• ACI Russia

08/12/1998 20:39:42 US investors ask if Russia's debt swap was mistake

By Apu Sikri

NEW YORK, Aug 12 (Reuters) - Hindsight, it is said, has 20/20

vision. In that case, Russia's recent $4.1 billion swap of

short-term bills for longer-term dollar debt may have been a big

mistake, according to some investors and analysts here.

The debt exchange provided an easy exit for holders of

short-term Treasury bills, known as GKOs, looking to cut Russian

exposure. At the same time, it dumped another $4 billion in the

dollar bond market at a time when investors were already reeling

under the weight of oversupply.

"The debt swap was kind of a disaster," said Gretchen Rodkey,

sovereign analyst at Bear, Stearns & Co. "It killed the secondary

market, but it did not raise enough money in the primary market"

to buy back the GKOs.

Robert Koenigsberger, portfolio manager at Gramercy Advisors

in New York, added that the debt exchange let "GKO holders, who

were paid 80 percent yields to take on Russia risk, to go scot

free. But it has effectively closed the capital markets for

Russia. It may well have been a huge mistake."

With GKO yields hovering in the prohibitively expensive 140

percent range, Russia may well have to restructure outstanding

GKOs or devalue the rouble, Koenigsberger added.

Russia has not been able to raise money in the domestic bill

market for the past four weeks, and it may well have to

restructure its outstanding stock of GKOs, according to investors

and analysts.

Russian officials said Wednesday the republic would use about

$1 billion of International Monetary Fund monies to pay out on

GKOs coming due. The equivalent of $20 billion in GKOs is coming

due this year and another $14 billion in the first six months of


Russia's Finance Ministry took other steps to preserve foreign

currency reserves. It put a ceiling on foreign currency purchases

by local banks, which helped only to refocus market attention on

the increasing vulnerability of the rouble against other major

currencies, traders said.

Investors contend Russia will need another injection of funds

besides the $22.6 billion provisioned by the IMF.

Also on Wednesday, Russia's benchmark dollar bonds, the PRINs,

declined to an all-time low of 26.

"Russia should be the ward of official creditors and not

market creditors," said Michael Rosborough, portfolio manager at

the Pacific Investment Management Co., which manages $4 billion in

emerging market bonds but has stayed away from Russian debt.

"Russia cannot service debt at 80 percent to 140 percent

yields without fixing its fundamental problems," he said.

Jonathan Schiffer, sovereign analyst at Moody's Investors

Service, said Russia's ability to service short-term debt has

always been a concern with the rating agency.

"We pointed that out in March when we downgraded Russia's

foreign currency rating to Ba3, and we were derided for it. People

said after missing out on Asia, Moody's is being overly cautious

on Russia," he said.

In a release accompanying that downgrade, Moody's said

"rapidly growing domestic debt on the Treasury bill market has

complicated the debt servicing position of the federal government

and has placed increasing pressure on an already-difficult


Moody's subsequently downgraded Russia's foreign currency

rating to B1 in May.

Standard & Poor's, the other leading credit rating agency,

rates Russia at single B-plus.

Investors said the possibility of an additional multilateral

package for Russia to meet its short-term debt obligations cannot

be ruled out. The issue will likely be discussed in a meeting

between Russian officials and U.S. Treasury Undersecretary for

International Affairs David Lipton in Moscow this week, according

to bankers.

Bankers also said they believed informal discussions about

Russia's ability to meet its debt obligations were afoot among the

IMF, the U.S. Treasury, the State Department and Russian Finance

Ministry officials.

Officials at the IMF and the Treasury declined to comment.

Officials at Goldman, Sachs & Co., the investment bank that

arranged the debt swap, were not available to comment.

(( -- N.A. Treasury Desk, 212 859-1562 ))

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