Vera Kuznetsova, Natalya Romanova, Andrei Denisov
Vladimir Putin opens credit line to the Russian economy
US President George Bush is not the only man who has a costly plan to bail out the financial sector. A similar, albeit somewhat cheaper, plan has been offered by the Russian Government. Prime Minister Vladimir Putin made it clear yesterday that he was trying hard to disperse the clouds gathering over not only the American and European, but also the Russian economies. The meeting devoted to two strategic documents, the long-term concept of Russia's development to the year 2020 and the guidelines for the Government's activities over the next four years, brought sensational news about how the authorities intend to tackle the problems in the near future.
This is not, however, about saving problem assets. The measures Putin announced yesterday are geared to the solution of a specific problem: the big outstanding foreign debts of Russian banks and companies. The problem has existed for a long time. Even before there were any signs of an international crisis, economists drew the Government's attention to the huge international borrowing by Russian companies, including state-owned ones. Authorities, however, could do nothing to stop even the state-owned companies and banks from borrowing. All the Finance Ministry and the Central Bank managed to do was to start monitoring such borrowing.
Now, the worst fears have come true. In the current crisis situation Russian borrowers are unable to refinance their earlier loans in the West. Refinancing is essential, however, and its mechanism was the subject of detailed discussion at one of a string of conferences held late last week. Yesterday Vladimir Putin made it public.
For the time being, the Central Bank will deposit $50 billion into the Vnesheconombank (VEB). The Prime Minister said that "any Russian bank or company can apply to Vnesheconombank for a loan to repay debts to foreign creditors, as long as the loan was issued before September 25 of this year."
Besides this, "the Central Bank will be allowed to issue unsecured loans to commercial organisations, which will support the banking market by providing liquidity within a short space of time," the Prime Minister announced.
The Central Bank will also act as an insurance guarantor, but not for all market participants: Putin said that the bank may sign agreements with "some" financial institutions to compensate part of the losses arising from the issue of credits to other players in the market.
Finally, the authorities will also support the VEB, which is to play a substantial role in the unveiled plan. Putin announced that the VEB will have its authorised capital increased by 75 billion roubles. The money will be part of the 250 billion roubles earmarked earlier to support the stock market. He said the VEB had already started insuring leading banks in the financial market and that the initiative should be supported in every way. Also yesterday, it was announced that the Central Bank had deposited $2.5 billion along with the VEB to secure commitments to the clients of Svyazbank (the bank, which had run into serious problems, was bought by the VEB several days ago).
Because many of the Prime Minister's proposals necessitate amendments to laws, he instructed the Finance Ministry to put them through parliament as soon as possible.
There is no doubt that the Duma will be swift in approving the proposals and will not follow the "bad example" of the US Congress, which took a critical stance on the Bush plan.
Still, Putin's plan raises some questions. For example, what is the origin of the figure $50 billion? Who will have access to these credit resources? On what terms will they be made available? How serious are the problems in this sphere to begin with?
A Vremya Novostei source familiar with the way the decision was prepared says that initially, only banks were to be given access to these resources, and not all banks, but rather, only those which had to repay syndicated loans or Eurobonds. Serious security was offered for these instruments and the collateral would provide a solid guarantee that the Central Bank's gold and currency reserves would be intact. The sum of $50 billion should be enough to make all these payments before the end of the year. The source explains that the credits from the VEB would be issued for a term of two years, judging by the discussions.
However, these parameters are obviously unrealistic, since Putin has said that not only banks will have access to credits.
According to Standard & Poor's, before the end of the year, Russian companies have to pay $45 billion to foreign creditors. London's Deutsche Bank, which released a report "Russia: The ‘Other' Crisis" at the end of last week, cites the following data about the foreign commitments of Russian banks, without, however, giving the deadlines for repayment. VTB's foreign debts stand at $30.2 billion, those of Rosselkhozbank at $16 billion, Gazprombank at $8.3 billion, Sberbank and Alfa-Bank at $6.1 billion each.
