The Russian government Wednesday extended to April 30 its deadline to foreign creditors for accepting its terms to restructure billions of dollars of defaulted debt.
The extension came as commercial and investment banks continued to clash over the terms of Russia's restructuring offer, which had originally been scheduled to expire March 5.
Among foreign creditors, most U.S. and European commercial banks are prepared to accept a payoff of less than 5 cents on the dollar for the Russian securities they hold, banking sources said.
"The cupboard is bare in Russia, so we might as well take what we can get," one commercial banking source said.
But investment banks in the creditor group are balking and are threatening to bring litigation against Russia, sources said. Members of this group, which includes Lehman Brothers and Credit Suisse First Boston, fear they might be sued by customers who lost money investing in Russian securities.
Russia unilaterally defaulted last August on about $12 billion of short- term, ruble-denominated government securities, also known as GKOs. Around half the securities are held by foreign commercial and investment banks, foreign investors, and what is thought to be Russian investors operating through offshore accounts.
The default forced big banks like BankAmerica Corp., Republic New York Corp., and Chase Manhattan Corp. to write off hundreds of millions in losses on their holdings of Russian government securities.
Late last week Deutsche Bank and Chase Manhattan Corp. agreed to accept an offer by Russia to restructure its debt, triggering protests from investment banks opposed to the terms. The protests forced Deutsche Bank to relinquish chairmanship of the 19-member committee responsible for negotiating with the Russian government, creating a leadership vacuum among creditors.
Banking sources said commercial banks believed they had no other option than to accept the Russian offer.
"The Russians have been willing to come to the negotiating table but have few financial resources at their disposal," said Arnab Das, an emerging market analyst at J.P. Morgan & Co.
Meanwhile, sources said that some investment banks want to take legal action and seize Russian assets abroad to recoup some of their losses. Many of these firms purchased Russian securities for their own trading accounts, as well as on behalf of their customers.
The sources stressed, however, that litigation could prove far more damaging to commercial banks-which want to develop long-term business in Russia-than to investment banks, which are believed to have more of a short-term outlook.
"If your interests in Russia are fairly short-term, you're probably going to be inclined to go the litigation route," said one London-based banking source close to the talks.
"If your interest in Russia is longer-term, you're not going to be inclined to litigate."
"Getting involved in litigation could drag on for years," another source added.
At least one commercial bank-Chase Manhattan-purchased some Russian securities for its customers. Though Chase has agreed to Russia's restructuring offer for securities held in its own account, it is still consulting with its customers on their options, a Chase source said.
Russia is prepared to offer a mix of cash and short- and medium-term bonds in exchange for its defaulted debt. Banking sources said they hope to get a broader menu of options from Russia on restructuring the debt, including swapping proceeds from a sale of the securities into Russian equities.
They added that they are also seeking to clarify ways in which holders of the debt might eventually convert the proceeds into hard currency and repatriate their funds.
Sources also said that even if the Russian offer on domestic government securities is accepted, it appears increasingly likely that Russia will have to renegotiate an additional $60 billion worth of Russian debt, including around $30 billion in Soviet-era debt as well as some $16 billion worth of Eurobonds issued after 1991.
"It's clear that the Russians don't have enough dollars to go around for all sets of debt," said Richard Gray, an economist with BankAmerica Corp. in London.
"That means all of Russia's creditors are in competition for a finite amount of dollars."