Govt. Comes to Troubled Cos. – To Stay
First Deputy Prime Minister Igor Shuvalov officially announced that it is possible government structures may buy shares in the capital of companies that have suffered during the financial crisis. The government has chosen a soft variety of nationalization as an anti-crisis measure, that is, the purchase of convertible bonds. Shuvalov was the first member of the government to admit the risk of moral hazard – reduced responsibility for nationalized companies. So the government, unlike Vneshekonombank, does not plan to be directly involved in the management of the nationalized companies.
First Deputy Prime Minister Igor Shuvalov has officially announced that the state embargo on preliminary information for the press on government discussions of economic anti-crisis measures. He confirmed at a lengthy press conference that one of the extreme measures the government and Kremlin are discussing is partial nationalization. He said the government would not remain a shareholder for long in companies receiving that form of aid, but it may, nonetheless, buy preferred stock and convertible bonds in Russian companies. Shuvalov said those companies would mainly be the ones for which the funds received through Vneshekonombank (to which the Central Bank allocated $50 billion to issue as loan to replace foreign credits) were inadequate.
Shuvalov was careful to avoid the word “nationalization,” but he was, in fact, speaking of the same mild version of it that is being implemented in European Union countries. He did not name any potential recipients of such aid. Deputy Prime Minister Sergey Ivanov had spoken on October 17 of the possibility of the government buying stock in hi-tech and military-industrial companies from private owners.
Convertible bonds are not a popular instrument on the Russian financial market. The largest issue of them ever made was by Rosneft, worth $790 million, formally through DrKW, convertible into Rosneft ADR, payable in 2009. Mechel issued $150 million in convertible bonds (formal issuer UBS, convertible into Mechel GDR, payable in 2009). Buying preexisting preferred stock is unlikely to be of much help, but issuing new bonds could help any company that agreed to it.
Speaking of the risk of moral hazard, Shuvalov stated that it would be countered by increased government control, but not government representatives in company management. “We won’t go there as managers,” he said. “There are no worse managers than we are.” Economists are not enthusiastic about the proposal. “I don’t like any direct stock purchase [by the government]. The government always has the temptation to nag,” Merrill Lynch’s Yulia Tseplyaeva said.
Dmitry Butrin, Alexey Shapovalov, Elena Kiseleva
All the Article in Russian as of Oct. 28, 2008
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