State to Guarantee RZD Bonds

The Cabinet on Thursday approved Russian Railways' investment plan for next year, which will include state-backed bonds worth $3.6 billion, a government spokesman said.

The decision to have the government back the state railway's debt is a novelty for Russia, which in the past has only issued bonds to cover budget shortfalls. But with companies finding it increasingly difficult to raise funds through other channels, the decision could open a new financing tactic for state-owned firms.

Prime Minister Vladimir Putin said Russian Railways must not reduce its previously announced spending plans, and the Cabinet voted to pass the company's 2009 budget of 434.2 billion rubles ($15.8 billion).

The plan projects that railway traffic will drop 6 percent next year. On the upside, Putin said, falling prices for metals and cement will make construction cheaper.

Russian Railways, or RZD, reduced its investment this year by one-quarter to 388 billion rubles in the aftermath of the global financial crisis.

The government-backed bonds are one of the plan's options for raising a portion of the money, Cabinet spokesman Dmitry Peskov said. Officials will work out details for the issue later, he said.

The company is planning to raise 100 billion rubles through the bonds, the Cabinet said on its web site. RZD is in talks with banks about the interest rate for the securities, Transportation Minister Igor Levitin said, Interfax reported.

A share issue to the government was another option for filling its investment budget, RZD chief Vladimir Yakunin said. The company is also looking to borrow 52.4 billion rubles from banks, the Cabinet statement said.

On Friday, Yakunin is meeting the chiefs of the country's largest banks to discuss financing options, RZD said in a separate statement.

Moody's Investor Services, Fitch Ratings, and Standard and Poor's all have investment-grade ratings for the railway company.

A bond issue to finance railroad construction would open a new page in the history of Russia's financial market, said Kirill Kazanli, an analyst at Troika Dialog. The government has made building roads and other infrastructure a priority in order to bolster economic development, he said.

The government now predicts economic growth will slide to 3.5 percent next year from about 7 percent in 2008, but there are hopes that the rate will begin to pick up speed in the future.

"The bet is on infrastructure to be ready for a rebound in economic growth when it happens," Kazanli said.

The investment will also help steel and cement producers replace their contracting exports as the global economy runs out of steam, he said.