Moscow Times
November 18, 2008
Crisis Opens Door to Reprivatization
By Anna Smolchenko / Staff Writer
Editor's note: This is the seventh in a series.
When the liquidity crunch recently put the squeeze on NPO Saturn, which is developing the engine for the long-awaited Superjet, the company turned to state-owned Vneshekonombank for help.
The bank, charged with helping companies refinance their foreign debt, agreed to help on the condition that the engine maker, which is majority owned by its management, sell a 13 percent stake to state defense firm Oboronprom, effectively ceding control of the company to the state, said an official familiar with the nature of the talks.
"Basically, the talks are now focusing on capitulation," the official said on condition of anonymity in order to speak candidly.
"Bargaining is under way: how much he needs and how much they can give him," he said, referring to NPO Saturn chief Yury Lastochkin.
The unavailability of loans has made it increasingly difficult for NPO Saturn to pay wages and continue with the engine project for the Superjet, the long-awaited hope of the Russian civilian aviation industry. This means that it may have to bow to state pressure to survive.
NPO Saturn's story highlights the risk of favoritism and abuse in the state's distribution of tens of billions of dollars in bailout funds. As floundering companies and banks across the country line up to receive state support, some companies, like NPO Saturn, will probably face pressure to cede control to the state.
"We are looking at attempts to revisit the results of privatization," said Oleg Panteleyev, a senior researcher at Aviaport, an aviation consultancy. "From the point of view of trust between the state and business, this precedent is utterly unpleasant."
The government denies that its bailout measures might lead to a broad redistribution of property or that it will end up owning private companies. But First Deputy Prime Minister Igor Shuvalov has acknowledged that the rescue package will likely be accompanied with abuse.
"Rescue, hand twisting, machinations, corruption all of this will be present in a great amount," Shuvalov told a small group of reporters following a recent meeting on state assistance for small- and medium-sized businesses.
But the government has no choice but to press ahead with its bailout measures despite the risks, he said. "Nobody is going to destroy the companies. We need strong business entities," he said.
A Slippery Slope
On Nov. 6, Putin signed off on a plan with 55 measures that aim to support the weakest sectors and promise to significantly strengthen the state's hand in the economy by easing the process of seizing collateralized assets, among other things. While the steps may seem unavoidable in a time of crisis, the government plan does not specify the time frame for when the measures will remain in effect.
"We are concerned that the plan represents a step back to a more planned economy, with the Kremlin dictating which sectors and companies banks are to invest in," UniCredit Aton bank said in a recent report.
ING Bank expressed a similar worry, saying that "in the aftermath of the financial crisis, Russia's economy will become more tightly controlled by the state."
Under the plan, banks are to lend money to four priority sectors: airlines, construction, automobile and farm equipment manufacturing. The strategy, however, comes with the risk that weak, unprofitable companies in the priority sectors get a better chance of survival while healthier firms in other sectors go belly up.
Zhelko Bogetich, the World Bank's chief economist for Russia, said the measures reflect the large role that the state holds in the structure of the economy. "If you want to limit the effects of the crisis, you can't cancel support for state corporations," he said.
In loosening procedures to seize property, banks will be permitted to foreclose on pledged assets without a court decision. The government will also support domestic manufacturers by giving them preferential treatment during tenders, even if their goods are 5 percent to 25 percent more expensive than similar foreign-made goods.
Ruslan Grinberg, director of the Economics Institute at the Russian Academy of Sciences, said he worried that unlike Western measures, the ones in Russia might remain in effect long after the crisis is over because of an absence of checks and balances in economics and politics.
"Our state has many opportunities to privatize the public interest," he said.
The government has pledged to allocate more than $200 billion in loans and tax cuts, among other measures, to help companies and banks deal with the worst financial crisis since 1998. That package includes $50 billion to state-owned Vneshekonombank, or VEB, to help companies refinance foreign debt. VEB chief Vladimir Dmitriyev said last week that the bank had received refinancing applications totaling $75 billion, including $44 billion from companies.
In a dramatic reversal from 1998, the government has accumulated so much money that it will now decide "who should live and who should die," said Alexander Murychev, a senior official with the Russian Union of Industrialists and Entrepreneurs, or RSPP, the big- business lobby group.
It is perhaps little surprise that the Kremlin-friendly billionaires were first in line to get assistance. First up was Oleg Deripaska, who received $4.5 billion to pay back debt to foreign creditors, even though VEB initially said no company would get more than $2.5 billion. Another billionaire, Mikhail Fridman, received $2 billion to help his Alfa Group hold onto its 44 percent stake in VimpelCom, the cellular provider.
