Russian debt: under control now, but for how long?

The news spotlight on alleged Russian spy Robert Hanssen shifted quickly this month to the spy-plane standoff with China. But Russia will be back, perhaps soon, demanding attention in Washington.

After all, the country is difficult to ignore. Russia is the only country with the nuclear power to devastate the United States. It has the world's most powerful military after the US. It has troops in Bosnia and Kosovo. It has one-seventh of the world's land mass, with borders to several European nations, China, Japan, and Turkey.

And it owes $150 billion to foreign banks and nations.

Russia was considered close to being an economic basket case after adding to an international financial crisis in 1998 by defaulting on domestic debt and devaluing the ruble.

But today, the Russian economy is doing much better. It has benefited from high oil and natural-gas prices. The ruble devaluation has made imports expensive and thereby encouraged domestic production of goods.

Last year, the nation's output of goods and services grew 8 percent after inflation - at least a 20-year record.

This year, the Russian economy is growing at an annual rate of about 3.5 to 4 percent, says Ben Slay, an expert on Russia with PlanEcon Inc., a Washington consulting firm.

That's quite decent.

Moreover, Russia is servicing its foreign debt. The ruble has strengthened a little. Russia has foreign exchange reserves of $30 billion. The budget is in good shape, partly because of improvements in tax collection. And President Vladimir Putin has some control of the political situation. He remains popular - though is seen as trying to remain so by muzzling the only independent, nongovernment TV network.

With much of the Russia's economic activity not reported to the authorities, estimates of its size vary. If the domestic purchasing power of the ruble is considered, the gross domestic product of Russia was about $720 billion last year, Mr. Slay says. That compares with the $10 trillion GDP of the US.

Though real household income rose 10 percent last year, most Russians remain poor.

Paying off its foreign debts stands as a challenge for an economy this size. With booming oil revenues, servicing the debt is manageable this year. Interest payments amount to $7 billion - a large chunk compared to a federation budget of $40 billion. Russia has even told the International Monetary Fund that it needs no help at the moment.

But in 2003, servicing the debt will cost the Russian treasury about $19 billion. That could be an issue not only in Moscow but in Washington and Berlin.

Russia owes Western governments some $42 billion, about half to Germany. A total of $78 billion of debt was piled up by the Soviet Union as its economic failure worsened under Mikhail Gorbachev (1985 to 1991).

Many Russians feel the nation was taken advantage of by the West at a time of financial ineptitude. "They were completely inexperienced," says Leon Aron, a senior fellow at the American Enterprise Institute.

So far, Western governments have refused to write down debt, despite pleas from Russia. The Bush administration will have to deal with that issue. But it may be inclined to be hard-nosed.

Slay fears that American policy with Russia will become "all hard ball, no soft ball." And it won't do much to encourage the development of democracy and free enterprise in that nation.

"The new administration hasn't got all its ducks in a row yet," he says, adding that no one has stepped in to reconcile and settle differing policy views on how to deal with Russia.

The Defense Department, under Secretary Donald Rumsfeld, tends to be Reaganesque - hard line. It criticizes Moscow for selling arms to "rogue" states, such as Iran.

The State Department, under Secretary Colin Powell, tells Russia the US wants to be engaged in its transformation from a rigid communist society to a Western-style democracy. But it doesn't want to be as involved as the Clinton administration was.

Mr. Aron expresses concern that the "tough and realistic" policy proclaimed by Bush policymakers will mean "reducing our relationship to Russia to a minimum. They will do what this administration knows best, which is arms control and real politik."

Aron cautions that handling of Russia's debt has become a battleground in Moscow between politicians representing the "new Russia" and the Communist political remnants.

There would hardly be a greater goal for US foreign policy, he adds, than encouraging a democratic, capitalist Russia.

(c) Copyright 2001. The Christian Science Monitor