Tuesday, 6 January 2009

VEB plays Father Frost to Russian blue chips

Financial News

Jason Corcoran

Letter from Moscow - January 4, 2009

Letters to Father Frost, the Russian equivalent of Santa Claus, have been stacking up well ahead of the Orthodox Christmas Day on January 7.

This year, the postal service in Moscow’s Kuzminki district reported an unusually high level of correspondence from adults who wish for a new job or help with meeting credit payments.

However, grown-ups looking for personal bailouts may be better served popping a letter in the mail to Vnesheconombank, the state development bank, which has come to prominence during the financial crisis as the Kremlin’s main piggy bank.

VEB, which traces its genesis back to the October 1917 revolution, was originally responsible for managing Soviet-era debt. It was transformed two years ago into a development agency to spearhead efforts to diversify Russia’s economy but has only recently come to international attention as the state’s lender of last resort.

More than 100 businesses are believed to have gone cap-in-hand to VEB which has been authorised to disburse $78bn in state aid. At the height of the banking crisis in September, VEB stepped in to acquire mid-tier lenders Globex and Svyaz Bank after both defaulted on some of their obligations. Its remit is not restricted to the domestic market judging by its recent acquisition of Prominvestbank, Ukraine’s sixth-largest bank, for a reported $1.2bn.

Russian blue chips and some of the country’s best-known oligarchs have been beating a path to VEB’s door. Steel and mining group Evraz, part-owned by billionaire Roman Abramovich, secured a $1bn loan in December with an option for a further $800m.

Oleg Deripaska, once Russia’s richest man, received aid in November when VEB stepped in to refinance a $4.5bn loan that he had taken out to buy a 25% stake in miner Norilsk Nickel.

VEB is offering corporates one-year loans, but they come with caveats and collateral agreements. Unless debts are repaid in full, the Government can seize assets.

The bank is also demanding that one of its representatives sits on the recipient’s board and VEB will have a right to veto any debt, asset sale or big investment decision. Former presidential administration head Alexander Voloshin was nominated by VEB last month as chairman of Norilsk Nickel in a sign of the Kremlin’s expanding corporate influence.

In some cases, VEB could end up with significant equity stakes in Russia’s leading companies and outright control of a few of them is not out of the question.

The chairman of VEB’s supervisory board is Prime Minister Vladimir Putin, and powerful government officials, including the finance and transportation ministers, prop up the rest of the board.

VEB’s goodie-bag has been increased. It was appointed on December 29 as state management company for managing pensions until 2014 and a further $1bn is being made available this year to help small to medium enterprises.

The agency is in charge of financing Russia’s vast infrastructure programme and projects launched by VEB last year were worth $26bn. The bank also last year disclosed it was the anchor investor in a Macquarie Renaissance joint infrastructure investment vehicle.

VEB chief executive Vladimir Dmitriev said the bank had no plans to become a commercial bank and would focus only on solving the tasks relating to financial stability.

Dmitriev neither looks nor sounds like Father Frost but the soundness of his bank’s gift-giving will be crucial in restoring confidence in a needy economy.


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