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. Last Updated: 07/27/2016

State Loan for VSM To Pay Bond Debts

It can't pay its own sovereign debts, but the Russian government Tuesday moved to help pay off 435 million rubles ($19 million) of bonds issued by the company set up to build a high-speed rail link, accepting as collateral a grab bag of condemned buildings, a half-built hotel and an uncertain share portfolio.

The Finance Ministry sidestepped State Duma opposition to push through a loan of 80 million rubles for the company, known as VSM, to pay off almost all the company bonds that are held by private individuals. Corporate holders of the bonds - who are owed 335 million rubles of the 435 million rubles outstanding - will have to wait for their money for now, although VSM is lobbying hard for the state to cover those obligations also.

VSM missed bond payments due in September and October and trading in its bonds was suspended in mid-January.

The Duma had removed from the 1999 draft budget a provision for funds to pay off the bonds, which had been backed by a joint federal and St. Petersburg government guarantee.

However, while the budget originally simply allocated a state subsidy for VSM, Tuesday's grant was a loan backed by collateral, said Andrei Vorontsov, deputy head of the Finance Ministry's department for securities and financial markets.

VSM, in which the government holds a controlling stake, had said last month that a loan was close to being released, adding that the company and the government just had to agree on collateral for the credit.

The state and the company have agreed on a selection of VSM assets - most of them of dubious value - as collateral. These include several condemned buildings in St. Petersburg, an incomplete - and long-abandoned - second section of the Hotel St. Petersburg, some unspecified buildings in Moscow and a handful of scattered holdings in various enterprises.

The $5 billion project to create a rail service between Moscow and St. Petersburg that would make the journey in 2 1/2 hours has been harshly criticized on economic and environmental grounds ever since VSM was founded in 1991. But strong support from leading government officials helped get the project off the ground and, even in the project's death throes, the Russian government has been reluctant to cut VSM loose.

Provisions to back the government guarantees for the bonds issued by VSM were included in both the 1998 budget and in the 1999 draft budget.

However, the Duma killed off the guarantees in the 1999 bill. Deputies said the cash-strapped Russian state had more important obligations than meeting its guarantees to the VSM bonds.

"Last year the government paid off its treasury-bill obligations to private clients, but this year we decided that we have higher-priority state debts to pay off than those to VSM's bondholders," said Viktor Gitin, deputy of Yabloko's Duma faction who is also deputy head of the budget subcommittee of the Duma's Banking and Budget committee.

Gitin said Tuesday that he was surprised to hear about the Finance Ministry's move, but doubted that it could be reversed.

With the 1999 budget not yet law, the government is officially acting under an extension of the 1998 budget, where it uses one-twelfth of the 1998 budget's total revenue and expenditure figures for each month until the 1999 budget is passed. Because last year's budget included guarantees for VSM bonds, the Finance Ministry was within its rights to issue Tuesday's loan, Gitin said.

VSM is already being sued by one of its corporate creditors.

The Rus insurance company in St. Petersburg instituted proceedings last month against VSM over 360,000 rubles ($16,000) of debts that include 303,000 rubles in interest payments on the bonds. Rus won that case, and a bailiff has already served a writ of execution on VSM, Vladimir Davydov, Rus director for legal affairs, said Tuesday in a telephone interview from St. Petersburg.

VSM's Nikandrov declined to comment on Davydov's claims.