Rescue package weighs heavy on Russian governmentOctober 21st, 2008 - 11:56 am ICT by IANS
Moscow, Oct 21 (RIA Novosti) The relations between Russia’s private business houses and the government have never developed smoothly. However, when hit by the financial crisis, many companies realised that government support is their only chance of repaying their debts.Russian industrialists, bankers, retailers and even omnipotent oil producers have now put their hope in the government.
The Russian government, apprehensive that the financial crunch could grow into a general economic crisis, is now desperately seeking solutions on how best to rescue businesses.
On Oct 13, President Dmitry Medvedev signed a series of bills authorizing the government to begin distributing state funds among those companies that are the most important for Russia’s economy.
Prime Minister Vladimir Putin said the government would offer companies alternative sources of financing to replace Western loans, thus protecting their assets from being sold out at clearly underestimated prices.
The supervisory board of the Bank for Development and the Bank for Foreign Economic Affairs (Vnesheconombank or VEB) laid down criteria which are to be used when distributing the $50 billion allocated by the government among companies for the refinancing of their debt.
Putin said that each borrower would receive between $100 million and $1.5 billion from VEB. The money will be provided to any company that has worked in one of the non-financial sectors of Russia’s economy, whose project was of strategic importance for a region, or whose current debt has resulted from loans taken out for investment projects or acquisition of Russian assets.
It is clear that the amount is not large enough to rescue all struggling companies. VEB estimates that Russian companies’ total outstanding debt to be cleared by the end of next year is $120 billion. As many as 55 companies, including 20 banks, have applied for help.
The amount planned will provide at the most $1.5 billion each to 33 companies. However, if VEB decides to issue the minimum amount, $100 million, it will be able to support 500 struggling companies.
Food retailers were given top priority government assistance, without having to wait for anti-crisis laws to be adopted.
The government recommended late last week that Russia’s largest banks, Sberbank and VTB allocate money to finance major food retail chains. The priority list includes nine companies - X5 Retail Group, Magnit, Diksi, Seventh Continent, Mosmart, Viktoria, Lenta, O’Kay and Holiday Classic.
The lending conditions will be negotiated with each borrower separately. Presumably, the financing will be issued at 15 percent to 18 percent interest rate. The amounts have not been determined yet, but retailers say they need a total of $2 billion to stabilize the sector.
However, banks are reluctant to lend more to retailers whose total debt already exceeds millions of dollars. The debt of each of the nine chains is three or seven times their earnings before tax, depreciation and amortization.
Market players say Sberbank had earlier declined to lend to two major retailers, X5 Retail Group and Magnit, before the government recommendations were issued.
At this point, food retailers are trying to keep afloat as best they can, by accelerating turnover through grand sales, and trying to save on investment projects.
X5, for example, has cut its planned investment by $400 million and tried to talk its suppliers into rescheduling their debts - last month, grace periods were extended from 30 to 90 days.
It is only natural that the government is showing special concern for food retail. Most retailers will inevitably collapse without state support, which means that Christmas shoppers would be in for the shock of finding empty shelves in most stores.
If that happens, it is unlikely that the government will ever be able to convince Russians that the country’s economy is strong and stable enough to protect them from the global financial turmoil.
Yet over-borrowing retailers are not the only businesses that are unable to repay what they owe. Companies in the most profitable business of all, oil production, have also applied for government aid. Oil major LUKoil, Rosneft, TNK-BP and gas giant Gazprom have asked the government for a multi-billion dollar loan “on market terms” to refinance their foreign debt, citing a total of $30 billion.
Commodity producers approved huge investment programmes expecting that oil prices will remain high. For example, LUKoil made its plans based on $105 per barrel, but oil is now traded at around $80/barrel.
The government is facing a difficult choice. If it does not support domestic companies, the crisis will spread to more sectors of the economy, which means people would start losing jobs and finding supermarket shelves empty.
However, officials recognize that anti-crisis measures could send inflation up by as much as two percent even before the central bank allocates 950 billion rubles to support large banks.
To support all struggling businesses will cost the government around $140 billion, already approved and allocated. If the situation remains as tight, and the government continues supporting every failing debtor, its monetary resources (including free federal funds, the reserve fund and the central bank’s foreign currency reserves) will be spent within the next 18 months or so.