Russian agribusiness group EkoNiva recently got a 2 billion ruble ($32 million) loan to expand its dairy operations in the Black Earth region of Voronezh. There’s nothing unusual about that, except that the loan came from the Central Bank of Russia, which has set aside 100 billion rubles to help finance industrial and agricultural projects.
Central bankers usually stick to macroeconomic policy and leave business lending to others. But Western sanctions imposed against Russia for its aggression in Ukraine have made it hard for the country’s banks and companies to raise money. So over the past few months, Russia’s central bank and government have become lenders of last resort. “We need to quickly saturate the economy with long-term, cheap financing,” says Andrey Margolin, an economist and vice rector of a state economics academy with close ties to Vladimir Putin.
The government says it’s prepared to spend as much as 60 percent of a $75 billion sovereign wealth fund to help provide financing for companies as well as major industrial and infrastructure projects. It’s also pressuring the central bank to expand its project finance program. Separately, the bank has pumped tens of billions into the nation’s financial institutions since last year, and has helped state oil giant Rosneft raise money to pay $26 billion in foreign currency debt.
Moscow has restricted Western imports in retaliation for the sanctions, and a weaker ruble has made foreign goods more expensive. That should have created opportunities for Russian companies by boosting demand for their products at home. But high domestic interest rates and the lack of access to foreign capital have prevented many from taking advantage of the situation.
EkoNiva would have had to pay at least 16 percent interest on a commercial bank loan, vs. the 11.5 percent it got under the central bank program, according to Wolfgang Bläsi, chief financial officer of EkoNiva’s German-based parent company. The central bank funnels the aid through a state-owned agricultural bank.
As the central bank poured short-term financing into the banking system, lenders were instructed “to put at least 50 percent into projects the government wanted,” says Vyacheslav Smolyaninov, chief equity strategist at BCS Financial Group in Moscow. And the Kremlin drew up a list of 199 “systemically important” companies that will receive priority for aid, including loan guarantees. State-owned energy giants Rosneft and Gazprom are on the list, as well as supermarket chains, a fertilizer company, and a consumer electronics retailer.
Including the money in the sovereign wealth funds, the government has $358 billion in foreign currency reserves and gold. So why not put some to work aiding businesses? One problem is that some banks and companies are poorly managed and deserve to go under, according to Bernie Sucher, a longtime U.S. investor in Russia who serves on the board of Moscow-based UFG Asset Management. Bailing them out only delays the day of reckoning, he says. That’s what happened in the 2008 financial crisis in Russia, when “the government sprayed liquidity all over the economy,” he says. “The big miss in 2008 was the failure to use the crisis to pursue deep structural reforms.”
The Kremlin’s largesse will only tighten its control over an economy already dominated by large, inefficient state-run companies such as Rosneft—a situation that weighs on the economy. Russia’s growth began flagging in 2012, long before last year’s decline in oil prices and sanctions pushed the economy into crisis.
The $358 billion stash could be drained pretty quickly. Reserves already are down 30 percent from last year’s peak, as the central bank has repeatedly stepped into the currency markets to buy rubles. If crude oil remains close to the current price of about $50 a barrel next year, the Kremlin is likely to deplete a $73 billion sovereign wealth fund it’s been using to fill a budget shortfall. In that case it would probably turn to the $75 billion wealth fund—originally intended to buttress the country’s pension system—now being tapped for corporate aid, says Dmitry Polevoy, chief Russia economist at ING Bank Eurasia in Moscow.
More than $20 billion in that fund has been earmarked for projects, but relatively little has been spent. That’s partly because the Kremlin is carefully doling out the money in installments and partly because red tape and bureaucracy have slowed distribution, Polevoy says.
Central Bank Governor Elvira Nabiullina is reluctant to expand the lending program that aided EkoNiva. She said in June that the program hadn’t stimulated private investment, as backers had predicted it would. Others, including Dmitry Tulin, a first deputy central bank governor, want to do more. “If our financial system doesn’t turn its face toward material production, then our country won’t have a future,” he told the newspaper Komsomolskaya Pravda in April. Meanwhile, the Kremlin is mining new sources of aid. Its latest find: Rusnano, a state investment fund created in 2011 to support an emerging nanotechnology industry. On July 27, Rusnano announced it would put almost $100 million into a new pool for Russian companies that would help reduce the country’s dependence on imported technology. Its co-investor: Moscow-based SMP Bank, owned by Putin friends Boris and Arkady Rotenberg. “There’s no limit to where they’re looking now,” a senior government official says. “They’re taking money wherever they can find it.”
—With Ilya Arkhipov and Andrey Biryukov
The bottom line: Russia’s central bank and government are spending billions to prop up struggling companies and projects.