Russia tycoons bailout could turn into Kremlin trap

MOSCOW (Reuters) - Russia has spent $8 billion from its foreign exchange reserves to help some of its richest men to refinance foreign debts and the names of the recipients give a clue to the Kremlin’s favorites.

But the reserves are not being sacrificed for free.

The billionaires have transferred stakes in some of their most prized firms from Western banks to the Russian state as collateral, handing the Kremlin the means to grab the assets should the oligarchs fail to repay loans or fall out of favor.

“The turmoil provides an opportune moment for the state to get a little closer to the equity that was sold in the 1990s,” said Michael Kavanagh, metals analyst at UralSib.

State-owned Development Bank, also known as VEB, has been entrusted by the Kremlin to distribute a $50 billion rescue package, helping Russian companies to refinance a total of $120 billion of Western loans by the end of 2009.

The first round of payouts has already been approved.

VEB disbursed $2 billion to Mikhail Fridman’s Alfa Group to help it pay back a loan to Deutsche Bank and rescue Alfa’s 44 percent stake in Russia’s No. 2 mobile phone firm, Vimpelcom, which was used as collateral with the bank.

Fridman joined Oleg Deripaska, Russia’s richest man, who this week became the first billionaire to get state support in refinancing his foreign debts.

VEB has said no company would get more than $2.5 billion, but Deripaska’s aluminum major, United Company RUSAL, received $4.5 billion to pay back debt to foreign banks, which it amassed to buy 25 percent in mining giant Norilsk Nickel.

“It is possible that neither Alfa nor UC RUSAL will find fresh cash to repay the VEB loans, and the state could eventually get the stakes in both Norilsk Nickel and Vimpelcom,” analysts from UniCredit Aton said in a note.


Russian billionaires became fabulously rich in the 1990s during the so-called loan-for-shares schemes when they lent money to the state and got stakes in prized firms as collateral. The state never paid back the loans, allowing future tycoons to become owners at a fraction of the real value.

“Today, it’s almost like a reversal of the shares-for-loans scheme,” said Kavanagh at UralSib.

The idea of another round of property nationalization or redistribution now seems appealing even to some rich.

“Why did Deripaska get the money? I don’t understand why?” said banker Alexander Lebedev, a former Soviet spy who was once stationed in London at the Soviet Embassy.

He said he did not ask for help and was outraged by the distribution of reserves.

“You should just tell the population you got cheated in the 1990s, they gave it all to these chaps who have now just brought it back again. Then you could privatize these assets in a few years, but privatize them in the proper way,” he said.


Lebedev is not the only one worried by the fact that Russian reserves are being eaten into. Economists, politicians and ordinary Russians see them as a key defense for the country as it tries to withstand the global turmoil.

But demands on the cash pile, accumulated during a period of high oil prices, are rising fast as the central bank spends billions of dollars per week to support the currency. Budget social spending is set to rise sharply in 2009.

Reserves fell by $31 billion in the latest week, moving below the $500 billion mark for the first time in eight months.

Traders said some $13 billion was spend on propping up the rouble. Some of the drop occurred because of the dollar rally last week versus the euro but a big chunk flew away as money was transferred to VEB.

Industry sources said state oil major Rosneft received around $800 million in refinancing aid. Russian media reported that railway monopoly RZhD and top developer PIK Group received $270 and $300 million respectively.

Analysts said the ultimate goal of the giant $4.5 billion help to RUSAL would long interest the market.

“The major question is the price that UC RUSAL will have to pay for such generosity,” Troika Dialog analysts said in a note.

The state could force RUSAL and Norilsk to merge, retaining a stake in the combined company.