Iceland Turns to Russia for Loan

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Iceland has had assistance getting foreign currency and is talking with Russia about obtaining a loan to help Iceland fend off the economic crisis.

Iceland has already approached the International Monetary Fund for financial aid and has been forced to abandon attempts to defend its falling currency; as well, the country has used a swap facility on Tuesday to get € [krona] 200-million ($273.2-million U.S.) each from the central banks of Norway and Denmark.

The Iceland government is seeking another potential funding source and has sent a delegation to Moscow.

The delegation did not include any ministers or the central bank chief and was led by Sigurdur Sturla Palsson, director of the international and market operations department, which manages the central bank's market activities.

“We had an excellent reception here,” Mr. Palsson said.

Iceland has floated the idea of a €4-billion loan which is about one per cent of Russia's gold and forex reserves. No details have been agreed, although Russian officials are said to be looking on the loan request favorably.

Last week, Iceland took control of the operations of its major banks Kaupthing, Landsbanki and Glitnir.

Russia's move is widely seen as politically motivated.

“From Russia's perspective, there are several possible objectives behind extending support to Iceland. The first is reputational,” Eurasia Group said in a research note.

“Second, Russia is likely eyeing the exploration and production licenses for arctic oil and gas that Iceland is planning to begin auctioning off next year ... Third, in the context of ongoing acrimony about NATO expansion, the Kremlin likely relishes the prospect of being owed such a significant debt – politically – by a member of the alliance.”

Mr. Haarde, Iceland's Prime Minister is not aware of any “political strings” that Russia would want to attach to any financing.

“We haven't actually discussed an amount yet, but that figure (€4-billion) has been mentioned elsewhere. We are just discussing the general financial affairs in Iceland,” Iceland's Mr. Palsson said, adding that on the Russian side the talks were chaired by deputy finance minister Dmitry Pankin.

The delegation will fly back to Iceland on Thursday.