Russia Wants to Repay with Materials

Korea’s efforts to retrieve loans extended to Russia are expected to be challenged despite Russia’s former commitment to cash debt repayment from June 1.

A Russian diplomatic source from Moscow said on May 30, “Russia made an unofficial proposal in which it would repay $700-800 million in defense industry materials, among the outstanding loans of $1.33 billion that Russia owes Korea.”

In September 2003, the Korean government reached an agreement with Russia to cancel $660 million in accrued interest and retrieve the outstanding debt by cash commencing June, 2007. However, the possibility of reclaiming this debt in cash is once more uncertain.

With Russia’s suggestion, criticism and concern have arisen once again over the Korean government’s loan recovery policy and the potential reoccurrence of the failed loan repayment negotiations of four years ago. In 2003, the Korean government proposed tax credits for Korean companies making inroads into Russia’s special economic zone, Nakhodka, in return for partial debt cancellation, but Russia in effect called off the proposal.

Russia insists on paying with materials-

On the eve of the loan repayment date, Russia released a proposal based on the provision of the agreement between Korea and Russia from four years ago.

The agreement contains the following provision: ‘The principle of the loan, due in 2007, will be paid by cash, but if the two parties agree, materials can be used in place of cash.’

Russia appears to be using the debt repayment issue as a channel to sell Russian weapons. Moscow’s military experts say, “Russia earns profits just as large as those earned from the exportation of complete goods, selling parts for Landing Craft Air Cushions and the T-86U - products that were given to Korea in place of cash repayments."

Possibility of a “big deal”-

Russian participants at the Korea-Russia Economic Forum, held in Seoul on May 28 – just four days before the repayment deadline – allegedly strongly supported the establishment of a Korea-Russian logistics joint venture for modernizing North Korea’s outdated railroads.

Observers predict that Russia may push ahead with a so called, “big deal,” in relation to North Korea’s rail roads, while delaying total cash repayment. The potential scenario is that Russia cancels $8 billion that North Korea owes to Russia in return for transferring money for repayment to the North Korea rail roads project.

In addressing the issue, a Korean embassy high-ranking official in Russia said, “Currently, the two parties are exchanging debt re a Korea embassy high-ranking official payment opinions informally and no concrete result has been reached.”

viyonz@donga.com