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December 4, 2000
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Germany and Russia Discuss Debt for Equity Swaps

by Michael S. Bernstam and Alvin Rabushka

In their December 4, 2000, editions, The Wall Street Journal and The New York Times reported on a December 1, 2000, meeting in Berlin between Chancellor Gerhard Schroeder of Germany and Prime Minister Mikhail M. Kasyanov of Russia. The subject was $19 billion of Soviet-era debt that Russia, which inherited a portion of Soviet-era debt, owes to Germany (Russia owes more than $40 billion overall in Soviet-era debt to Western governments). Chancellor Schroeder rejected the idea of debt forgiveness, insisting that Russias debts must be repaid in full.

The New York Times reported that Russia proposed repaying a portion of its debt to Germany by transferring shares in Russian enterprises to the German government. The German government, in turn, would then sell these shares to private German firms. The Wall Street Journal reported that Germany proposed the idea of a debt-for-equity swap, and that Prime Minister Kasyanov regarded the swap idea as a serious step forward. Regardless of which version is correct, the two leaders agreed to set up a working group to explore the proposal. The current market value of Russias three largest oil producers is in the neighborhood of $20 billion. Gazprom alone, the giant natural gas monopoly, has a current market value of about $15 billion. Total market capitalization of Russian equities was reported in The Wall Street Journal at $57 billion. A debt-for-equity swap has the potential to reduce Russian foreign debt and bring in foreign technology and management assistance in Russian industry, which is badly in need of modernization.

The idea of debt-for-equity swaps for Russian enterprises is not new. In our book published in July 1998, Fixing Russias Banks: A Proposal for Growth, we set forth in Chapter 4 the mechanics of debt-for-equity swaps that would restore Russias banks to solvency and permit them to engage in the standard intermediation found in Western market economies that funnels private savings to investors.1 We would encourage the German-Russian working group to study our proposal for debt-for-equity swaps for Russian banks, which are readily applicable to the whole of Russian industry, especially natural resources industries.