Russia's $50 Billion Rescue Package Props Up Russian Industry

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Researched by Industrial Info Resources (Sugar Land, Texas)--State-controlled Vnesheconombank (VEB) (Moscow, Russia) will provide assistance to Russian companies as part of the government's $50 billion economic bailout package. The current global financial crunch has forced many Russian conglomerates and business houses to turn to the government for financial aid to repay loans. The Russian government is extending full support as a measure to avoid economic depression. In October last year, Russian President Dmitry Medvedev approved several bills that allowed the government to start using state funds to help companies in financial distress.

The government and VEB have laid down certain criteria for companies to receive these funds. To be selected, the company should be in the non-financial sector, have projects that have strategic bearing to the country's economy, and the debts incurred must be from acquisition of assets in Russia or investments on global projects. Selected companies will receive $100 million to $1.5 billion based on assessment. Although only 55 companies and 20 banks applied to receive funds, in December, with the crisis deepening, Prime Minister Vladimir Putin announced that the government would provide financial assistance to 1,500 companies. These companies will be identified based on their contribution to the economy and GDP of the country.

VEB has already funded infrastructure projects worth $26 billion in 2008. When these projects are complete, they will increase demand locally and help Russia come out the financial crisis. VEB will also focus on bailing out small and medium size enterprises. The bank has allocated $1 billion in funds, which is 230% higher than the budgeted fund of $310 million for this fiscal year. The charter capital of the bank will be increased to provide for the differential funding. The supervisory board of VEB also sanctioned aid in excess of $1.5 billion to assist the metals and mining industry in the country, which owes more than $120 billion in loans. In December, VEB paid out $800 million to Evraz Group (Moscow), considered to be the largest vertically integrated company in the metals industry globally. The bank also helped Russian aluminum giant Rusal (Moscow) with $4.5 billion of aid. A major component of Rusal's debt was the investment to buy stakes in Norilsk Nickel (OTC:NILSY) (Dudinka, Russia). The global decline in the metals industry, especially steel, is considered to be the worst in the last 60 years.

Gazprom OAO (OTC:OGZPY) (Moscow), the world's largest gas exporter, also sought assistance of $750 million for its oil branch Gazprom Neft (MCX:SIBN) (St.Petersburg, Russia). With increasing global debts and reducing revenues, Gazprom stopped gas shipments to Ukraine, claiming that the country has not paid the $2 billion it owes to the company, and as a major gas-transit country, the shut off has cut off gas supplies to a large portion of Europe. Gazprom also plans to increase the price of gas supplied to Ukraine from $179 per thousand cubic meters to $418 per thousand cubic meters. This will bring the price to par with other European buyers. The gas prices in Belarus may also increase, as Gazprom intends to hike gas prices from $128.9 per thousand cubic meters in 2008 to $240 per thousand cubic meters in 2009. This will help Gazprom increase revenues from Belarus to $5.2 billion this year from $2.8 billion in 2008. Domestic price of gas is also expected to see an increase of $10.20 per thousand cubic meters, bringing in additional revenue of $ 3 billion this fiscal year.

The financial bailout package by the Russian government and VEB is a necessary step to help keep crisis from engulfing other sectors of the economy, but experts indicate that this step will affect the gross domestic product (GDP) in 2009. The GDP growth in 2008 is expected to be around 6%, but the government has indicated that with oil prices at $50 per barrel, the GDP growth in 2009 will be around 2.4%. While the International Monetary Fund (Washington, D.C.) has indicated a growth rate of 3.5%, Russian financial institutions like Uralsib (Moscow) and Renaissance Capital (Moscow) are optimistic that the rate will be 4%-4.5% if oil is priced at $50 per barrel.

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