Page 19 - IFR Opportunities in Russian capital markets

CHAPTER 01
ifrintelligence reports/Opportunities in: Russian Capital Markets
Foreign borrowings by the non-financial sector increased 27% to US$159.5bn: however, the rela- tionship to GDP dropped slightly to just over 16.2%, he told the State Duma in presenting the draft federal budget for 2008–10 in May.
Russian banks, however, are borrowing more than ever and increased the amount of credits drawn from international capital markets to US$48.5bn in 2006 from US$19.2bn in 2005. This suits the companies that prefer to borrow in rubles and the banks, which can borrow abroad more cheaply. Standard & Poor's predicts that domestic credits will increase almost 40% in the next three years, from 30.8% of GDP in 2006 to more than 50% by 2009.
At the same time, the amount of money Russian banks had on deposit in foreign banks rose from US$150bn to US$220bn over 2006, according to United Nations Conference on Trade and Development.
State funds
The Russian government has set up four funds in all since the stabilisation fund was set up in 2004. With so much money flowing into the state coffers, the problem has been what to do with all the free cash.
Stabilisation Fund
The Stabilisation Fund is a piece of prudent money management, building up reserves in good times in anticipation of the bad. However, it quickly took on a second function, as it is one of the more effective money sterilisation tools the CBR has to help hold back ruble appreciation against the dollar and euro.
However, once the fund passed the US$19bn mark the state began thinking about how to make best use of the excess revenue.
The Duma was torn over what to do with these surplus revenues. There was a strong lobby, headed by Prime Minister Mikhail Fradkov, that wanted to use the excess cash to fund a drastic cut in taxes – and especially VAT, which accounts for a third of the state's tax revenue.
This debate is ongoing and VAT is likely to be cut from 18% to 15% in 2008, slashing some RUB400bn (US$15bn) from the state's tax revenues.
State Investment Fund
The more conservative faction at the Finance Ministry carried the day and the second fund to be established was the State Investment Fund – a special fund that will be used to finance big infrastruc- ture projects, like building new hydro-power stations, upgrading roads and rail, and modernising the ports – all assets that have been barely touched since the fall of the Soviet Union 15 years ago.
By the middle of 2006, the first projects had been allocated to receive finance from the State Investment Fund, but instead of the state simply doling out money, each of these projects has been done in partnership with a private investor. Companies and regions have to raise a significant part of the financing before they can apply to the State Investment Fund commission for financing to complete the project.
The State Investment Fund runs in parallel to a series of ‘national programmes’ headed by First Deputy Prime Minister and deputy head of the presidential administration, Dmitri Medvedev. These are high profile and well-funded programmes designed to put social services like health and education back on track.
Likewise, some of the money has been ploughed into a series of federally-owned banks designed to support this investment effort, including: the Roseximbank, an export promotion agency; the National Development Bank, which will oversee and organise big infrastructural investment projects; and Rosselkhozbank, which is financing the agricultural sector.
All these programmes are part of Putin's pubic-private partnership policy. Alive to the failings of the Soviet Union's central planning, the Kremlin is trying to involve professional managers and commercial interests wherever it can to ensure efficient, profit-motivated management of all these projects. This usually takes the form of a strategic partner and the sales of shares and IPOs are offered as the incentive for private concerns to come in on the project – in addition to attractive financing terms.
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