As more information emerges about the proposal to convert some of Russia's debt to Germany into equity stakes in Russian companies, initial shock over the concept appears to be subsiding in Moscow, with even the Communists saying it might have some merit.

German Chancellor Gerhard Schroeder floated the scheme last week at meetings in Berlin with Russian Prime Minister Mikhail Kasyanov, saying it could cover the nearly $20 billion of Russia's $48 billion in Soviet-era debt that is owed to the Paris Club of nations.

There was an initial outcry in Russia, with many fearing that the nation's prime enterprises could be handed over to the Germans, and later to other Paris Club nations.

But official and semi-official statements from the Russian side have subsequently put a different spin on the plan, saying it could in fact lead to further foreign investment in domestic firms and that it wouldn't involve major companies such as Gazprom or power utility UES.

Moreover, Russian experts say, any discussions and negotiations over Russia's debt present opportunities for Moscow to reopen talks with the Paris Club, which would give the country extra time and breathing space to monitor economic developments in 2001.

"This is a piece of luck for the government – being able to enter another round of talks with the Paris Club, even if nothing ever comes of them," said economist Yevgeny Gavrilenkov, director of the Institute for Macroeconomic Research. "Letters would be exchanged, experts would go to work, commissions would be formed. Time would go by. Time that we could use to delay paying."

Schroeder was reluctant to speak in detail about the scheme, and he stressed that no debt would be forgiven. The chancellor's foreign policy adviser, Michael Steiner, told Dow Jones it was "only one of several possibilities for a German-Russia debt accord."

But experts see it as significant that other members of the Paris Club did not reject Schroeder's suggestion out of hand and are showing interest in further discussions. That extra time, they say, would allow Russia to see if its current economic success continues, or if oil prices fall back from record highs, which would help build the case for payment extensions.

"Honestly, in the current situation, it’s difficult for us to explain to creditors why we’re refusing to pay, even though the economy is strong," said First Deputy Finance Minister Alexei Ulyukayev. "But right now, it's impossible to say how Russia's trade balance will shape up next year. We don't know what to expect in six months. It's crucial we delay a bit in order to see how the situation develops."

Observers agree that the German proposal, although still in its raw stages, arrived at just the right moment. Many creditors were looking at the 300 billion rubles ($10.5 billion) in additional budgetary revenues that Russia is pulling in this year and saw no reason for further debt restructuring. Budget 2001, which the government hopes will pass the State Duma lower house of parliament by the end of 2000, makes no mention of payments to the Paris Club.

In concessions to Duma deputies, the government has been setting aside less money than needed for debt payments, even though the next $3 billion bill comes due in February. Furthermore, instead of using this year's additional revenues to create a reserve fund for upcoming debt payments, the government bowed under pressure from the left and increased salaries, pensions and benefits.

However, finance officials insist that none of this means that Russia will go into technical default. Deputy Finance Minister Ulyukayev said he believes that in the worst-case scenario, debt payments would be approved through an amendment to the budget.

"Of course, the way that additional revenues are being split [between debt payments and budget expenditures] means that we need much more money than expected to pay the $150 billion [in debts to all creditors] due next year," he said. "But we will pay in any case, even if our best efforts to convince creditors to ease conditions fail, simply by pushing a special law through parliament. I think deputies will support it at that time when they see that there's no getting around it. They'll realize that we tried but were unable to convince creditors, if it comes to that."

But, so far, the efforts of government economists and diplomats look promising, as the debt-for-equity idea is being given serious attention in Russian financial circles.

"Before reacting, we should take a detailed look at what the plan would mean," cautioned economist Gavrilenkov. "Not many people understand. There is no mechanism, no projects, just a main idea that should be made more concrete."

Officials took a stab at making the idea more acceptable and attempted to assuage fears – mainly of leftist economists and politicians – that Russia was about to sell itself to the West in exchange for its debts.

"The participation of German companies in investment projects and the transfer to these companies of share packets are completely differentthings," Economic Development Minister German Gref argued at the "East-West" economic conference in Moscow. "That kind of collaboration [of German companies in Russian firms] would be interesting for both sides, but it's too early to talk about specific schemes."

A possible scenario described by Oleg Vyugin, a former first deputy finance minister and now vice president of Troika-Dialog – who many consider an "unofficial" government spokesman – appeared to calm some fears. He and others explained it this way: If Russia owed a country, say, $10 million, instead of handing that money directly to the creditor nation, Russia would invest the money into a needy Russian enterprise. The creditor nation would then be given an equivalent stake in that company. That way, officials say, the money would stay within Russia and help build its industry.

The creditor nation could sell that stake to one of its domestic companies. That company, officials say, would want to maximize its investment and would push to make the Russian enterprise as profitable as possible.

"Nobody's talking about transferring part of the government's stakes in companies, but rather about a form of cooperative investing," Vyugin suggested. "In any event, that was the scheme used with other countries. The total of all restructuring ever carried out this way is around $4 billion."

Worded like this, the idea even appeared to find favor with the Communists.

"This is a realistic idea, although it needs some work on the details," said Sergei Glazev, head of the Duma economic policy committee and one of the authors of the Communists' economic program. "As far as I understand it, the idea concerns investment, not a transfer of shares in companies."

Glazev said he was appreciative of the government's need to hold off creditors and, correspondingly, hold off payments. He also saw the possible advantages of the scheme.

"It is a breakthrough that Germany, which holds more than 40 percent of our debt, is prepared to enter talks," he said. "They may be able to convince the remaining Paris Club members to look at this type of investment scheme or to search for other options.

"Russia may gain an investment-based restructuring rather than a postponement," he added. "Money would not be sucked from the budget and could then be spent on domestic debt. Investment in industry would receive a boost as well."

Economist Gavrilenkov said he also thought that Russia would benefit from real investment and from the presence of effective property owners. However, he added that the idea was probably one for the future and that it was probably best if Russia were to simply pay off its debts.

"In the future this could be a good option, but not now," he said. "Right now we have the money and should pay. Shares of Russian companies are too cheap now. They are obviously undervalued, and we just don't know how much they are really worth."