What Russia Offered Greece

Alexander Mercouris, http://russia-insider.com/en/business/what-russia-offered-greece/ri8306

Russia’s offer of a pipeline came with an offer of a $5 billion prepayment.  This was intended to buy Greece time to apply for a loan from the BRICS Bank.  However the Greeks don’t seem to be embracing the offer.

...In March 2015 Tsipras went to Moscow and the question of how to help him then came up.

It is a fallacy that Putin can simply click his fingers and give Greece money. Any money Russia gives Greece must come from some source. These are (1) the Russian state budget (2) the National Welfare Fund or (3) as commercial payment for a project. 

Russia’s budget has been approved by the Russian parliament and makes no provision of money for Greece. For that to change the budget would have to be amended, which would require the approval of the Russian parliament. That would be controversial at a time when the budget is in deficit.

Providing money from the National Welfare Fund is equally problematic. The National Welfare Fund is only supposed to invest funds in AAA credit rated securities. Greece, which is bankrupt, doesn’t have such a rating.

In December 2013 the Russians overrode this provision to make a loan of $3 billion to Ukraine out of the National Welfare Fund. Ukraine at that time did not have a AAA credit rating. The Russians have regretted the decision ever since. It is inconceivable that the Russians would be prepared to do the same thing again.

That leaves commercial payment for a project as the one remaining option, and that is what the Russians proposed. 

Though it reverses what the Russians decided when they cancelled South Stream last autumn, what they proposed to Tsipras in March and April was the building of a pipeline across Greece taking gas from the hub. This would have come with a $5 billion prepayment paid out of Gazprom’s financial reserves. Greece could have used that payment to pay this month’s installments to the IMF.

That solution would obviously not have sufficed to help Greece overcome its problems. However it would have provided Greece with a breathing space. It seems that the Russians proposed that Greece use this breathing space to join the BRICS Bank. It could then have negotiated with the BRICS Bank for a loan.

Behind the BRICS Bank stands China with its practically unlimited reserves. A loan from the BRICS Bank — with the knowledge that China, however discreetly, was now involved — would have changed the dynamic of the situation and might by itself have stopped the bank run that has been underway in one form or another in Greece since December.

It goes without saying that the proposal that Greece join the BRICS Bank — which the Russians have made publicly — could only have been made with China’s agreement.

That in essence appears to have been the offer the Russians made to the Greeks.

It is far from certain it would have succeeded. There would have been risks in it for both sides. 

The Russians would have gambled that Greece, unlike Bulgaria, would defy the EU and would press ahead with the pipeline project despite it not being compliant with the Third Energy Package. If this gamble failed and the Greeks, like the Bulgarians, reversed themselves then the Russians would have given Greece $5 billion with nothing to show for it.

It says much for the goodwill the Russians have for Greece that they were prepared to take this risk, which meant reversing the decision they took last autumn to abandon pipeline construction on EU territory.

The Greeks for their part would have gambled that knowledge that Russia and China were involved would force the IMF and EU to restructure Greece’s debt. Without such a restructuring a default is at some point inevitable since the debt at 180% of GDP is obviously unsustainable.  

The IMF and EU might have agreed to such a restructuring rather than permit a default that would have pushed Greece further into Russia’s and China’s embrace. However there is no guarantee of this. It is equally possible that the IMF and EU would have been so incensed by Greece’s turn to Russia and China that they would have continued to refuse a restructuring. In that case there would at some point be a default while Greece in the meantime would have burned its bridges with the EU.

Though accepting the Russian offer would have been a gamble, it is not obvious as I write this that accepting it would have left Greece in a worse position than the one it is in anyway. Reports today suggest that the IMF and EU are continuing to take a very hard line and are refusing a restructuring even though the Russian offer has been essentially rejected.

The problem is that while one part of the Greek government based around the energy ministry seems to have embraced the Russian offer, the other part, based around the finance and foreign ministries, seems determined to reject it. Tsipras seems unable to make his mind up between the two.

The Russian offer is probably still on the table if it is embraced wholeheartedly. As of now that does not seem likely. At the moment it looks like the Greeks will only likely embrace it in the event of a Grexit. Whether at that point the offer will still be there remains to be seen.