Russia’s early debt repayment highlights the country’s growing 　　economic might, fueled by energy exports
　　
　　DRILLING FOR POWER: With numerous oil fields like this one in western Siberia, Russia is able to flex its economic muscle on the international stage
　　Despite Russia’s efforts to optimize its industrial mix, the energy sector still constitutes the bulk of the Russian economy. In recent years, Russia has enjoyed annual economic growth of some 6 percent, three percentage points of which is fueled by energy-related industries, according to Wang Lijiu, an expert with the Institute of Russian Studies at the China Institutes of Contemporary International Relations (CICIR).
　　“With energy prices soaring in the international market, Russia’s oil and gas industries have undergone rapid, stable growth, contributing greatly to the increase in the government’s fiscal revenue,” Wang said in an interview with Beijing Review.
　　And that’s largely the reason why Moscow has been able to repay billions of dollars of debt ahead of schedule, Chinese analysts agreed.
　　
　　Honoring its debts
　　
　　On August 21, Russia fully paid off its Soviet-era debt to the Paris Club of creditor nations. Vnesheconombank, the state-owned bank that acts as Russia’s debt agent, announced that it had made a repayment of $23.8 billion to the Paris Club. About $1.27 billion was paid on schedule, whereas the rest was paid ahead of time.
　　The Russian Finance Ministry hailed the repayments in a statement. “The early repayment to creditor nations was made possible by growth in the economic and financial might of Russia,” the ministry said.
　　According to Wang of the CICIR, when the Soviet Union broke up, Russia inherited a huge sum of debts worth over $180 billion together with its assets overseas. Most of the debts are owed to the Paris Club and the London Club, with the former dealing with government debt and the later dealing with corporate debt. He indicated that while it is difficult for Russia to claim the debts owed to it by many developing countries, it has to honor its own debts.
　　The Paris Club is an informal organization of creditor states handling the settlement of debts of different countries. The association, which has existed since 1956, consists of 19 permanent members. The history of relations between Russia and the Paris Club began almost simultaneously with the collapse of the Soviet Union, when the country’s leadership began rescheduling the debt.
　　According to the Finance Ministry, Russia’s total debt to the Paris Club as of April 1, 2005, was $46.2 billion. The repayment schedule set the year 2020 as a deadline, with 7 percent annual interest.
　　Initial talks on Russia’s early repayment of its debt began in the spring of 2005. The country, which has been enjoying record-high oil export revenues and stashing them away in a so-called Stabilization Fund, decided to repay the debt with windfall oil revenues, thereby saving on interest payments. As most of the debt Russia owed was to Germany, the latter held the talks with the former on behalf of the Paris Club.
　　Russia and Germany reached an agreement in principle in April 2005 and came to an accord in May of that year on early repayment of a $15 billion portion of the debt.
　　Russia began making payments in different currencies on June 11 and finished on August 20 of last year, saving about $6 billion in interest payments. After those payments, Russia’s debt decreased to $28 billion. As a result of planned repayments at the end of 2005 and the beginning of 2006, it decreased to some $22 billion as of May 1, 2006.
　　With new negotiations, an agreement on the repayment of this sum was reached in June. However, this time Russia was forced to accept an agreement under which it would pay about $1 billion in premiums for the ahead-of-schedule payment.
　　On August 15, Russia began repaying this portion of the debt. Savings on interest payments amounted to nearly $8 billion.
　　
　　Economic recovery
　　
　　For the first few years after the collapse of the Soviet Union, Russia, mired in an economic morass, was not able to repay its foreign debts, said Li Xing, a professor of Russian studies at Beijing Normal University. Li told Beijing Review that Russia could hardly make ends meet without debt during the presidency of Boris Yeltsin, making foreign creditors worried that Russia could not even pay the interest.
　　In recent years, however, the Russian economy has improved, with progress made not only in the oil industry but also in iron and steel, metallurgy, munitions and the space industry. While enjoying political stability, the country has posted a trade surplus and at the same time raised people’s living standard, he noted, adding that Russia’s foreign exchange reserves now rank third in the world after China and Japan. All these made it possible for the country to repay the debt ahead of time, the professor said.
　　With the full settlement of the debt to the Paris Club, Russia has repaid 95 percent of the foreign debt left over from the Soviet Union. It is expected to repay the remaining 5 percent of the debt in kind.
　　Experts noted that the early settlement of the debt could bring many benefits to Russia. Apart from saving on interest payments, Li said it helped the country fend off the potential inflation risks derived from maintaining large foreign exchange reserves.
　　It also helped to enhance Russia’s international standing and credit rating, Li said. Impressing foreign creditors with this move, Russia has shown that its economic clout is not to be underestimated.
　　CICIR’s Wang pointed out that with the constant reduction in foreign debt, Russia will have more funds to pump into its economic development and social reform, a trend that is conducive to the government’s active fiscal policy.
　　Li said President Vladimir Putin’s steady economic reform has been essential to improving the Russian economy. He cited some of the policies that helped to boost its treasury-taming the oil oligarchs, nationalizing strategic resources such as oil and natural gas, cracking down on tax evasion and combating corruption.
　　Echoing Li’s views, Wang also underlined the improvement in the Russian economy. Since 1999, when the economy began to recover from stagnation, it has maintained a moderately high rate of growth, he noted. However, the growth is largely driven by the energy sector, he claimed, adding that the other sectors, including the country’s traditionally competitive heavy industry, have not been restored. In addition, he said Russia’s recent efforts to foster the development of emerging industries have yet to bear fruit.
　　As the reform continues, other industries are expected to flourish and play their due role in the Russian economy, said Wang.

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