Page 1 of 2 Russia's next revolution has started - at the bank
By John Helmer
MOSCOW - The first sign of a Russian economic crisis is a line of desperate
people, pushing and shoving outside a locked door, on which a scribbled sign
has been posted indicating that the cash those outside thought they owned would
be unavailable until further notice.
In the classic Soviet tradition, a handful of enterprising individuals would go
to the back door to see what could be arranged out of the glare of publicity
and with a little bribery for those inside. There they were told the truth -
their money had gone.
So far, as the financial crisis continues to engulf the world, only
four or five Russian banks have gone to the wall, visibly - KIT Finance, a
small St Petersburg investment institution connected to cabinet ministers; Bank
Soyuz, the cash box of Oleg Deripaska's aluminum-based holding; EvrasiaTsentr
("Eurasia Center"), a tiny Moscow lender; and Globex, a slightly bigger retail
deposit bank, also in Moscow.
All have been swiftly secured, without the distress becoming too public or a
line of angry depositors forming outside. The sale of Renaissance Capital, a
fifth investment house, for a fraction of its pre-crisis value, was another
distress sign, but not in the mass market.
The apparent calm reflects Russians' confidence in the state. Since the earlier
financial crises of the post-communist period were all triggered by the
weakness of the state treasury, Russian depositors believe their savings are
relatively secure this time because state reserves are huge and the state banks
flush. And the depositors are right.
They can also hear their leaders assuring them that the state budget will be
used to revive and re-stimulate domestic investment and demand. A decade ago,
former president Boris Yeltsin let the International Monetary Fund dictate
massive cuts in government spending while letting his brand new oligarchs ship
the untaxed profits of their export concessions in oil, gas, steel, nickel and
aluminum to safe havens abroad. This time there is no danger of the first type
of disinvestment. The second type is also less likely, because President Dmitry
Medvedev and Prime Minister Vladimir Putin control the oligarchs and not the
other way round.
Nonetheless, there is a crisis queue right now; according to Vnesheconombank
(VEB), a state financial institution, at the last count there were 55
applicants for help standing outside the door. Until this month, the 55 - 20
banks and 35 industrial corporations - were among the most powerful and richest
enterprises in the country, whose shares made their proprietors the richest men
in Russia and in Europe.
VEB has a history of servicing lines of desperate Russian enterprises. Begun in
1922, it was the first state trading bank after the communist revolution had
wiped out privately owned, commercial banks and initially handled short-term
financing needs for export-import transactions. By the time the Soviet Union
ended in 1991, VEB was responsible for all foreign debts of the defunct state.
Renamed the Bank for Development in 2007, it has been revived as the conduit
through which the vast cash reserves and special wealth funds of the government
can be channeled into the domestic economy.
Not since the 1920s has VEB played the role of peak power banker to Russian
commerce. Then and now, that's a unique political role, and those on the
present VEB board have their own special standing in the current factional
alignment between the Kremlin of Medvedev and the White House (as the prime
ministry is known in Moscow) of Putin.
Putin is chairman of the VEB board. Under him sit eight members, including
Victor Zubkov, first deputy prime minister and the senior official in charge of
domestic consumption and agriculture; Sergei Ivanov, a former intelligence
officer, defense minister, and now supervisor of the military-industrial
complex; and Dmitry Kozak.
Kozak, a St Petersburg lawyer, was until this week obliged to cool his heels as
the junior minister of regional development. On Tuesday, he was promoted by
Medvedev to be minister in charge of the preparations for the Sochi Olympic
Games to be held in the winter of 2014.
Although that job remains a provincial one, and Kozak has not quite escaped the
exile from Moscow into which he was sent in September 2004, he is a powerful
figure for the faction that opposes the ambitions of Deputy Prime Minister Igor
Sechin and his allies. Sechin, a former Kremlin assistant to Putin, is now the
deputy prime minister in charge of resources, energy and industry. In that
position, he supervises the concessions through which the oligarchs control
their oil, gas, metal and mining empires. Those who have challenged Sechin in
the past - cabinet ministers, the head of the state oil pipeline company, the
head of the state tanker fleet, as well as St Petersburgers Ivanov and Kozak -
have all been beaten, and many forced into exile. For some, opposing Sechin has
led to prison or foreign asylum.
