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. Last Updated: 07/27/2016

Cabinet Resorts to Domestic Lending




A lack of new foreign loans has forced the government to tap Russian commercial banks to finance spending, Finance Minister Mikhail Kasyanov said Thursday.


Kasyanov was vague on details of the behind-the-scenes process, which he said was forced on the government by its need to meet massive debt repayments to international creditors.


"The one tranche that Russia has received from the International Monetary Fund is not enough to make all remaining payments on foreign debt; another $1 billion in external funds needs to be found for that," he said.


"Therefore, Russia is making payments through a scheme of loans taken from some commercial Russian banks and the Central Bank," Kasyanov told a news conference Thursday.


Kasyanov was laconically thrifty with details on what the scheme might entail.


He would only say that in order to boost the budget's hard currency income and balance the books, funds are regularly garnered by raising loans from the Central Bank and "from banks that have, on the whole, some state participation."


Finance Ministry officials were also unwilling to comment on the scheme.


Analysts said such a system could create another covert debt pyramid for the Finance Ministry for which payment in full could be carried through in the budget from year to year.


"It would be better to close the loopholes for capital flight and to continue to improve tax collection, than create an off-market debt scheme to boost hard currency income," said Charles Blitzer, an economist at Donaldson, Lufkin and Jenrette.


"But that would require a little more effort. This, however, reeks of non-transparency," he said.


Russia has as much as $1.62 billion in foreign debt repayments that fall due in November and December this year, according to calculations made by Russian sovereign debt expert David Riley of the London-based rating agency Fitch IBCA.


And it is finding it extremely hard to raise loans from abroad. While the 1999 federal budget allows for $9.5 billion in foreign borrowings, Russia has so far only raised $5.9 billion, Finance Ministry officials said Thursday in statements reported by Prime Tass.


Meanwhile, Kasyanov put the figure at "somewhere around $5 billion."


Whatever the amount the Finance Ministry claims to have raised, economists were astonished to hear figures as high as $5 billion.


"How can that be possible?" asked Peter Westin, an economist at the Russian European Center for Economic Policy.


Russia has received just $1.14 billion so far this year - $150 million in World Bank loans, $640 million in International Monetary Fund credits and $350 million of a $700 million loan program approved by the Japanese government for this year - Riley at Fitch IBCA said.


Some funds may also have been brought in to the government by export loans from different states, but these are unlikely to bring the total anywhere near $5.9 billion, and amounts brought in this way are not made public, Riley added.


Russia was essentially cut off from international lenders for the first half of this year while it negotiated a new agreement with the IMF.


While economists in both London and Russia were scratching the heads over where the influx of funds might have come from, Kasyanov was unworried.


"These figures are nothing new and do not represent anything of interest," he told journalists Thursday.


Even though it is well known that the Central Bank has long been delving into the nation's hard currency reserves to lend money to the Finance Ministry to pay off monthly debt dues, close observers of the Russian economy say they have been left in the dark about any debt deals clinched with commercial banks. The Finance Ministry may be issuing bonds to sell on a strictly off-market and nonpublic basis, analysts said.


An earlier report of off-market debt issues based on private contracts between organizations came to the fore when Finance Ministry documents were leaked disclosing details of a deal between the ministry and the government agency charged with restructuring the banking sector, ARKO.


Finance Ministry documents dated April 29 showed ARKO spent 2.5 billion rubles ($95.7 million) buying special Finance Ministry off-market bonds.


The bonds were part of an emission sold on an internal private market directly to buyers as part of a government strategy to fill in its budget shortfall.


The five- to seven-month ruble-denominated bonds sold to ARKO had an annual yield of just 25 percent payable on maturity.


Analysts were critical of that deal at the time, saying that it smacked of non-transparency and that the government had only just printed money to create ARKO but then through the debt scheme had immediately borrowed those funds back.


The hard-currency-raising scheme would probably be carried out through the partially-state-controlled banks Sberbank, Vneshekonombank and Vneshtorgbank, economists said Thursday.


"We have no information on the volume of paper issued so far by the Ministry of Finance or on the yields they might have been issued at. These deals are not conducted at auctions but according to private contracts," said Alexei Zabotkin, a fixed income analyst at United Financial Group.


"I had no idea they'd even begun issuing paper to these banks. I had heard reports that such a scheme was under consideration," he said.


Finance Ministry officials were either unavailable for comment later Thursday or said that the scheme was not in their field.


However, even though an additional bill had to go through parliament to allow the Central Bank to in essence finance Russia's budget by unlocking currency reserves to pay off Russia's foreign debt, the emission of Finance Ministry bonds is written into Russia's budget for 1999.


"The budget plan maps out emission of state treasury bills on the primary market in the second half of 1999 for a sum totaling 17.9 billion rubles," the Russian federal budget for 1999 says.


No further legislation is needed, leaving the Finance Ministry free to trade the bonds with whomsoever it pleases.