Kremlin Aide Sees Bad Assets Program

MTDvorkovich, seen in his office Friday, says state-run banks may co-manage toxic assets received from borrowers.��
State-run banks may co-manage toxic assets they get from borrowers who default on loans, the Kremlin's top economic aide, Arkady Dvorkovich, said in an interview Friday.

Dvorkovich also said the government might cover this year's budget deficit with bonds worth "a few hundred billion rubles" and suggested that Russia would recover from the crisis earlier than other countries.

"I think it would be reasonable for state banks to cooperate in managing their problem assets," Dvorkovich told The Moscow Times. "It would be a good way to cut expenses. And they won't necessarily have to merge the assets for that."

Dvorkovich said he was referring to noncore assets that state-controlled banks held as collateral for defaulted loans or those that they already had on their books.

Dvorkovich said he knew that VTB and Sberbank are exchanging information about how they manage their noncore assets, "trying to work in a coordinated manner on the same problems."

VTB would not comment Friday on the discussions or the idea of co-managing problem assets, and it declined to disclose its noncore assets.

Sberbank did not respond to requests for comment.

Yevgeny Nadorshin, chief economist at Trust National Bank, expressed skepticism about the idea of lumping together noncore assets. "What would managing an oil well and a restaurant have in common?" Nadorshin said. "A government collection of assets from banks in return for more financial support would be a more reasonable [solution] because the state has assets to which the toxic ones could be added."

Dvorkovich said the state might consolidate problem assets. "So far, no one in the world has managed to consolidate and successfully manage such assets," he said. "But we do not rule out that way completely."

Separately, Dvorkovich said in the interview that the government might issue bonds for a few hundred billion rubles -- part of which might be borrowed in dollars -- to cover the budget deficit this year.

"We can fully cover the deficit with the Reserve Fund money," Dvorkovich said, speaking in his parquet-floored office on Staraya Ploshchad, which was occupied by Soviet leader Leonid Brezhnev in the 1960s. "But we don't rule out issuing state bonds for a few hundred billion rubles because we understand that the crisis may continue beyond 2009."

Dvorkovich said earlier in the week that the 2009 deficit would exceed 6 percent of the country's gross domestic product, or 2.5 trillion rubles ($69 billion). It will be the first budget shortfall in a decade after commodity prices crashed, with oil dropping by 70 percent since a July peak of $143 a barrel.

Dvorkovich said the state might issue some bonds in dollars. "We know that those who have dollars today are dreaming about investing them in state bonds," he said.

Nadorshin, of Trust, said the government would probably try to raise as much as possible through bonds and plug the rest of the deficit from the 5 trillion ruble Reserve Fund.

Budget spending will remain at the previously planned level of 9.024 trillion rubles, but the structure of the spending will change, Dvorkovich said.

"We will prioritize some of our projects, mainly social and infrastructure ones, while we may delay some others," he said. "The Finance Ministry, for instance, has proposed cutting around 15 percent of some of the government's expenses, partly administrative costs."

The government is now revising the budget it adopted last year, which was calculated at $95-per-barrel oil, to assume an average price of $41.

Dvorkovich said Sberbank would soon get at least 400 billion rubles as an injection to its capital.

On Thursday, the government approved a new package of up to 500 billion rubles ($14 billion) for VTB, the country's second-biggest lender; Vneshekonombank, which is overseeing the state's bailout program; and private banks.

Dvorkovich said the government would not take a big stake in the private sector because it does not want it and would face a fight from investors.

"The state's taking a significant stake in the private sector is highly unlikely," he said. "Businessmen in Russia do not give away their assets easily. It was too hard for them to get hold of their companies."

He added: "The government does not actually want to bear the full responsibility for all those problem assets."

As the ruble settles near the bottom of its trading band at 41 against a dollar/euro basket, Dvorkovich said, market players will stop the flood of currency transactions that have earned them millions of dollars as the ruble was gradually devalued over the past three months.

"A new phase for the economy is beginning now because exporting is profitable and the currency markets are more stable," he said.