Economist Sergei Aleksashenko had this comment on the announced plans: "There is both good news and bad news. The good news is that the authorities have rightly assessed the source of possible future problems: corporate external debts. The bad news is that the Central Bank will, in effect, underwrite all the private debt obligations."
In the opinion of Deutsche Bank's chief economist, Yaroslav Lisovolik, the short-term effect of the proposed measures is likely to be positive. The Government indicates that it is ready to help the companies if they have problems repaying foreign debts, which would calm the market a bit. However, Lisovolik notes, that raises a number of questions; in particular, one has to wonder how effectively the money will be used and what companies will get it and on what terms.
"In the current situation the plan proposed by the Government is the only way out for the companies," says Yevgeny Gavrilenkov, chief economist of the Troika-Dialog investment company. "It is better to pay back than declare defaults. Previously, companies refinanced their debts by raising money in the external markets. Now these markets are closed to issuers because of the crisis. That measure may diminish the gold and currency reserves somewhat, but also the foreign debt, which is the key problem today."
Concept-2020 and the Cabinet's plans for the next four years also got their share of attention yesterday. Mr Putin noted that the Government would make the final decision on these documents as early as Wednesday, October 1. Yesterday he presented a very general vision of the desired results. They are: providing a favourable macroeconomic environment, strengthening the monetary system, identifying growth points in the regions and scenarios for the development of the pension system.
The Government's pension plans are so vague that officials prefer not to speak about them. No decision has been made on the rate of the single social tax: the signs are that it will be raised, but neither the Finance Ministry nor the Ministry of Economic Development is willing to discuss it. Deputy Minister of Economic Development, Andrei Klepach, tried to cheer up the public by promising to repay the social debt. He believes the scenario currently being prepared by the Government "is oriented towards a substantial rise in pensioners' living standards, with a whole range of measures to be introduced as early as 2010."
Mr Klepach also said that the question of the Single Social Tax rate may be resolved before this year is out, and that of the VAT the following year, though he was tight-lipped on exactly how the tax issues would be solved. "Details will be revealed later," the Deputy Minister said, adding, "everything depends on what model is approved." At some point, those present began to doubt what the Government's tax plans were for the next four years if decisions on two key taxes were suspended. Nonetheless, the Deputy Minister said that the Cabinet had, after all, established a tax policy.
Mr Klepach said that the discussion of the two conceptual documents at the meeting with the Prime Minister showed that "a common position on the model of development of the RF has practically been formed." He said the Government agreed on one thing: the Russian economy should follow the path of innovation. The emphasis is on boosting the growth of labour productivity and energy saving in the Russian economy. "Energy efficiency of the Russian economy should increase by 1.5 times or more before 2020," the Deputy Minister said, noting that this challenge could be met by providing economic incentives for enterprises and by increasing electricity rates.
The model of Russia's development to 2020 is socially oriented. "We expect a substantial growth in incomes. The level of poverty will be cut by more than half (by 2020)," Mr Klepach said.
Congress kills the Bush plan
The U.S. House of Representatives yesterday rejected, by 228 votes to 205, the bill that envisages emergency measures to settle the country's grave financial crisis, ITAR-TASS reports. The plan would allocate about $700 billion out of the federal budget to buy out illiquid assets in bank balances. In addition, the plan would allow the U.S. Treasury Department to appoint receivers of such assets. A supervisory body that would monitor how the bail-out money is used is to be created. Finally, the bill would introduce caps on the bonuses paid to CEOs of private banks and companies that will receive federal aid under the programme.
Addressing a routine press briefing an hour ahead of the vote, Assistant White House Press Secretary Tony Fratto predicted that the bill would get past the House. "We will have enough votes to pass the bill. We are absolutely sure of that."
Consultations about the plan had been going on in Congress non-stop, and on Sunday it seemed that it could get the support both of the Democrats and the Republicans. Commenting on the outcome of the vote, Fratto said that Bush "was very disappointed" with the stance taken by the House of Representatives. "There is no doubt that the country faces a serious crisis to which a response must be found," he stressed. The stock markets responded to Congress's decision with an instant downturn.