Moscow’s repayment crisis casts gloom over EU-Russia summit

Date: 11/02/1999

By Simon Taylor

EUROPEAN Union officials are chewing their fingernails in the run-up to next week's EU-Russia summit.

Their concern this time is not just over whether Russian President Boris Yeltsin will be well enough to attend the meeting. Far greater anxiety is being sparked by growing doubts over whether Moscow will be able to repay the €15 billion in loan interest it owes this year.

Failure to honour its financial commitments could threaten a new International Monetary Fund (IMF) package which Moscow desperately needs to stay afloat.

This is the worrying backdrop to next Thursday's (18 February) summit between Yeltsin, German Chancellor Gerhard Schröder and European Commission President Jacques Santer in Bonn.

Diplomats say Russia's financial situation will top the agenda at the meeting, with the Union asking for clear indications as to what Moscow plans to do to ensure it continues to receive support from the IMF.

Commission officials are quick to stress that Russia has kept up its repayments on the loans the EU has made this year. But they share the view of many economic analysts that output in Russia's economy will shrink in 1999.

Some financial market experts claim Russia is only weeks away from major defaults which could trigger a new round of devaluations of the rouble. Jürgen Conrad, Russian expert at Deutsche Bank Research in Frankfurt, warns that one of Russia's largest banks, ONEXIM, is unlikely to make its scheduled payments on foreign loans.

He points out that one of the world's largest credit rating agencies, Moody's, which assesses the risk of lending to countries and companies, recently decided that Russia was at risk of “selective default”.

According to Conrad, output in the Russian economy fell by at least 5&percent; last year, with a real chance that when the final figures are released, they could show that the actual drop was even bigger.

Despite Russia's difficulties in meeting its repayments, Conrad argues that it would be disastrous for both Russia and the IMF if Moscow did not get further help to roll over its debts.

Given that failure to get agreement on a new IMF package would threaten a new wave of financial crises on the EU's doorstep, Schröder and Santer will use next week's summit to hammer home the message to Yeltsin that Russia must press ahead with economic reforms, including restructuring its shaky banking sector

“We will ask the Russians to try to solve the external debt issue in a non-controversial way, to re-establish the confidence of the international investment community,” said one senior official.

But according to Conrad, the chances of Russia's parliament agreeing radical reforms are slim. “Economic policy in Russia is unclear and opposed to market reforms,” he said.

Commission officials insist, however, that there are signs of progress, with small improvements in some regulatory areas. They also stress that work with Russia on getting the Partnership and Cooperation Agreement up and running has gathered speed. The PCA is the main instrument for the EU's technical and commercial efforts in Russia.

Trade relations will also feature high on the agenda at next week's summit. Last year's economic crisis and the slump in the rouble has halved EU exports to Russia, with Commission trade experts estimating that the fall in orders has cost the Union a market worth as much as its sales to China.

EU diplomats say the slump in sales has injected greater urgency into discussions with their Russian counterparts about specific trade niggles such as discrimination against imports of alcoholic drinks from the Union and the charges which European airlines have to pay to fly over Siberia.

Russian progress in bringing its technical standards into line with those in the EU will also be discussed. Union officials complain that many of the country's norms differ from international standards and point out that Moscow stands little chance of profiting from an enlarged EU if exporters constantly run into problems over product benchmarks.

The EU will also raise concerns about the safe storage of nuclear waste in the Kole peninsula in north-western Russia.

Efforts to secure a peace deal in Kosovo will also be high on the agenda. EU leaders will try to secure Russian support for intervention on the ground to halt fighting between Serbian forces and Kosovan separatists.