The first challenge to Sechin since Medvedev became president in May was the
clash between British Petroleum (BP) and TNK-BP, controlled by Mikhail Fridman.
As Fridman openly pointed out, BP had tried to oust Fridman and his
co-shareholders by making a secret pact with Gazprom to buy them out. What
Fridman didn't say was that Medvedev, formerly chairman of the Gazprom board,
and his legal counsel at Gazprom, Konstantin Chuichenko, had encouraged BP to
believe it would be supported. BP then made the mistake of trying to play
Kremlin politics. Fridman rallied Putin and Sechin, who also serves as chairman
of Rosneft, the state oil producer. Medvedev saw the lineup, and the outcome
was inevitable. BP was defeated, and TNK-BP emerged with Fridman to call the
shots on how this oil company will be managed in future.
Fridman and his diversified conglomerate of banking, oil, mining and other
assets has also consolidated his relationship with Medvedev. On present
indications, Fridman's core business, Alfa Bank, is "in great shape - cash on
hand, unexposed and gaining market share", an insider claims. "We see the
current environment as an opportunity to increase our market share in our
retail, commercial and investment banking businesses."
Fridman is also the only
commercial banker publicly known to have met
Medvedev since the crisis broke. That was on
October 6. The following day, Medvedev met with and the state bankers -
from SBerbank, VTB and VEB and the head of
the central bank head.
Such visible signs are clues. Calculations of how much paper value the Russian
oligarchs have lost in the crisis create mind-boggling numbers, but their
accuracy is questionable. That's because they don't discriminate between the
gross wealth generated by stock market value and the wealth that is net of
debt. Leverage is now the key to the survival of Russia's biggest enterprises
and the oligarchs who control them; the lower the leverage, the higher the
survival chances.
But if oligarchs lack short-term liquidity or access to credit, they face loss
of assets, dwindling of their cash piles and re-nationalization - that is the
transfer of their concessions to competitors.
What passes through the money window of VEB is therefore the real evidence of
how the distribution of power may be changing in Russia today. Sechin, it
should be noted, is not a member of the VEB board. This creates a more level
playing field at VEB for those aspiring to enlarge their concessions, and
attack those concessions Sechin protects. This is now the revolutionary dynamic
of Russian politics. It is also governed by simple arithmetic.
Legislation enacted by parliament last week for the emergency stimulus of the
Russian economy provides up to US$50 billion in loans from VEB for the
refinancing of foreign debt which Russian banks and other companies have raised
but face trouble repaying or refinancing in the current crisis. That's the
amount in the vault, behind the locked door, in front of which stands the queue
of 55. The notice on the door says that credits will be issued on a
discretionary basis, priced at no less than 5% over the benchmark London
Interbank Offered Rate, and - here's the crunch - no more than $2.5 billion for
a single applicant.
According to VEB chairman Vladimir Dmitriev, the aggregate borrowing
applications already amount to more than VEB has agreed with the government and
central bank to lend. Who gets refinancing, and how much, is thus a crucial
test of how stable the current oligarch system is, and how likely the
concessions they administer may be about to change. VEB has promised the queue
that within 18 days it will decide on all applications filed by October 25.
The first test puts Sechin on the defensive, for it is his Rosneft whose
financing need is the largest and most urgent. Rosneft absorbed the oil
production assets of the defunct Yukos when its founder Mikhail Khodorkovsky
went to jail and Yukos was convicted of tax fraud and wound up. The company now
owes $11 billion in short-term debt, and $23 billion in total debt. Only
Gazprom is more heavily leveraged, with $21 billion in short-term debt and $61
billion in long-term debt.
According to news repots in Moscow, Rosneft has applied to VEB for $4.2 billion
in emergency cash; LUKOIL, controlled by Vagit Alekperov, for $2 billion;
Fridman's TNK-BP for $1.8 billion; and Gazprom for $1 billion. At the moment,
LUKOIL has total debts of
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