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14 Oct, 2008 10:30

Government bail out leads to longer term questions on States role in economy

The Russian government’s plan to offer over $50 billion from state coffers to help companies refinance foreign debts will benefit large corporations. But, smaller players may have to rely on their own resources or prepare to go bankrupt.

The money is there, but not everyone is eligible to get it, according to Prime Minister Vladimir Putin.

“We should refinance only those credits that were taken for the implementation of investment projects or the acquisition of assets in Russia.  And as a rule help will be offered to those companies, that find co-investors on their own, and therefore share the risks with the state. ”

Putin said the state will support only those working in key sectors of the real economy. That means State companies are first in line. It will help repay only those loans that were taken out to fund projects – or buy assets within Russia. Russian companies are due to refinance over $350 billion in debt within 6 months. With no State support, many smaller firms will have to go belly up according to Vladimir Tikhomirov, Chief economist at Uralsib. 

“Each government has to draw a line where they can offer support and ask how far they can go.  So I wouldn’t rule out that some Russian companies, particularly those which were expanding in a very aggressive fashion and have distorted their balance sheets, might find themselves in a very difficult situation.  In this case these companies could become very easy targets for acquisition or for mergers with larger companies, if the price is right and they attractive.  Some companies can default and can go bankrupt, that is the nature of the crisis globally and in Russia as well.”  

The money will flow through state-owned Vnesheconombank. It already received more than 35 applications from companies in all sectors of the economy. The state will receive shares of borrowers as loan collateral, potentially boosting the state’s role in the economy, and this leads to issues further down the track according to Tikhomirov.

“The big question that comes up here is that whether the government is prepared to step down once the situation stabilizes and the economy starts to grow. Whether the government will be prepared to get rid of the assets, to sell them, and to increase private initiative, or would prefer to keep these assets for themselves and to have a more government state managed economy in place.”

Whether or not the state’s role will be limited and temporary remains to be seen.