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Oligarchs Seek $78 Billion as Credit Woes Help Putin

Posted by Kris Roman on December 22, 2008

By Yuriy Humber and Torrey Clark

Dec. 22 (Bloomberg) — Russian oligarchs are lining up for $78 billion of Kremlin loans to survive the credit squeeze, handing Prime Minister Vladimir Putin the opportunity to increase government control of the nation’s biggest companies.

Just 12 years after they gained ownership of the former Soviet Union’s industries by bailing out the government, the tables have been turned. More than 100 business leaders are vying for loans from Putin and the administration of PresidentDmitry Medvedev because Russian companies have about $110 billion of foreign obligations due next year, according to the central bank, double the total owed in Brazil, India and China.

Business leaders who tripled international debt in the past three years are putting up part of their stock as collateral for government support because they’ve been hobbled by tumbling commodity prices and the biggest drop in the ruble since Russia’s default in 1998. Putin already is aiding billionaires Roman Abramovichand Oleg Deripaska and considering requests from Dmitry Pumpyansky of pipemaker OAO TMK, OAO Severstal’s Alexei Mordashov and AFK Sistema’sVladimir Yevtushenkov.

“Some of them will definitely lose their property, either to the state or to investors,” billionaire Alexander Lebedev, 49, said in a Dec. 8 interview, 11 days before Deutsche Bank AG demanded early repayment of a loan guaranteed by 3 percent of Moscow-based ZAO National Reserve Corp.’s 29 percent stake in OAO Aeroflot, the national airline. “They’ve been over- borrowing and sales of their companies have been falling.”


The oligarchs, Russian business leaders who used their political influence to help gain assets after the collapse of communism, essentially dictated the policies that allowed them to gain control of the nation’s biggest companies in the 1990s by providing financing to the government that was never repaid.

Anatoly Chubais, who oversaw the government’s sale of assets through the so-called loan-for-shares program, said in an interview in 2000 that the plan was necessary to create “big private capital” and help then-President Boris Yeltsin win reelection in 1996 to prevent a return to communism. Chubais, 53, is now chief executive officer of Moscow-based Russian Nanotechnology Corp.

Vnesheconombank, the Russian state lender known as VEB, is responsible for handling the bailouts. In return for one-year loans, VEB is requiring a representative at the company and the right to veto any debt or major asset sale, according to the bank’s Web site. Putin, 56, is head of its supervisory board. Borrowers offer shares, assets or export revenue as collateral.

Fewer Oligarchs

“It’s extremely unlikely they’ll all be able to repay in a year,” said Zina Psiola, a money manager at Clariden Leu AG in Zurich with $220 million in Russian equities. “Some oligarchs will no longer be oligarchs.”

At least 10 of the 25 wealthiest owners have faced margin calls from lenders since August as Russia’s worst financial crisis since 1998 wiped $230 billion from the value of their equity, according to data compiled by Deutsche Bank and Bloomberg.

Profits for four of Russia’s largest steel producers as well as Moscow-based TMK, the biggest maker of pipes for the oil and gas industry, will fall by about 50 percent to $10.5 billion next year as prices of the metal plunge, according to Clemens Grafe, an economist at UBS AG in London. That may leave the companies unable to pay for anything beyond their $10.3 billion of debt in 2009.

“If they have to pay this then they have no money for capital expenditure, no nothing,” Grafe said.

Shrinking Reserves

Prospects for refinancing debt are dwindling. Russia’s war with Georgia, a 75 percent drop in oil and the worsening credit crisis led investors to pull $211 billion from the country’s stocks, bonds and currency since August, according to BNP Paribas SA. The withdrawals weakened the ruble by 17 percent against the dollar, forcing the government to drain $163 billion, or 27 percent, from foreign-currency reserves. The ruble fell to the lowest level in almost three years against the dollar today.

Russian companies have about twice as much foreign debt due in 2009 than the $56 billion total owed by companies and the governments of China, India, and Brazil combined, according to data compiled by Commerzbank AG and RBC Capital Markets.

The leaders of Russia, Kazakhstan and three other former Soviet states agreed last week to form a $10 billion fund to help their economies weather financial turmoil, Kazakh President Nursultan Nazarbayev’s press service said on its Web site today, without providing more details.

State Control

Greater state involvement may reassure investors, said Jerome Booth, head of research at Ashmore Group Plc in London, which manages $32 billion of emerging-market assets including Russian corporate debt.

“There’s less chance of mass defaults in Russia than in Western Europe,” Booth said. “There’s a degree of state control in the economy already, so this will be more of the same.”

The prime minister, saying he has no intention of nationalizing the economy, pledged on Dec. 4 to offer loans and buy stakes in companies that solicit help, releasing collateral and selling back the holdings later.

Putin, who served eight years as president before becoming prime minister, provided $12 billion of loans since October to companies such as those backed byAbramovich, 42, and Deripaska, 40, and pledged $38 billion more. That covers only half the amount sought. Among the applicants is Pumpyansky, 44, of TMK, which owes $1.7 billion in 2009, more than forecast earnings. Yields on TMK’s dollar bonds due September 2009 topped 80 percent last month. TMK plans to delay some investments and is seeking to refinance with longer-term debt, according to an e- mailed statement.

Deripaska Selling

Deripaska is selling Moscow-based Soyuz Bank and may part with control of insurer OAO Ingosstrakh in Moscow, Vedomosti reported last week. Named Russia’s richest man by Forbes in April, Deripaska ceded stakes in auto-parts maker Magna International Inc. in Canada and German builder Hochtief AG to banks in October after the stocks lost more than half of their market value.

VEB’s $4.5 billion loan allowed Deripaska’s United Co. Rusal to keep a 25 percent stake in OAO GMK Norilsk Nickel, Russia’s biggest metals producer. A further $1.8 billion went to Evraz, the steelmaker part-owned by Abramovich.

Deripaska said he’s seeking to sell stakes in “practically all” his companies including Rusal, the world’s biggest maker of aluminum, to pay off loans, according to comments in the Wall Street Journal confirmed by spokesman Sergei Babichenko today. Deripaska said he hopes to have new investors in the companies by end of March.

Sistema, Evraz

Yevtushenkov’s Sistema in Moscow may seek as much as $2 billion from Moscow-based VEB to pay debts next year.

Moscow-based Evraz and Cherepovets-based Severstal didn’t respond to requests for comments.

“Not all of them are going to be helped out,” said Kieran Curtis, who helps manage $787 million in emerging market debt at Aviva Investors Ltd. in London. “I’m not convinced we know who is going to get state funds and that will be a major factor in terms of rollovers and redemptions.”

Vladimir Potanin, the biggest owner of OAO GMK Norilsk Nickel shares, may lose them to the government within a year, Vedomosti reported today, citing an unidentified Kremlin official. The shares are pledged against a $3 billion loan from state-controlled lender OAO VTB Group. Potanin has received margin calls on the debt after the stock lost value this year, the Moscow-based newspaper said.

Without a revival in commodity prices or state help, some Russian companies risk failing, according to Pacific Investment Management Co., which runs the world’s largest bond fund.

“It really depends on whether they can weather the storm with metals prices,” saidTim Haaf, Pimco emerging-market fund manager in Munich, who helps oversee $50 billion of emerging- market debt including Russian bonds. “We’re very conservative on Russia.”


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