Government Shifts Financial Support to Banks

Russia will extend support to the banking sector and sharply scale back help to industries, regions and infrastructure projects as it is forced to proceed with drastic budget cuts, First Deputy Prime Minister Igor Shuvalov said Wednesday.

Participants at Troika Dialog's Russia investment forum said Shuvalov told them that the government was suspending its program of releasing $50 billion to help companies repay foreign debts after having spent only one-fifth of the sum.

"For us, the most important thing today is macroeconomic stability and support of the banking sector," Shuvalov said.

Russia is facing the worst economic crisis of the decade with industrial production contracting sharply after years of growth and companies laying off thousands of people, raising the prospects of social unrest.

The ruble has weakened some 35 percent versus the dollar in the past six months amid heavy capital outflows and a collapse of budget revenues because of a fall in oil prices.

Shuvalov said he expected the second and third quarters of this year to be especially challenging and the number of unemployed could rise by a million people. The latest data showed that Russia has 5.8 million unemployed.

But the rise in unemployment will not stop the government from a sharp budget cut, including reduction of spending on infrastructure projects and support of regions.

Only a few key monopolies can count on state support if the projects in question are carrying international obligations, Shuvalov said.

"Today is a very favorable period to restructure industries," Shuvalov said.

The government plans to recalculate the budget for 2009 on an assumption of oil price of $41 per barrel instead of the previous $95, and Shuvalov said the cuts would be announced Thursday. He expects the GDP to fall or be at best flat this year.

The government would focus on supporting the military complex as well as Gazprom, Russian Railways and power firms and does not plan to create a bad asset bank, as it could spur corruption.

Russian firms have to redeem around between $80 billion and $120 billion of foreign debt this year, which could be adversely affected by the government's decision to suspend refinancing help.

The government has already spent $11 billion on refinancing help, of which $4.5 billion went to businessman Oleg Deripaska's United Company RusAl to help it repay a Western loan it took to buy a blocking stake Norilsk Nickel.

Shuvalov hinted that he regretted the move as the state could have bought this stake today for just $1.5 billion.

He also said the government had yet to agree on a package of support measures for the banking sector, which could be announced Thursday.

The Cabinet is studying a second wave of support for the struggling banking sector, the total package of which has been valued at between $27 billion and $40 billion.