East-West Debt is an international company active in asset trading, debt recovery and debt collection of overdue claims on high risk countries. The company has set up a network of specialists, with many years of overseas experience in the recovery of claims, especially in Africa, the Middle East, Eastern Europe, Latin America and South-east Asia.

UN embargo against Iraq continued
The UN Security Council voted in December 1999 to extend the oil-for-food programme for another six months. Iraq rejects any new resolution that aims to resume inspections and does not lead to an end to the embargo.
On 15 December the UN Security Council adopted a new sanctions and weapons inspection regime. The new UN Monitoring, Verification and Inspection Commission (Unmovic) is charged with searching for and destroying Iraq’s chemical, biological and ballistic missile arsenals. Iraq does not want to co-operate. It maintains the weapons have already been destroyed.
As China, France and Russia abstained from voting, Kuwait hopes that these three UN members will do their best to persuade Iraq to start co-operating with the United Nations and with Unmovic.
Like most Arab states, Egypt criticised the UK and US bombing of Iraq in December 1998,but holds to the view that the best way for Iraq to end the sanctions is to comply with UN resolutions.
Meanwhile Iraq’s oil industry continues to be in a lamentable state. Unless the Security Council allows the sale of key spare parts, Iraq’s oil production will drop.
A drop in oil exports could affect humanitarian relief for Iraqis struggling to cope with economic sanctions.

Russia restructures debt
On 28 December 1999 the World Bank awarded a USD 100m loan to Russia. This was the first sign of support by western financial institutions since September, when Russia began its military campaign against rebels in Chechnya.
The loan is part of a package of more than USD 750m destined for restructuring the coal sector. The decision of the World Bank to grant the loan is due to the fact that Russia had met all the conditions and recognised that the conflict in Chechnya had not affected macro-economic stability.
Nevertheless, the US blocked a USD 500m loan guarantee by the national Eximbank to TNK, a Russian oil group. The IMF decided to suspend a second payment in autumn to Russia, indicating further progress is to be made on economic reforms.
The Russian finance minister Kasyanov said that gross domestic product had grown 1.6 per cent in 1999. Annual inflation had worked out far lower than predicted at 36.5 per cent. Budget revenues had been 25 per cent higher than planned. Industrial production was up by 8.1 per cent, as oil companies and machinery producers boosted output after the sharp devaluation of the rouble in August 1998.
However, the military campaign has intensified, pushing up costs more than the government expected. Finance ministry officials have almost no control over how the defence ministry spends its budget. Official statistics do not point to increasing government spending yet or the build-up of arrears. The government continues to reduce arrears. Russia is struggling to meet foreign debt payments this quarter without new international loans. The ministry is trying to cover the budget deficit by additional placement of previously issued bonds.
In February this year a deal was made between Russia and the London Club of creditors to restructure USD 26bn of ex-Soviet trade credits into USD 18.4bn worth of 30 year eurobonds and a 7 year grace period on interest payments. The deal will probably be finalised end of March. 
Russia also wants to negotiate similar levels of forgiveness on its Paris Club obligations.

Getting paid: the dollar vs. ‘soft’ currencies
For companies selling internationally, one of the biggest issues is getting paid – in a hard currency. Currency issues cause headaches for businesses selling internationally.

What is a hard currency?
There is no “official” definition of hard versus soft currency. However, a hard currency is usually distinguished by a few identifying factors:
- The currency is freely convertible in the country of issue for currencies of other countries;
- The currency does not lose large amounts of its value in short periods of time; and
- The convertibility of the currency by nationals of the country of issue is not subject to the approval of local banking and monetary authorities (the process of conversion is more or less automatic).

Who bears the risk?
In an international transaction where one of the parties is based in a hard currency country and the other is located in a soft currency country, the question becomes who bears the risk that the soft currency will fluctuate wildly or will become inconvertible during the transaction.
It is easy for businesses located in the US and in other industrialized countries to require payment in a hard currency, but this is not a total solution.

Why not require payment in dollars of another hard currency?
A simple approach, and one adopted by many, if not most, international companies, is to require payment in a hard currency, usually US dollars or another hard currency. This approach, while easy, ignores a few basic problems:
- The customer based in the soft currency country will bear the risk of a significant devaluation of the currency. If there is a significant devaluation, the customer may default and not be able to meet its obligation.
- Even if there is no devaluation, the customer may face significant changes in the exchange controls and banking regulations of its country. These changes could effectively prohibit the customer from making payments to the seller.
- Competitors may be willing to accept payment in the local currency or provide special terms to the purchaser that help the purchaser to lessen the currency risk.

Why not accept payment in a soft currency?
Why should the seller not consider taking payment in the local, soft currency?
- The seller would bear all of the risk of loss, and this situation is usually intolerable for a company from an industrialized country.
- If local authorities impose exchange controls or requirements on the conversion of the local currency, the local purchaser will be in the best position to address and deal with these concerns. These authorities may have little incentive to make hard currency available or otherwise give approval for the exchange of local currency owned by a multinational seller of goods.

Is there a “Middle of the Road” approach?
A few sophisticated and experienced multinational companies take a long term view to their business with soft currency countries. Their overriding concern is that they have a long term relationship with the country, both in times when the exchange rates and conditions favour payment in local currency and in those times when it does not.
- These companies sometimes “split” the exchange rates with the purchaser.
- They peg the exchange rates to commodity prices or other independent benchmarks.
- They agree to defer payment until such times as the local currency strengthens.

