#6038
[Second Issue of the Day]
#9
Financial Times (UK)
24 January 2002
Doubts cast on Russian deal settling Czech debt
By Robert Cottrell and Andrew Jack in Moscow
Investors and politicians are demanding more details of an opaque deal whereby Russian debts to the Czech Republic with a face value of $2.5bn were settled at a huge discount through an obscure intermediary called Falkon Capital.
Falkon bought the rights to the Russian debt last year for about $550m, then agreed to transfer them to UES, the Russia power monopoly, apparently for a similar sum, say people familiar with the transaction.
A complicated series of loans and debt repayments followed, involving other Russian companies, which even some directors of UES admit to not understanding.
Finally, the Russian government acquired the Czech debt from UES, in exchange for writing off debts of $1.35bn that UES owed to the Russian federal budget.
Citing the difference between the $550m paid to the Czechs and the $1.35bn written off by Russia, two US economists, Michael Bernstam and Alvin Rabushka, have called the deal an "electrifying - taxpayers could say 'electrocuting' - switch" of budget money to UES.
They claim that the transaction was one of several arranged by the Russian government late last year to boost nominal tax revenues.
UES was due to hold a meeting with analysts on Thursday to explain its part. It is seeking to play down the immediate impression that it may, in effect, have gained up to $800m, saying the true figure was much less.
"I don't like the deal," said Bill Browder, a leading private investor in UES. "It's not clear who benefited from the transaction, who owns Falkon, and whether there is any connection between the decision-makers."
One question hanging over the deal is why the Czech and Russian governments did not settle the debt directly. On Wednesday the Russian finance ministry was referring inquiries to UES, which said it had legal advice that a direct deal between governments would breach Paris Club rules governing sovereign debt.
However, the Czech Republic is not a member of the Paris Club, and its published rules do not appear to present any obstacles.
According to a person involved in the transaction, the Russian government tied the Czech debt deal with UES to a broader series of transactions involving UES and the federal budget.
UES was required to settle trade debts with other creditors including Gazprom, the country's gas monopoly, and the nuclear power industry, enabling these companies in turn to settle tax debts to the treasury.
"The government did not pay out any cash; it ran the money around, and in the end it may have been owed less in uncollectable debts," summarised one investment manager.
"My biggest concern is not that this is a bad deal for UES but simply that there is so much secrecy surrounding it," said David Herne, a non-executive director of UES on Wednesday. He said the deal had not been discussed by the UES board. Additional reporting by Robert Anderson in Prague
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