When Russia and China lend to emerging markets it is as much about politics and soft power as it is about economics. This makes any restructuring process unpredictable, writes Brian Caplen.

Under a Paris Club restructuring an emerging market in default might be offered Houston terms or Naples terms depending on its income level. But in the current environment such a default might not even come to the Paris Club. Once the centre of action in sovereign debt restructuring, the Paris Club of 22 mostly developed country members may find itself increasingly bypassed.

That’s because two leading creditor nations – Russia and China – are showing a penchant for doing things differently. Russia is in the Paris Club but in its $3.15bn restructuring of Venezuelan debt last November it acted independently. This allowed Venezuela to repay other creditors and avoid outright default and kept the country clear of assistance from either the Paris Club or the International Monetary Fund (IMF).

Both Russia and Venezuela are under US sanctions so they may feel some common cause that made agreement easier. China is not a member of the Paris Club but is also a Venezuelan creditor. Russia and China together have lent more than $20bn to the country, and they both have a political agenda in building support in emerging markets.

This makes it tricky to know how they might behave in a default situation in contrast to Paris Club deals that are much more predictable. Nikita Aggarwal, a research associate at Oxford Internet Institute and a former IMF lawyer, says: “International finance is as much about politics as economics. There are soft power considerations. This makes it difficult to predict how China and Russia will handle things as creditors in a default situation.”

For example, when Sri Lanka failed to pay its debts to Chinese state-owned entities in respect of Hambantota port, the facilities were handed over to China on a 99-year lease last December. Whereas Russia’s Venezuela deal looks politically led, this one seems to have a more hard-nosed commercial outcome (although also with a political element as Sri Lanka is key to China’s Belt and Road Initiative).

More light may be thrown on the situation in 2018 with emerging market defaults becoming more likely as interest rates rise and paying back foreign currency loans and bonds proves more of a challenge.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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