#18 - JRL 7173
May 8, 2003
Integration into World Economy Demands Sacrifice
Russian government has unexpectedly focused on the increase of foreign debt of Russia's largest companies
It has been said by Russian authorities and experts for several years already that it would be good for the country to get incorporated into the world economy and to participate in the international division of labor. The 1998 economic crisis in Russia should have disillusioned most ardent reformers, because excessive openness and dependence upon the situation on the world markets is ruinous for Russian economy. China, for example, makes its market open only under strict political control. It means that it can ban or limit foreign presence on the market at any moment, even despite the fact that China is a WTO member. But Russia's free market reformers seem to have no restraints, which adds more problems to the government.
Right before the May vacations, the Russian government unexpectedly focused on the increase of foreign debt of Russia's largest companies. Deputy Minister of Finance Sergey Kolotukhin even warned large-scale business that authorities would take measures to restrict foreign debt size for Russian companies. This very much reminds of the helpless attempts made by Viktor Chernomyrdin government to reveal the initiators of the 1995 "black Tuesday". It may sound incredible but those attempts disagreed with the line declared by the government.
The situation is very much alike this time. Russian companies actually attract money from abroad when they fail to find finance in the country. At that, under conditions of investment deficit, they borrow more than they should. However, the limit of foreign debt of Russian companies is not defined from a scientific point of view. The Russian Ministry of Finance made calculations defining the total debt balance for the whole of the country. These calculations obviously disregard needs of separate companies at that. Why should private companies hesitate to borrow money abroad when the state-run monopoly Gazprom has managed to place securities to the sum of $1.75 billion since beginning of the year. And they do. The Tyumen Oil Company (TNK) borrowed $300 million, Alrosa - $500 million, Norilsk Nickel - $250 million. And so on.
Should the authorities in this situation restrict growth of domestic companies, which in its turn may affect the state budget revenues? Or, should the government allow all companies to borrow as much money abroad as they wish and let Russia's total foreign debt increase because of the increasing amount of money borrowed by Russian companies? Any other government in some other country would immediately focus on banking reform in this situation. This measure should be taken to let domestic companies borrow money in Russian banks. However, the situation is very particular in Russia where talks about banking reform always ended in nothing. And Russian bankers demand that the government should guarantee "special" conditions for them. Bankers of this kind would be immediately dismissed abroad. In Russia, on the contrary, the government is making attempts to persuade oligarchs not to borrow too much.
It is clear why the Russian government is so alarmed. They remember that the Asian crisis five years ago was caused by a sharp disproportion between minimal governmental debts and high debts of private companies. If we take into consideration the fact that the governmental debt is considerable, we certainly cannot take seriously assurances of Minister of Finance Alexey Kudrin saying that another default is impossible. To be objective, we should admit that the situation was even worse before the crisis occurred in 1998.
The government now prefers not to mention about another tendency that, unlike the foreign debt increase, may pose a greater danger to the country as well as for activity of the government. The present-day situation in the world makes Russia's largest companies unite with large foreign ones. This allows the Russian business to feel more confident on the world markets and brings them more investment that is sufficient for further development.
At the one hand, the tendency satisfies the policy declared by the government: all measures are good for foreign investment attraction. It also doesn't contradict the development logic of the domestic business. Some time ago it was popular practice when companies hired western top-managers who have served the time at home and former politicians for improvement of their business. However, as the measure proved ineffective for progress on the western markets, it was decided to start strategic partnership with giants of economic imperialism. So, the deal concluded between TNK and British Petroleum, the intention of the recently joined companies Yukos and Sibneft to sell a large share holding to a strategic foreign investor should be welcomed by the government. However, as it turns out, judging by information received from the House of Government, high-ranking officials are not ready for this situation.
Indeed, governmental officials should approve of creation of the world's fourth largest oil company as a response to Americans who, contrary to the international law, seized Iraqi oil. But they cannot understand why this newly created company can be sold to foreigners. This is treated very much like a diversion. This is then a reason why Russian mass media report that the Ministry for Anti-Monopoly Policy won't allow Yukos and Sibneft unite, that the Kremlin will frustrate consolidation of oil oligarchs, and so on. Although analysts say the unification of the two oil companies is a breakthrough, what is the objective of the breakthrough then?
Yukos chairman of board Mikhail Khodorkovsky observes the law and regularly pays all debts, at that, he cares about future prosperity of his company. The Russian Constitution doesn't say that his business must be obligatorily Russian. And it is quite evident that prosperity of the business depends upon incorporation into the transnational oil companies' club, where neither Yukos nor the joint company YukosSibneft are welcomed so much. Merger with a foreign transnational company is a way-out in the situation. Mikhail Khodorkovsky will certainly seize this opportunity to further have no problems with oil export to China or the USA, of with money for development of the company. Probably, this policy disagrees with so-called "national" interests, but it meets the law and freedom of business.
Coming of large-scale investors from abroad will seriously change the economic situation in the country, and the changes won't be quite to the liking of the Russian top officials and ordinary citizens. Certainly, foreign investors will take every effort to make the crude Russian business transparent and complying with western corporate standards, the profitability and effectiveness norms.
At that, no allowances will be made for the social situation in the country. Unnecessary personnel will be dismissed; Russian plants will be getting less orders, because foreign shareholders are unlikely to be satisfied with Russian products and won't prefer them to traditional and reliable partners. As for prices for export and prices inside the country, they will be fixed on a level that is desirable for the foreign owner. And this is despite the fact that the company extracts Russian oil with the help of Russian drillers. We will buy oil and oil products from foreigners.
The situation would be the same if foreign shareholders joined the capital of Russia's energy monopolist RAO UES of Russia: we would have to buy electricity from foreigners as well. In fact, this quite satisfies the policy declared by the government. Such is Russia government's national economy policy. Coming of foreign investors to the country will make it irreversible.
In this connection, anxiety of the government about big debts of Russian companies seems to be not quite serious. Especially that too big debts is one of the ways to attract foreign shareholders in the country. Debtor companies are not prohibited to settle their debts with shares, as they often do it now.