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Russian Central Banks to Save Struggling Companies

According to Bloomberg Moscow has restricted Western imports in retaliation for the sanctions, and a weaker ruble has made foreign goods more expensive.

That should have created opportunities for Russian companies by boosting demand for their products at home. considering high domestic interest rates and the lack of access to foreign capital have prevented many from taking advantage of the situation.

Russian agribusiness group EkoNiva recently got a 2 billion ruble ($32 million) loan to expand its dairy operations in the Black Earth region of Voronezh, the loan came from the Central Bank of Russia, which has set aside 100 billion rubles to help finance industrial and agricultural projects.

So for  past few months, Russia’s central bank and government have become lenders. “We need to quickly saturate the economy with long-term, cheap financing,” says Andrey Margolin, an economist and vice rector of a state economics academy with close ties to Vladimir Putin.

Announced by government for spending as much as 60 percent of a $75 billion sovereign wealth fund to help provide financing for companies as well as major industrial and infrastructure projects, EkoNiva would have had to pay at least 16 percent interest on a commercial bank loan, vs. the 11.5 percent it got under the central bank program, according to Wolfgang Bläsi, chief financial officer of EkoNiva’s German-based parent company. The central bank funnels the aid through a state-owned agricultural bank.

Including the money in the sovereign wealth funds, the government has $358 billion in foreign currency reserves and gold. So why not put some to work aiding businesses?

One problem is that some banks and companies are poorly managed and deserve to go under, according to Bernie Sucher, a longtime U.S. investor in Russia who serves on the board of Moscow-based UFG Asset Management. Bailing them out only delays the day of reckoning, he says. That’s what happened in the 2008 financial crisis in Russia, when “the government sprayed liquidity all over the economy,” he says. “The big miss in 2008 was the failure to use the crisis to pursue deep structural reforms.”

Central Bank Governor Elvira Nabiullina is reluctant to expand the lending program that aided EkoNiva. She said in June that the program hadn’t stimulated private investment, as backers had predicted it would. Others, including Dmitry Tulin, a first deputy central bank governor, want to do more. “If our financial system doesn’t turn its face toward material production, then our country won’t have a future,” he told the newspaper Komsomolskaya Pravda in April. Meanwhile, the Kremlin is mining new sources of aid. Its latest find: Rusnano, a state investment fund created in 2011 to support an emerging nanotechnology industry. On July 27, Rusnano announced it would put almost $100 million into a new pool for Russian companies that would help reduce the country’s dependence on imported technology. Its co-investor: Moscow-based SMP Bank, owned by Putin friends Boris and Arkady Rotenberg. “There’s no limit to where they’re looking now,” a senior government official says. “They’re taking money wherever they can find it.”