Chancellor Schroeder is reluctant to concede

Chancellor Gerhard Schroeder plans to stick to his position that there is no need to cancel any of Russia's debts as it is capable of paying, a report in business newspaper Handelsblatt said on Friday.

Hefty debts

Russia owes about $48bn in debts accrued by the Soviet Union to the Paris Club countries, a group of industrialised countries that includes the United States

An estimated $20bn of this is owed to Germany.

Part of Russia's argument all along has been that this debt was built up by a previous regime and they shouldn't be responsible for it.

Altogether, its foreign debt is $148bn.

Russia has already defaulted on this debt twice, once when the Soviet Union collapsed in 1991 and then again in 1998, when the rouble collapsed amid crisis in global financial markets.

But this time around it appears clear the issue is political.

President Vladimir Putin's government hopes to replicate the success they had when they renegotiated their debt with the so-called London club of creditor banks.

Under this agreement, the London club agreed to effectively wipe out more than half of a $31.8bn debt burden dating back to Soviet times.

So far, the Paris Club appears to be less amenable to forgiving that much debt, hence the Russian's willingness to engage in brinkmanship.

Threatening to default is a risk, said Konrad Reuss, sovereign analyst at US rating agency Standard and Poor's, and is likely to make the markets nervous.

"It raises questions about commitment of government to debt service," he said.

Strong hand

But he recognises the current strong position of the Russian government at the negotiating table.

"Obviously with the very buoyant export earnings, they have at the moment, there are no pressing needs to come to an agreement with Western creditors. They are not desperate for funds, that obviously strengthens their position," he said.

In any case, any renegotiation of the debt will not take place until Russia has agreed a programme with the International Monetary Fund (IMF).

Since President Putin came to power a year ago, Russia and the IMF have struggled to agree a programme of reform, which will be a precursor to fresh loans.

The hope had been that these talks would be completed in December. With a deal as yet unsigned, the IMF is now expected to return to Russia at the end of January.

Good and bad

The IMF's messages on the Russian economy have been mixed.

The headline figures are good.

The Treasury's revenues have been boosted by the high price of oil and it enjoys the highest level of official reserves ever.

The current account surplus accounted for about 18% of GDP during the first half of last year, compared with a deficit of 3% of GDP during the first half of 1998.

Last year saw the economy grow an estimated 7% and analysts expect it to grow another 4% in 2001.

Inflation was 20.6%, down from 85.8% the previous year. It is forecast to hit 18% in the year to come.

The drop in the rouble triggered by the 1998 financial crisis has made imports less atttractive than goods made domestically, providing a boost to local manufacturers.

Even the budget is expected to be in balance, with the government planning to spend about $40bn this year, roughly the same as its projected revenues.

But analysts agree with the IMF that Russia could be doing more.

The oil windfall does leave a window of opportunity for Russian politicians to make the infrastructure investments needed following decades of neglect.

But little or no structural reform appears to have been done since 1998, the IMF said.