Financial Crisis as a threat of loosing control over strategic enterprises of the country

1. Russian foreign corporate debt. In 2008, Russian aggregate corporate debt exceeded 350 billion dollars. It is a challenge to Russian government under the circumstances of the financial crisis, which is very dangerous as it is. How did this happen?

         Russian economy, which progressed at a rapid pace in the recent years, demanded a considerable financial input. Using the benefit of cheap and "long" money in foreign markets Russian businessmen and banks often turned to foreign loans during the processes of modernization of production, boosting output, broadening number of services and acquiring assets. The result of this was the increase of Russian foreign corporate debt for the period from the beginning of 2000. In March 2008 the aggregate foreign debt of Russian companies and banks was 350 billion dollars and exceeded one third of Russian GDP. Moreover, 30% of all foreign debts fall at government companies.

         No wonder that debt service under the circumstances of global financial crisis is above the scope of many of Russian corporations. The service of the snowball a foreign corporate debt is has been troublesome before, but under the circumstances of the crisis became even more problematic. The mechanisms of refinancing seized to work while the end of the year is a period of payments in many of Russian companies. Thus, there is a serious threat that many of Russian corporations would be unable to service their foreign debt in time.

         It is also important to keep in mind that in order to support the foreign bank loans the most valuable and fluid Russian companies' shares were placed as collateral. Thus, 25% (blocking package) of Norilsk Nickel shares were placed as collateral by Russian Aluminium as credit guarantee for creditors, among which are BNP Paribas, Merrill Lynch, Credit Suisse and Royal Bank of Scotland. Alpha Group share in the capital of mobile network operator Vympelcom (44%) played the role of credit guarantee for Deutsche Bank. When Rosneft company was credited by Mitsubishi UMJ bank for 2,3 billion dollars, around 1 billion was acquired as collateral for Rosneft shares.

         The situation is aggravated by the fact that the collateral assets fell in price considerably as a result of dramatic decline in stock listings. In some cases, the value of shares dropped by 300 to 400 per cent. This led to creditors demanding early debt liquidation or raising the cost of collateral assets. These demands cannot be satisfied under present circumstances. As a result, the risk of loosing collateral assets became quite real for major Russian corporations. If the companies would not be able to provide the means of liquidating their debts, some of the shares, placed as collateral, would become the property of the creditor banks. These banks may keep the assets or sell them, given the fact that there are no appropriate restrictions.

         According to analytics, the group of risk includes the head company of such distributing networks as Pyaterochka and Perekrestok X5 Retail Group, Rosneft, Norilsk Nickel, UT Rusal, LUKoil, Svyaz'invest, Systemu Gals, STS Media, AFK Systema oil assets in Bashkiriya (Bashneft, Uralneftehim, Novoil, Ufaorgsintez, Bashnefteprodukt and Ufa NPZ) and a number of other companies.

         This situation threatens partial or total loss of control over key enterprises of the country, including strategic spheres. The outcome of this scenario may be most negative for Russian national security from the perspective of keeping control over communal societies, which have strategic significance for defense and safety of the country.

         2. Emergency measures for strategic spheres. The current situation demands emergency actions from the government: in order to keep control over strategic enterprises the government allocated 50 billion dollars (according to 'Additional Measures for Russian Financial System Support' federal law). These funds, allocated from the Russian gold-value clause, will be distributed via Vneshtorgbank in order to refinance foreign loans, made before 25^th September 2008. This measure seems to be absolutely reasonable and even necessary. In total, according to Central Bank of Russia data, companies are required to pay 47,5 billion dollars during the last quarter of this year, and 115,7 billion in the next year.

         However, this is an extreme measure that demands re-allocation of considerable financial resources (in total exceeding 160 billion dollars) from the gold-value clause during the time when the economic crisis is in its full swing. Under different circumstances the consequences of the crisis could be much worse. Thus, if the government did not have the financial resources at its disposal or if the size of the loan greatly exceeded the government's financial potential, the situation could follow a negative scenario for national security - assets of the companies would have leaked abroad. The later buyback of these assets would have demanded even more resources or would have at all been impossible.

         Taking into consideration the cyclic nature of economic development, the current situation may repeat itself in the future, which creates a constant threat of losing control over strategic corporations. The statement of this fact demands the government to take measures, limiting the amount of shares that can be placed as collateral by strategic corporations in future. This can be achieved by making adjustments to the federal law #57-FL (29.04.2008) 'The order of making foreign investments to communal societies that have strategic value for defense of the country and governments' safety'. What is particularly important is the order in which the law regulates the arrangements that put the shares of strategic companies as collateral for foreign financial institutions.

         Such measures include:

-         Restrictions to providing the shares of Russian strategic enterprises as guarantee for foreign financial institutions (no more than 25% of shares)

-         Receiving approval from Russian government for planned collateral in shares of strategic enterprises.

     It is also crucial that central bank provides the possibility of reallocating of credit resources that are equivalent to assets of strategic enterprises when forming the gold-value clause. These funds serve as a backup if it is necessary to put them as collateral for refinancing of foreign debts.

Evseev Vyacheslav ,
12.05.2009. Views: 3187

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