French step up campaign over tsarist bonds

Alexander Livshits, the Russian Deputy Prime Minister, was greeted yesterday in London by the latest stage of a campaign for compensation of French holders of defaulted tsarist bonds.

This ancient historical argument has become an embarrassment for the Russians who were in London drumming up support for the country's first foreign bond issue since the 1917 revolution. It is likely to be for up to $500m (pounds 300m).

The bondholders placed advertisements in the Financial Times warning that a 1992 agreement between France and Russia to recompense them had not been honoured, "which raises questions about [Russia's] ability to fulfill its obligations".

They said they had complained to the credit rating agencies that are assessing Russia's economy.

Mr Livshits acknowledged the importance of a good reception for the new Eurobond to Russia's financial standing abroad.

He said. "The purpose of entering this market is not a short-term goal, it is for the long term. We want from the outset to look respectable and the cost of borrowing is a very important factor for us."

But his aides rejected the request for payments on the tsarist bonds, saying it was between the French holders and their own government. The issue has become bogged down because Russia is making counterclaims against France. Britain settled for modest payments on defaulted tsarist bonds in the1980s.

With tense negotiations under way for the release of the next stage of a $10bn International Monetary Fund loan, which has been held up because of doubts about the Russian economy, Mr Livshits refused to be precise about the amount or the interest rate. But he did reject suggestions that it would be as high as 11 per cent, a penal rate in dollars.

To ease a serious concern among Western investors about Russia's potential for default, Mr Livshits announced that his government had agreed to honour the interest payments on the whole of a $24bn domestic issue of Ministry of Finance bonds, made in 1993 and held by Russians. It was frozen in June.

Large numbers of unissued bonds disappeared from bank vaults in Chechnya during fighting, and the government froze the bond issue when it found it was having to pay interest on far more than should in theory have been in circulation.