As they scramble to keep Russia's financial crisis from worsening, the country's officials and international bankers may have to move toward a restructuring of foreign debt, international banking experts said.
The Russian government announced Thursday that it was adding the New York law firm Cleary, Gottlieb, Steen & Hamilton and investment bank UBS Warburg Dillon Read to debt-restructuring talks led by J.P. Morgan & Co. and Deutsche Bank.
The talks have focused mainly on extending the maturities of an estimated $43 billion of Russian government domestic debt after the devaluation of the ruble and amid related difficulties among Russian banks in meeting their foreign currency obligations. (Meanwhile, the central bank is trying to avert depositor panic. See article on page 5.)
Observers now warn that a restructuring of foreign debt may also be on the horizon.
"I would think the odds are pretty good that there will have to be some restructuring of foreign debt at some point, but we don't know what the terms of that will be," said Raphael Soifer, a banking analyst at Brown Brothers, Harriman & Co.
A broader restructuring, he added, could cover loans to Russian banks, foreign exchange contracts, and the government's foreign debt.
A spokesman for J.P. Morgan in London emphasized that talks "are still informal and mainly involve exchanges of ideas at this point." He stressed that no bank has yet obtained a formal mandate to present a restructuring plan.
Analysts said Russia must proceed cautiously. A unilateral restructuring of ruble-denominated debt could worsen the crisis because a large portion of Russia's domestic government debt is held by foreign banks and investors. Any further loss of confidence in Russia, they added, could trigger a further flight out of Russian financial instruments.
"We're a little concerned about (the government's) ability to distinguish between different types of debt," said Roger Scher, vice president for sovereign ratings at Duff & Phelps Credit Rating Co. "We think there is scope for a further deterioration in their credit."
Citing "significant weaknesses that could lead to problems in debt service," Duff & Phelps earlier this week put Russia under review for a possible downgrading of its already highly speculative B-plus rating.
Monday, Russia allowed the ruble to devalue by as much as one-third and said it intended to restructure all ruble-denominated debt maturing before the end of 1998. The government also imposed a 90-day moratorium on foreign debt payments by Russian commercial banks.
Analysts said any further deterioration in Russia's ability to service debts could have serious implications for U.S. banks and others that have rapidly expanded in the Russian market. The international creditors could be forced into converting loans into longer-term bonds at steep losses.
U.S. banks had a combined $7.68 billion in cross-border and local- country exposure in Russia as of March 31, up 19% from yearend, according to data from Brown Brothers Harriman and the Federal Financial Institutions Examination Council.