Fears grow as Russia admits debt default

The risk that Russia could be forced into widespread default on its huge foreign debt emerged yesterday after it said it had failed to meet its latest interest payments to western countries.

The Russian finance ministry said Russia had defaulted on debt interest payments to several big western creditor nations since its economic crisis erupted. The payments, due on August 20th, were on its $40 billion (£27 billion) restructured Soviet-era so-called Paris club debt. The admission underlines the growing severity of Russia's financial troubles and marks a deep shift in Moscow's stance towards foreign debt. Russia had pledged it would keep up payments on its debt to foreign governments and commercial banks despite Russian banks' domestic debt moratorium. The payment delay now shifts attention to Russia's Soviet-era debt owed to western commercial banks, with huge interest payments due on December 2nd.

Russia has $26 billion debt to commercial bank creditors that it inherited from the Soviet Union, the so-called London club debt. This commercial bank debt, which was securitised, or converted into bonds, last December, includes some of the world's most heavily traded emerging market debt instruments. A Russian default could have a serious knockon effect for other emerging markets.

Germany Russia's biggest official creditor with around $20 billion in Paris club debt said yesterday it had received only partial payment of a tranche due on August 20th but it insisted this would not affect lending towards Russia. It was convinced Russia would settle fully by the year-end, it said.

Britain, which holds $630 million in Paris club debt, confirmed yesterday it had received only partial payment of interest due at the end of August.

The Russian finance ministry insisted it was honouring new debts of the Russian Federation taken on after 1992 even though it was struggling to meet Soviet-era obligations.