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* Deal brokered behind Paris Club's back
* Japanese accord with Cuba could be model
* Russia not first to break with Paris Club
By Marc Frank
HAVANA, March 14 (Reuters) - Russia's agreement to settle a debt squabble with Cuba over $25 billion owed the former Soviet Union has caused concern among other Cuban creditors grouped in the Paris Club, Western diplomats said this week.
The accord, signed late last month during a visit by Russian Federation Prime Minister Dmitry Medvedev, said the parties had come up with a formula to end the dispute and would sign final papers by 2014, although any deal still needs approval from the Duma.
Cuba last reported its foreign debt in 2009 as $19.8 billion. About 50 percent of that was "passive" debt from before it declared a default in the late 1980s, while the rest was accumulated afterward and classified as "active."
The Communist-run island has never included debt to the Soviet Union in its figures, claiming the amount is in overvalued convertible rubles and that the country sustained massive damage from broken contracts when its former benefactor collapsed.
While little information is available about the deal with Russia, Cuba has let other creditors know it is in no condition to pay its old debts, much of which now consists of accumulated service and interest charges.
Last year, Cuba settled a dispute with Japanese commercial creditors dating back to the 1980s. That could prove a model for settling other old debts.
Under the agreement, 80 percent of the 130 billion yen debt (about $1.4 billion) was forgiven, with the remainder to be paid over 20 years.
Cuba has been paying on time, according to Japanese business sources.
"The Russian agreement came as a complete surprise to other Paris Club members involved in the Cuba issue and broke ranks with them," said a diplomat who, like others, requested anonymity. "We first heard about it in the news."
The Paris Club is an informal group of creditor governments composed of Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, Russian Federation, Spain, Sweden, Switzerland, the United Kingdom and the United States.
Another diplomat said other Paris Club members had quickly discussed the matter and formally asked for a meeting with Russia.
The Paris Club reported that Cuba owed its members $30.5 billion at the close of 2010, a figure that included the old Soviet debt.
Unlike the International Monetary Fund and World Bank, from which Cuba is excluded under the longstanding U.S. trade embargo, the Paris Club does not issue multilateral loans.
"The Russian debt rescheduling, if it takes place, is a clear victory for the Cuban international economic strategy of divide and conquer," said Richard Feinberg, a nonresident senior fellow of the Washington-based Brookings Institution and author of a number of studies on Cuba's need to join the international financial community.
"Now, if it can remove the heavy weight of the old Russian debts, Cuba will be in a stronger bargaining position to restructure its remaining Paris Club debts with Western governments," Feinberg said.
Raul Castro, who replaced his ailing brother Fidel as president in 2008, has drastically reined in imports and cut state payrolls and subsidies while insisting the bankrupt government get its financial house in order.
The country has restructured its government and commercial debt with creditors including China, its largest, and has been paying suppliers on time.
In 2011, the Communist Party approved a five-year economic plan that calls for efforts to "enhance Cuba's credibility in its international economic relations by strictly observing all the commitments that have been entered into."
The plan also called for expediting the rescheduling of Cuba's foreign debts and implementing "flexible restructuring strategies for debt repayment" as soon as it is practical.
The Paris Club responded by putting out feelers about a possible resumption of talks broken off more than a decade ago.
Havana has indicated it would be interested only if an agreement was truly "viable" and would not result in repeated restructurings and new creditor pressures, the diplomats said.
Russia would not be the first country to break with the Paris Club.
In May 2000, Germany signed a bilateral agreement with Cuba covering $115 million in short-, medium-, and long-term debt.
Short-term debt was to be repaid through 2003 and medium-and long-term debt between 2006 and 2020, according to a letter sent to the Paris Club at the time by the German government.
The agreement covered, and reportedly all but wrote off, the island's debt to the former German Democratic Republic in the old Soviet convertible rouble currency.