Help did not come for free. The billionaires had to transfer the stakes pledged to Western lenders as collateral to the government, meaning that the state will end up owning the assets if the companies fail to repay the loans. The state would then have to decide whether to keep the assets or sell them to private investors.
The state's exit strategy opens the door for abuse, observers said. "The state has not proven to be a very efficient manager so far," said Igor Belikov, head of the Russian Institute of Directors.
"Yet an even greater danger is how the state will exit acquired assets will it transfer them to efficient owners through fair and transparent procedures or pass them through opaque procedures to 'friendly' persons and entities with questionable efficiency skills?" he said.
The bailout measures will trigger a new redistribution of property and strengthen state corporations, which will use their proximity to the Kremlin to snap up many of the prized assets, said Yevgeny Gontmakher, a former deputy social protection minister and Kremlin official in the 1990s.
"As a result, new oligarchs will emerge. They will act on behalf of the state but won't act in the interests of the state," said Gontmakher, who heads the Center for Social Policies at Grinberg's Economics Institute.
"The old oligarchs are retreating into the shadows," he added.
Other observers, however, are skeptical that the state might be using the crisis to concoct schemes to seize private companies or seek revenge for 1990s loans-for-shares auctions, when state property was sold on the cheap.
Anton Danilov-Danilyan, an economist who headed the Kremlin economic department from 1997 to 2004 and still serves as a Kremlin adviser, said the authorities do not have any designs on private property or want a return to a planned economy.
"Even those who favor a bigger state role realize that you can't encompass everything," he said. "There are not enough people to manage that."
He added, however, that some government officials want "better coordination" across the economy, especially in sectors that the government deems strategic.
Yulia Bushueva, co-head of research at UniCredit Aton, said that if the government wanted to lay its hands on private property, it would not bail out companies, including Deripaska's 25 percent stake in mining giant Norilsk Nickel. It would have simply let Deripaska default on his loans and bought his former assets from the Western banks that had lent him the $4.5 billion, Bushueva said. "They are trying to leave the assets in private hands," she added, referring to the government.
A poll of 70 companies the RSPP conducted in early October found that most of them favored state support during the crisis. Eighty-one percent said state support of bank liquidity was necessary, while just less than 20 percent said the state should purchase troubled companies' shares on the open market. Thirteen percent said the state should directly buy assets and companies that are "sensitive for the economy."
Regardless of where they stand on the issue of state involvement, most observers agree that the economic landscape will dramatically change once the crisis is over.
That is why it is crucially important to decide now the point at which the state's intervention into the economy will stop, said Murychev, first executive vice president at RSPP.
NPO Saturn's Dilemma
Anatoly Lisitsyn, a United Russia deputy in the State Duma, said the time to stop is now.
State officials are destroying NPO Saturn, said Lisitsyn, former governor of the Yaroslavl region, where the company is based. He recently sent a letter to President Dmitry Medvedev, deploring what he described as "blackmail" of the company by government officials. The state holds 37 percent of NPO Saturn, and an additional 13 percent would give it a controlling stake.
Over the years, Lastochkin and his management team have built NPO Saturn into what is widely seen as Russia's leading engine maker, investing $500 million of their own money and entering a partnership with France's Snecma to develop engines for civil aircraft. The company also builds engines for fighter jets.
Lastochkin declined repeated requests for comment for this report.
VEB head Dmitriyev, when approached for comment on the sidelines of a recent government meeting, said, "I am simply not aware of the situation."
When pressed minutes later in front of a television camera as to whether NPO Saturn had applied for state support, he said the engine maker did not have the foreign debt that would make it eligible for bailout funds.
Over the past two years, NPO Saturn has fought off attempts to fold it into an ever-growing state holding controlled by Sergei Chemezov, a close ally of Prime Minister Vladimir Putin. Pressure has grown in the form of tax investigations, checks by the Interior Ministry and Audit Chamber and a recent decision to open two criminal cases against the company.
State officials have expressed public dissatisfaction with the company's private owners. Finance Minister Alexei Kudrin, speaking in the Duma late last month, assailed NPO Saturn's "ineffective management," saying the state would soon take steps to change the shareholders' structure. The Industry and Trade Ministry has killed a Duma initiative to earmark additional funds for the Superjet engine program. In September 2007, Denis Manturov, then the head of Oboronprom, was appointed deputy industry minister in a promotion that was widely seen as strengthening Chemezov's influence.
It is unclear what will happen to the engine maker's joint venture with Snecma or the Superjet program itself, which has fallen behind schedule. Snecma spokeswoman Antoinette Menard said the company did not wish to discuss the issue.
Lisitsyn, the Duma deputy, said the Security Council was considering his letter to Medvedev and expressed hope that the Kremlin would hear his "outburst of despair."
"I hope they will allow private business to develop and leave the company alone," he said.