrowing.”

Christopher Green, senior economist at the Moscow Narodny Bank in London, said that the move had political implications as well as making economic sense. “It reflects the emergence of Russia as an economy on to the global stage,” he said.

Russia, the world’s second- largest oil exporter, has enjoyed a marked turnaround in its fortunes since its US$40bn domestic debt default and rouble devaluation in 1998.

At that time the price of oil was below dollars 13 a barrel, compared with nearly dollars 72 a barrel last Monday.

Two years ago, Russia set up a budget stabilisation fund to insulate it against fluctuations in the price of oil.

Over the past year the country has redeemed more than dollars 40billion of debts.

In another sign of strength, the rouble was made fully convertible at the start of July, a full six months ahead of schedule, - in a move which caught many watching experts by surprise.

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