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Analysis & Opinion
11.03.09 Oligarchs Bite The Dust
By Sergei Balashov

While some form of state support for floundering businesses is still technically possible, the government has recently made it clear that it would not go far in helping the super rich. Handing out loans to help refinance debts has been part of the state’s anti-crisis agenda, but the government now says that it does not intend to throw a lifeline to the oligarchs at the expense of further depleting the national foreign currency reserves.

Last year, Vnesheconombank received about $50 billion from the state to help Russian businesses refinance foreign debts. The largest recipients included Oleg Deripaska’s RusAl, which received a $4.5 billion loan, and Mikhail Fridman’s Alfa Group, which got $2 billion that it used to pay off a debt to Deutsche Bank. But in a recent interview to the Wall Street Journal, Arkady Dvorkovich, the president’s economic advisor, said that last year’s bailouts were “individual cases,” and that this policy would be discontinued.

It is now clear that the relief last year’s bailout provided was temporary, and the Russian corporate sector now finds itself with more enormous debts on its hands. The Vedomosti newspaper estimated Alisher Usmanov’s debt at some $3.5 billion, on top of Metalloinvest’s $4.8 billion debt. Roman Abramovich’s Evraz, whose value diminished from $46 billion to just $2 billion last year, owes about $10 billion both to domestic and foreign banks. Deripaska’s Rusal turned out to be the leading debtor, owing more than $14 billion, roughly half of it to foreign lenders. Thus, the Russian corporate sector will soon be required to pay off over $115 billion in debts.

It now appears as though the oligarchs have been left to their own devices to handle this situation. “There has been enough state support for the corporate sector. It is also fairly obvious that in a situation where the crisis is expected to last for a long time, the availability of financial resources, including currency, will become an issue,” said the Chief Economist at Deutsche Bank Yaroslav Lisovolik.

Some companies, including RusAl, are still looking for a deferral on the payoff date, but whether they will succeed is questionable. “The current situation is that basically nobody has the money. The only sensible strategy is to get the debt payoff dates postponed, but this doesn’t depend on the companies as much as on their creditors, as they have their own debts to pay,” said Dmitry Parfenov, an analyst at the Prospect investment company.

According to a report in the New York Times, the oligarchs might now be so desperate to get out of the hole they dug themselves into that they are looking to return their assets to the state. The newspaper reported that Russia’s top businessmen met President Dmitry Medvedev in January to offer to merge their assets, including some of Russia’s largest mines and factories, into a single state-controlled conglomerate, in return for the Kremlin’s aid in refinancing their debts to Western banks.

If the debts are not paid on time, some of the assets that have been pledged as collaterals could be turned over to foreign owners. Such a development would most certainly be frowned upon by the Kremlin, which has worked hard to get back the strategic assets controlled by private owners who are either foreign or perceived as unreliable. And yet capitalizing on the vulnerability of the Russian private sector and nationalizing strategic industries such as mining, oil and gas, and metallurgy, is not yet seen as an option. “The authorities don’t have any plans to take tings away from people and nationalize them…but it doesn’t mean that the state won’t wind up owning some assets that were held as collateral,” Dvorkovich told the Wall Street Journal. It appears that the need to do this is not yet that strong. The message sent by the state should rather be interpreted as an unwillingness to get oligarchs hooked up with state funds.

In fact, Russia’s large corporations have been able to get a hold of loans, even attracting money from abroad. The debts of oil and gas companies aren’t that difficult to handle. LUKoil was able to acquire of a ?1 billion loan from Gazprombank, to cover a portion of its $10.6 billion debt. Mechel also received $1 billion from Gazprombank, while TMK got $1.1 billion, all on rather favorable terms. For companies like TNK-BP, which, according to, owes just $2.1 billion, debt isn’t much of an issue at all.

Rosneft has been among Russia’s leading borrowers, winding up with over $20 billion in debt, but Russia’s largest oil and gas corporation recently secured a $15 billion loan from China. Pipeline operator Transneft also received $10 billion from the Chinese. “The bigger companies can still attract funding. I think there is enough for the corporate sector to hang on for this year. In some cases, the government could chime in and hold shares as collaterals, expanding their stakes in private companies, but these assets would later be privatized again. [Nationalization] is not the strategic direction Russia is following right now,” said Lisovolik.

The Federal Service for the Financial Market is currently working on legislation that would allow paying off debts with share emissions, a practice that is currently banned. This could take the burden off some of the debtors. Even though the legislation is seen as one favorable to the oligarchs, it could end up being more helpful to small businesses that aren’t likely to get any support at all. “This new legislation would favor small businesses, but those left off the state’s list of key and strategic sectors are going to have to restructure their debts without any state support,” said Lisovolik.
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