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Putin/Medvedev Moves To Protect Real Sector Alarm Financier Circles

Oct. 17, 2008 (EIRNS)—Of the package of crisis measures, about which Russian leaders have been in constant meetings all month, one aspect has greatly upset Russian and international financiers: Prime Minister Putin announced strict conditions for desperate Russian banks and companies to convert their foreign debt into loans from the state-owned Vnesheconombank (VEB). Those terms, as spelled out by Putin in an Oct. 13 session with the VEB Board (which he chairs), are the following:

  • the borrower must have most of its operations within Russia and in the real sector of the economy (tangible goods production and infrastructure);

  • operations finance must be of either regional economic importance, or be important to strategic sectors;

  • only foreign loans that were initially taken out for purposes of investment projects or asset acquisition inside Russia are eligible for the program.

The VEB refinancing program has been assigned state funding of $50 billion. As of Oct. 14, KM.ru reported, there were already applications from 35 corporations and 20 banks, totalling more than that amount. The loans being refinanced are part of about $450 billion of private foreign borrowings by Russian companies in recent years, when interest rates were lower in London and other foreign markets, than inside Russia. Now, with the borrowers unable to refinance in frozen credit markets abroad, the Russian government is acting to bring these credit operations home, and to direct them into priority areas.

A Bloomberg financial wire today screeched that VEB's refinancing will "extend control over business leaders" and "give authorities veto power over companies' financing decisions." Among those that have applied are Basic Element, the holding company of aluminum magnate Oleg Deripaska; Mkhail Fridman's Alfa Group; and the telecommunications/IT giant AFK Sistema.

Putin started pushing for active measures to defend real industry, at his Sept. 26 meeting with Andrei Kostin of VTB, another one of Russia's big four banks. "What's up with your relations with the real sector?" Putin demanded, "That's the first question." Kostin laid out the need to "save Russian assets," since the large private-sector foreign debt could suck the companies dry rather quickly.

The VEB refinancing plan was announced by Putin at a Sept. 29 conference, alongside liquidity of 950 billion rubles ($36 billion) being pumped into the Russian banking system and stock market. The relevant laws were signed by President Dmitri Medvedev on Oct. 13. That day, Putin held his session with the VEB board (including the closely-linked Development Bank), as well as a Government Presidium session. He told the Presidium that the directed measures were urgent, because merely pumping in liquidity would not save the industries. People from construction, machine-building and agriculture were reporting to him that "financial famine" threatened their operations, the prime minister said. Putin prioritized construction, leasing operations (used in transport and agriculture), machine-building, and the defense industry sector, noting that the latter "has special credit needs" outside of the stock markets.

All of these measures were reviewed again yesterday, along with reports from deputy premiers on consultations with Russian construction and auto industry executives, at an economic policy conference chaired by Medvedev. He instructed the government to pay particular attention to ensuring that the defense industry, regionally-oriented infrastructure and transport projects, and small business all receive financing.