UPDATE 2-Bankruptcy is option for Russia's Mechel, minister says

Thu Jul 10, 2014 9:38am EDT

* Sberbank, VTB, Gazprombank are the main Mechel creditors

* While officials debate, Putin has final decision - source

* Putin keen to avoid large job losses - source (Adds detail, quotes, context)

By Polina Devitt and Oksana Kobzeva

MOSCOW, July 10 (Reuters) - Indebted miner Mechel may be allowed to declare bankruptcy to sort out its finances, a Russian minister said, suggesting for the first time that the company might not be bailed out.

Russia has been nursing its oligarch-owned conglomerates through a prolonged downturn in the commodities cycle, seeking to avoid a wave of defaults that would lead to mass job losses at a time when the economy is at near standstill.

However, Industry Minister Denis Manturov said on Thursday bankruptcy might help Mechel, a coal-to-steel group with $8.6 billion in debt and which employs 70,000 workers, a day after state development bank Vnesheconombank (VEB) said it did not want to take part in any bailout.

While Manturov's comments could signal a change in policy, the final decision on what to do with Mechel, controlled by businessman Igor Zyuzin, will most probably rest with Russian President Vladimir Putin.

"We need to talk about financial recovery either via bankruptcy law, or by strengthening a managing company, which should take the risk on itself and the responsibility to take the company out of crisis," RIA news agency quoted Manturov as saying.

"But the tasks and the commitments are huge and I cannot say who is willing to take it yet. Therefore, we will continue to work on it," Manturov added.

He did not give any further details. Mechel declined to comment.

Hit by weak prices for its products, Mechel is in critical need of financial support. It has already undergone several debt restructurings with creditor banks, mainly with three state banks - Sberbank, VTB and Gazprombank.

In 2013, the company earned less than it needed to stump up in interest payments on its loans.

PUTIN'S DECISION

After months of negotiations, it is clear officials have yet to reach a consensus on what to do next with a company that provides employment to thousands in Russia's industrial Urals regions, its far east and Siberia.

Previously, the government had preferred a bailout because it was seen as safer for creditors and better able to save jobs.

A source familiar with government discussions on Mechel told Reuters that Putin would take the final decision.

"There were several orders (to discuss the problem) from him; now everything will return to him and he will have to make a decision himself," the source said.

"It's the company's destiny, not Zyuzin's, which is the president's headache now," the source said, suggesting that the government would like to avoid a large loss of jobs. "It's exactly that case when (something) is too big to fail."

The government had been considering implementing a 180-billion roubles ($5.3 billion) scheme in which three banks would loan this sum to VEB, which would use the cash to buy convertible bonds from Mechel.

However on Wednesday VEB chairman Vladimir Dmitriev said he would recommend to the bank's supervisory board, chaired by Prime Minister Dmitry Medvedev, that it should avoid bailout schemes as they would be loss-making.

It was not clear whether VEB's board would follow the advice, nor when they would next meet.

Besides VEB and bankruptcy, another option is for state banks to seek government guarantees for further restructuring of Mechel's debts. "If VEB declines (to participate), banks will push for state guarantees," a banking source told Reuters.

Shares in Mechel were down 13 percent in Moscow on Thursday. The company's market value has plummeted more than 95 percent since its peak in 2008, according to Reuters data. (Reporting by Polina Devitt, Oksana Kobzeva; Writing by Polina Devitt and Alessandra Prentice; Editing by Elizabeth Piper and Mark Potter)

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