Russian Defaults on State-Backed Loans Unnerve Finance Ministry

Defaults on loans provided under state guarantees at the height of Russia’s record slump four years ago are setting off alarms among officials over the risk-laden program, according to the Finance Ministry.

“During the crisis, decisions were being made very quickly, and risks weren’t adequately assessed,” Konstantin Vyshkovsky, head of the ministry’s debt department, said in an e-mailed response to questions Oct. 21.

Lenders including Russian Agricultural Bank have had a “very large” proportion of defaults on state-backed credits, and several criminal cases have been opened to probe borrowers and issuance procedures, he said. Russia made 132 guarantees totaling 242.8 billion rubles ($7.6 billion) in 2009 and 2010 under the crisis-era program.

With the economy of the world’s biggest energy exporter reeling from a 71 percent plunge in the price of oil in 2008 from its peak, then-Prime Minister Vladimir Putin’s government rushed out funding to stave off an industrial collapse and aid banks. Russia spent more than 3 trillion rubles in 2009 on anti-crisis measures, including state guarantees on loans, Putin told lawmakers in April 2010. The revival of lending in Russia depended on the speed with which the government introduced state guarantees on loans to companies, then-central bank Chairman Sergey Ignatiev said in 2009.

Corporate lending stalled in 2009, growing 0.3 percent on an annual basis, compared with a 34 percent jump the previous year and followed by increases of 12 percent in 2010 and 26 percent in 2011, central bank data show. Russia’s economy grew at an average annual rate of 7 percent during Putin’s presidency from 2000 to 2008 before plunging 7.8 percent in 2009.

Toxic Assets

“In a number of cases we’re seeing that state guarantees were issued on the most problematic loans, where banks used state guarantees to unload their toxic assets,” Vyshkovsky said.

Rosselkhozbank, as Russia’s state lender to the farming industry is also known, and OAO Sberbank have asked for payment on 895 million rubles on the five state-guaranteed loans that failed this year, adding to claims on bad loans that were filed last year, according to Vyshkovsky.

The government has paid a total of 2.5 billion rubles through the first nine months of 2013 to meet its commitments, including 1.8 billion rubles on claims made last year, he said.

Rosselkhozbank’s press service declined to comment. Sberbank’s press service didn’t respond to an e-mailed request for comment.

Stricter Controls

While losses on the guarantees remain small as a percentage of the budget’s planned 14 trillion rubles in spending for next year, the Finance Ministry plans to propose procedures that would require greater safeguards for the state to back loans, according to Vyshkovsky.

“Today state guarantees are seen as a panacea to solve any problem,” he said, adding that the ministry doesn’t plan to issue guarantees for Olympics projects financed by Vnesheconombank, the state-run development lender.

Russia had 172 guarantees for 933.9 billion rubles outstanding as of Sept. 30, plus another 15 dollar-denominated pledges for $11.3 billion, according to Finance Ministry data. Those sums, which include the crisis-program guarantees, are counted as part of Russia’s public debt, even when the state doesn’t expect to have to pay.

Countering Crisis

Under the anti-crisis program overseen by Putin, who was elected to his third presidential term last year, 295 companies designated as systemically important were eligible for a maximum of 300 billion rubles guarantees.

Each assurance could be for as much as 10 billion rubles and last as long as five years. Under the 2009 program, the guarantees may serve as no more than half the collateral used to secure each loan for civilian companies and 70 percent for defense producers.

Borrowers that have defaulted include a grain warehouse in the Siberian region of Omsk, a meat plant in the southern Rostov region and a St. Petersburg shipbuilder that traces its roots back to 1856, according to Vyshkovsky.

“State guarantees are playing an increasingly significant role as a tool for economic policy,” the Finance Ministry said in a budget strategy for 2014-16, published in July.

Russia plans to provide 984.7 billion rubles and $7.8 billion in guarantees over the period, including 574 billion rubles and $3.5 billion next year, according to the document. Possible payments related to the guarantees will add 412.7 billion rubles to the deficit during the period.

State guarantees are a useful tool and have been deployed successfully in other countries, said Igor Nikolaev, a partner at Moscow-based auditor FBK.

“In Russian practice, though, getting a guarantee isn’t a transparent procedure, which hurts the quality of the projects that are selected,” he said by telephone. “State guarantees as an instrument don’t need to be stricter, they need to be simplified and made more transparent.”

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