Vladimir Filonov / MT
Dvorkovich voiced doubt that the state would take a big stake in the private sector. "Businessmen in Russia do not give away their assets easily," he said.
The government expects the revival of some industries in the second quarter as programs jointly funded by the state and private investors to build infrastructure and homes are implemented. "For instance, metals producers will be provided with contracts through this. In this way, we want to revitalize the whole chain," Dvorkovich said.

A decision on the biggest current business project in Russia -- the possible merger of Metalloinvest, Norilsk Nickel, Raspadskaya, Russneft and Uralkali -- will be made soon, Dvorkovich said.

RusAl chief executive Oleg Deripaska and Norilsk Nickel major shareholder Vladimir Potanin have suggested creating a conglomerate of at least five companies producing nickel, iron ore, coal, oil and potash. Metalloinvest chairman Alisher Usmanov wants to merge his company with Norilsk.

The state has been offered a 25 percent stake in either merger if it helps cover or refinance the participants' multibillion-dollar debts.

"The opinions of the shareholders of the companies' involved differ," Dvorkovich said. "And I'm afraid they won't agree on anything without us.

"We understand that it would be unfair to cover private companies' debts with the money of Russian taxpayers," he said. "But if we do not help those companies, thousands of their workers will be put in danger."

The official unemployment rate is expected to reach 7.5 percent this year. Programs to retrain and relocate workers are expected to begin across the country by late March, Dvorkovich said.

Some workers who are moved to other cities or regions may take up jobs in infrastructure and housing construction, which would help Russia get out of the crisis quicker than other countries, Dvorkovich said.

"Stabilization on the low level may take place as early as in the second part of the year," said Dvorkovich, 36, who holds a master's degree in economics from Duke University in North Carolina. "The anti-crisis projects -- mainly infrastructure and housing construction -- will help the Russian economy get out of the crisis a bit earlier than other world economies."

As enthusiasm for buying dollars fades, sky-high interest rates on loans will go down soon, Dvorkovich said.

"We understand that taking out loans at current interest rates is dangerous," he said. "The interest rates may fall very soon. It will certainly happen in the first half of the year."

He said the timing of the drop in rates depended on expectations for both the inflation and ruble exchange rates. "The Central Bank is obliged to keep [lending] rates high to curb pressure on the national currency," Dvorkovich said.

Looking back at the more than one-third of forex reserves that the Central Bank has spent since November on gradually devaluing the ruble, Dvorkovich said the government did not initially expect the cost to be so high.

"Spending that amount of reserves to avoid a sharp fall of the ruble was the reasonable cost of financial stability, which we were paying consciously," Dvorkovich said. "But we didn't initially expect it would be that high."

Russia spent more than $200 billion of its reserves, the world's third largest, as the Central Bank softened the ruble's fall. The ruble has lost 26 percent of its value since the Central Bank started to widen its trading band Nov. 11.

Now that the currency risks are gone, Dvorkovich said, it is safe to invest in Russia.

"The price of assets has plummeted, while the main financial risks are substantially lower," Dvorkovich said. "It is a very good time to invest in the Russian economy."

BNP Paribas has estimated that foreign and local investors have withdrawn $290 billion from Russia since August, including through bets on the ruble's devaluation.

"The question is whether some of the foreign investors want to go through this uneasy time with us," Dvorkovich said. "I think those who are more far-sighted will do it and will invest in our assets. Those who are still cautious about the financial risks and get in later are likely to earn less."

As for political risks, which worried investors after Prime Minister Vladimir Putin harshly criticized Mechel in July and Russia fought a brief war with Georgia in August, Dvorkovich said they should not be a problem.

"There are no political risks for foreign investors in Russia," he said.

Asked why the Russian stock market and economy have performed worse than those in other emerging markets, Dvorkovich acknowledged that not every policy had been ideal.

"We haven't managed to diversify sufficiently from our dependency on commodities exports. We haven't had enough time for that," he said. "We haven't managed to build a financial system strong enough to become independent of foreign financial resources, and that is why we are going through all these problems now.

"But it all doesn't mean that we are worse than the others," Dvorkovich said. "We just still have a lot of work to do."