The currency tradeoffs 
Getting paid in dollars
- No currency loss issue for seller.
- All risk of loss transferred to customer.
- Will customer’s soft currency devalue thereby triggering a possible default by customer?
- Will customer be able to get hard currency through its banking system with which to pay?
- What will the competition do?

Getting paid in soft currency
- Seller bears all risk of loss.
- Seller bears the risk that local authorities will not grant Exchange Control approval.
- Hedging the potential currency loss will be difficult, if not impossible.
- By accepting currency risk, seller can establish long-term relationship with the country. 

Article by James C. Nobles, Jr. of Nobles & Associates, attorneys at law,Atlanta, Georgia, USA 

East-West Debt News is mailed controlled circulation to financial professionals within multinationals and banks all over the world. We are welcoming contributions on subjects of interest to our readers:  REPLY here.

Brazil’s economic reforms
In January 1999 the Brazilian authorities abandoned their exchange rate policy, sharply devaluing the real against the US dollar. Due to devaluation imports became more expensive. They were reduced to the necessary minimum like raw material and components.
The effects of the actions taken by the Central Bank, the support of the IMF, stabilisation of the level of Brazil’s international reserves and a slow export recovery boosted international confidence. However, the export performance was disappointing. This resulted in a 1999 trade balance deficit of USD 1.5bn. The 1999 current-account deficit is USD 26bn.
The finance ministry argued that Brazil can only set out for sustainable long-term growth by cleaning up the public finances. Priority must be given to the budget targets agreed with the IMF. 
In 1999, for the first time in recent history, the government as met all the fiscal targets agreed with the IMF. There have been considerable doubts in the markets about 2000. The government is expecting revenues to rise by USD 9.5bn because of tax rises and increased economic activity. That means unpopular measures to be taken like a further increase of taxes. Whereas Brazil already has a fiscal burden above the regional average.
After two years of zero growth, the government has promised 4 per cent growth in 2000 and 5 per cent in 2001. To revive the economy it outlined a USD 580bn spending plan over the coming four years. To increase activity, the interest rate needs to fall from its current 19.5 per cent. Therefore progress on the budget cutting reforms is required.  

Ecuador restructuring Brady bonds
On 1 October 1999, Ecuador officially suspended payment on almost half of the interest due on its Brady bonds. These are debt bonds that were introduced by the US Treasury when the debt crisis hit Latin America in the 1980s. Ecuador is the first country to do so. The country is suffering the worst economic crises of its history.
The US and the IMF have publicly backed Ecuador’s efforts to restructure its USD 13bn in foreign debt, around half of which is in the form of Bradys. With the support of the US, Ecuador can renegotiate its USD 1bn of debt outstanding with the Paris Club of creditor nations.
The IMF said that Ecuador is closer to securing a USD 400m stand-by loan after its Congress approved the next year’s budget. The most important element of the budget is that the fiscal deficit is within the limit of 2.5 per cent of the gross domestic product set by the Fund. The budget allocates 54 per cent of total spending to meet foreign debt obligations. The IMF’s stand-by loan programme would release an additional USD 500m in multilateral funds to support Ecuador’s financial sector.
After the military coup in January 2000, army chiefs opted to restore constitutional rule. It was clear that the US and other regional governments would discourage investment to a military regime. US officials had threatened to withdraw aid and oppose a long-awaited IMF loan. This allowed Mr Noboa, the former vice-president, to become Ecuador’s new president. He is Ecuador’s sixth president since 1996. The new president is continuing the process of dollarisation of the currency, helping the sucre recover some ground against the dollar. This is necessary to pull the country back from hyperinflation.  

Budget deficit Saudi Arabia
Saudi Arabia’s public and private sector investment together in 1998 amounted to USD 21.8bn. This is only 16 per cent of gross domestic product. For all developing countries the average investment is 40 per cent higher and more efficient.
Over the past 18 years the economic growth was 0.2 per cent, whereas the annual growth of population came to 1.89 per cent. Over the same period, the annual income per head of population has fallen by 55 per cent. In Asian countries, which have no plentiful oil assets like Saudi Arabia, the income rose 160 per cent.
Saudi Arabia had to borrow overseas to finance the purchase of civilian aircraft. This borrowing of USD 1.94bn now brings the total foreign debt to USD 9bn. Still this is only 7 per cent of GPD.
The actual budget deficit for 1999 is higher than many economist had forecast. Even the increasing oil prices were not enough to bring the current account back into surplus. The deficit went down USD 3,200m to USD 9,066m. The revenues were up USD 1,066m and expenditures down USD 2,133m. For 2000 the deficit is projected at USD 7,466m. 
For 1999 the contribution of the private sector to GPD grew 2 per cent to 38 per cent. Saudi Arabia wants to attract more foreign investors to improve the country’s economic health. Depending on oil causes structural weakness of the economy. More reforms and control to the growth of recurrent expenditure are necessary.

Yugoslavian assets
Since the collapse of Yugoslavia in 1991-1992 Slovenia, Croatia, Bosnia-Herzegovina and Macedonia have been trying to gain control over what they regard as their share of the assets of the former Yugoslavia (some USD 2bn of foreign assets).
The Federal Republic of Yugoslavia (Serbia and Montenegro) insists that it is the unbroken inheritor of the legal status of former Yugoslavia. It maintains that the other four states seceded. 
The four former Yugoslav republics insist that all five countries that emerged have equal legal status. They reached an agreement with the creditors of former Yugoslavia on their agreed share of the country’s debts. This allowed them to gain access to the international capital market.
Meantime talks failed to reach a settlement of the succession dispute.