By Dmitry Butrin, Maxim Shishkin, Yelena Kiselyova, Irina Granik, Olga Beshlei
VEB guarantees redemption of all Russian companies' foreign debts before year's end
The Bank of Russia has been told to issue unsecured stabilisation loans to the banking system, and Vnesheconombank (VEB) should pitch-in to solve the problems of the corporate sector, for which it will be issued $50 billion to refinance companies' credits.
The decisions were made yesterday during a meeting at Prime Minister Vladimir Putin's office. The cost of the issue is at least 8% of the Central Bank reserves and a possible downgrade in the country's credit rating. Economists are sure that these actions will only be able to keep Russia's financial problems at bay until the end of the year.
Based on yesterday's meeting, it turns out that the portfolio of the Government's measures to stabilise the financial system in times of crisis has not been exhausted. Instead of a meeting of the Government Presidium, a crisis management meeting at Prime Minister Vladimir Putin's office took place yesterday. Originally, the meeting was scheduled in order to discuss the concept of long-term social-economic development until 2020, but the Prime Minister announced after the meeting that the discussion had focused on the next three months.
Vladimir Putin unveiled four main anti-crisis measures, including disbursement of up to $50 billion through VEB to refinance companies' debts.
"Any Russian bank or company can apply through VEB for a loan to repay debts to foreign credits incurred before September 25 this year," Vladimir Putin said, specifying that the total sum the Central Bank will make available to VEB for these purposes "will not exceed $50 billion, at least for now."
The Central Bank published an update on the debts of Russian companies as of April 1. The aggregate Russian foreign debt was $477.1 billion, with the debt of the banking sector amounting to $171.4 billion, and the debt of all the other sectors, less government bodies, was $264.6 billion. As of the fourth quarter, the banks will have to pay back $15.2 billion, with non-bank loans to be repaid amounting to $23.9 billion and interest before the end of the year totalling $3.9 billion.
The $50 billion the Central Bank has promised VEB would cover all the current debt payments of banks and companies until the end of the year. The forecast for payments outstanding in the first quarter is $35.9 billion. Investment banks' debts to be refinanced were assessed in September at $15 billion for the banking sector and up to $50 billion for the non-banking sector.
The question as to the sources from which the Central Bank will draw to finance VEB's guarantee transactions worth $50 billion was not commented on at the Central Bank yesterday. Kommersant's written query filed with the Central Bank's press service went unanswered. But that does not matter: since the Central Bank is an emission bank, the use of its reserves or newly printed roubles to make deposits with VEB boils down to the same thing. We are talking about a sum amounting to 8% of the Central Bank's reserves, which include the Reserve Fund and the Fund for Future Generations, about $250 billion, and the Bank of Russia's own reserves, about $300 billion.
The Prime Minister made yet another decision connected with VEB: of the 250 billion rubles that President Medvedev had ordered the budget to allocate as one-half of the Government's investments in supporting the stock market, 75 billion roubles will go to VEB.
"VEB has already started insuring the actions of leading banks to support operations in the stock market," Vladimir Putin said.
Mr Medvedev promised that the state would invest 500 billion roubles in the stock market, mainly through VEB.
Paradoxically, VEB, which is emerging as the Government's number two agent, after the Central Bank, in fighting the crisis, yesterday told Kommersant that no plans to such an effect had been made.
Last week Vladimir Putin had at least two meetings with VEB head Vladimir Dmitriyev: on September 22 at the Bank's supervisory board and on September 25 at a meeting to decide the fate of Svyazbank, which is being bailed out by VEB. Kommersant sources claim that the head of the bank was in a meeting with the Prime Minister "far into the night".
It should be noted that VEB's minimum participation to date in the Government's anti-crisis actions has already caused it considerable damage: on September 26, shortly after it was announced that VEB would acquire Svyazbank, Standard & Poor's put VEB's rating on the CreditWatch list with a "negative" forecast. The agency expects clarification from VEB on the consequences of the deal.
The Government's decision to use the Central Bank's reserves to solve the debt problems of private companies is welcomed by nearly all the economists whose opinion we have sought.
Ex-deputy head of the Central Bank, Sergei Aleksashenko, told Kommersant that it was the right decision, saying, "the Government has at last seen the main potential threat."
TsMAKP expert Dmitry Belousov said, "VEB is essential as a mediating structure in commercialising state support of the bank financing system. It is good that VEB is acting as an intermediary between the Central Bank and non-commercial banks, it makes it easier to assess risks." In the case of VEB guarantees, we are talking about mainly protecting the interests of large companies, as the bank does not have a powerful regional infrastructure or enough staff.
"Dipping" into international reserves by the issuing Central Bank credits to VEB may affect Russia's country rating. Franklin Gill of S&P told Kommersant yesterday, "We have seen hints that such actions may be taken, for example, when it was announced that the National Welfare Fund assets could be invested in the stock market inside Russia. That is why the decision on downgrading the country rating has already been made. It is too soon yet to speak about further revisions of the rating."
Two other measures announced by Mr Putin have to do with the Central Bank's powers. Under the first, the Bank of Russia is to be allowed to sign agreements "with some lending organisations" on compensation of part of the losses in inter-bank crediting.
"As far as we understand, ‘some banks' refers to three government-controlled banks (Sberbank, VTB and Gazprombank) and possibly the Bank of Moscow," Renaissance Capital stated in its express review of the Government's decision yesterday.
Vladislav Reznik, chairman of the State Duma financial market committee, told Kommersant that the measure would resolve the problem of the distribution of Central Bank credits through major banks at the inter-bank exchange. "Up until now, the money to support liquidity issued by the Central Bank and the Government went to the major banks. Only Sberbank supported other banks on a significant scale. We in the committee have information to the effect that the money was then issued at 22% annual interest as loans to enterprises."
Finally, the measure that appears to be the most sensational - the Bank of Russia has been told to issue unsecured stabilisation credits to banks. "That is also a critical move, as only 28 lending institutions can raise funds without security when the Finance Ministry puts temporarily free budget money in bank deposits," Renaissance Capital says.
"Under the law, the Central Bank is an independent organisation which does not take its directions from the Government. It does not need the Government's permission. It is unclear why Mr Putin is meddling in this matter," ex-president of the Bank of Russia Viktor Gerashchenko wonders.
In fact, what is happening confirms the rights of the Central Bank as the "lender of last resort" for banks in a crisis situation, when collateral is technically impossible to assess.
Mr Aleksashenko explained that the decision reinstates the rights of the Bank of Russia. "Now liquidity is de facto regulated by the Finance Ministry through budget surplus and budget deposits. In this situation, the Central Bank becomes redundant," he explains.
Most economists regard the Government's anti-crisis measures as "preventative", aimed as they are at controlling the spread of the crisis, but do not rule out that in the mid-term, these measures may develop into a system of state financing of the economy with investments that replace foreign investments. thus: "Unlike other countries, the Russian Government is not constrained by fears of ‘moral hazard' or growing interference in the economy or the budget. It may take further measures to prevent defaults of Russian companies, even if the measures announced yesterday prove to be insufficient."
If the Paulson plan in the US is rejected, something that the Government could not predict as late as yesterday afternoon, the 1.2 trillion roubles by which the nearly 3-trillion rouble limit of guaranteed state injections in the economy has increased, may turn out to be only an interim sum.
