• ACI Russia

08/27/1998 17:00:05 Investors may sabotage Russia debt restructuring

By Catherine Evans

LONDON, Aug 27 (Reuters) - Disgruntled foreign investors may

attempt to sabotage Russia's forced restructuring of short-term

rouble debt by refusing to exchange GKO and OFZ bonds for new

paper, investment bankers said on Thursday.

They said the restructuring paid investors so little for

defaulted domestic debt that many would rather hold onto their

bonds in the hope that they will be included in any future

negotiated restructuring of Russian debt.

"This isn't an agreement, it's a diktat, so one doesn't know

to what extent people will give (Russia) the two-fingered salute

and say we're not accepting this, we'll stick with our GKOs,"

said a proprietary trader at a major European bank in London.

"All manner of things could happen...The restructuring could

be renegotiated, perhaps."

He estimated losses on the $20 billion of GKOs and OFZs held

by foreign investors at more than $13 billion.

"In fact, that's probably a generous estimate of what the

recovery rate will be," the trader said.

Other emerging markets debt traders were even more negative

on the restructuring.

"You have to value this at zero -- total losses are equal to

outstanding GKOs, which is $43 billion equivalent according to

our figures," said a trader at another European bank.

"You've got a rouble asset that's non-tradable, and you get

five percent cash upfront in your Reg. S account in Moscow that

will be untradable as well. Effectively you can say the loss is

total," he went on.

Russia intends to force investors holding GKOs and OFZs

maturing before the end of 1999 to exchange their debt at par

for new rouble bonds with maturities of three, four and five


The new three-year rouble paper will pay an annual coupon of

30 percent, while the four-year paper will pay 30 percent for

the first three years and 25 percent in year four.

The five-year paper will pay the same rate, stepping down to

20 percent in year five.

Investors swapping their debt into the new rouble bonds will

receive five percent of the nominal value of their old debt in


Russia has also offered investors an option to exchange GKOs

and OFZs into eight-year dollar bonds paying a coupon of just

five percent. Investors who choose the dollar paper will only

receive 20 percent of the nominal value of their rouble debt.

Only the three-year rouble bonds will be tradable, and then

on a limited basis.

"This exchange is worth a few cents in the dollar, no more,

to foreign investors. That being the case, I think a few will

hold onto their GKOs in the hope that will create the legal

momentum needed to claim that the Min Fin bonds are in default,"

said a senior economist at a U.S. bank in London.

Credit Suisse First Boston said in a statement released on

August 19 that its lawyers believed defaulting on the GKOs --

which technically Russia has done -- would trigger a

cross-default on $9.0 billion of Min Fins, fixed-rate dollar

bonds issued by Russia in lieu of frozen dollar accounts held at

the old Soviet foreign trade bank.

Russia has denied that it is the case.

Investors believe that triggering a Min Fin default will

force Russia to negotiate with its bondholders, the economist

said. They hope any agreed settlement would have to include

unexchanged GKOs.

But the economist said he did not believe investors would be

able to force a default on the Min Fins.

"I think they've structured (the GKO restructuring) to avoid

a Min Fin default. Under Russian law, if you get payment it's

not a default and I think they can count this as payment," he


((London Newsroom, +44-171-542 8863, fax +44-171-542 8688,


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