Misha Japaridze/AP
Russian Prime Minister Vladimir Putin, right, and Russian President Dmitry Medvedev, left,
attend the tenth United Russia Party Congress in November.

Russian Financial Bailout Could Mean Return to Nationalization

December 23, 2008 12:58 PM
by Christopher Coats
As industry leaders look to the Kremlin for a financial lifeline, economy observers see potential for a centralization of power and an end to the era of oligarchs in Russia.

A Lifeline With a Catch

Faced with crippling debts totaling $160 billion due in the next year, Russia’s largest companies have sought refinancing and stabilizing loans from a government lender, opening a door for increased government control.

In order to receive the funds from the Vneshconombank, the government’s official lender, the companies have been made to borrow against shares of their companies, as well as allow a government vote on their boards with veto power over all future debt, asset sales or sizable investments.

Although the loans will likely stave off bankruptcy in the coming year, many feel that they are only a short-term solution that will clear a path to likely government control of the companies by next year.

“Some of them will definitely lose their property, either to the state or to investors,” billionaire Alexander Lebedev told Bloomberg. “They’ve been over-borrowing and sales of their companies have been falling.”

According to a report by Australia’s Lateline, the loan agreements could clear the way for the Russian government not only to dictate how business is done in the future but who is allowed to do it.

Since October, Putin has cleared over $12 billion in emergency loans and cleared the way for $38 billion more to help companies stay afloat in the new year.

Background: A slow and deliberate campaign

The appeal for a financial bailout represents a turning of the tables for a number of Russian oligarchs who rose to power in the late 1990s as they themselves bailed out the ailing government by buying up formally state-run properties at deeply discounted prices.

The purchases allowed the government to stay afloat, but also provided a chance for the oligarchs to dictate financial regulations in their favor, resulting in a surge of billionaires in Russia.

But faced with overextended international credit, decreased oil prices and a domestic stock market that has declined over 70 percent in the last year, these business leaders have been forced to seek out government aid just to stay alive.

The requests and move to add government influence to the company’s boards are the latest developments in a lengthy and tense standoff between the country’s industry leaders and the Putin-led Kremlin.

While Vladimir Putin is the former president and current prime minister of Russia, he is widely seen as the most influential force in the Kremlin and is predicted to return to the presidency after Dmitry Medvedev's term.

Although Putin pursued free-market reforms popular among business leaders during his first term as president, recent years have seen a shift toward an increasingly aggressive stance on industry heads and their national influence. 

In 2004, this tension came to a head with the leveling of a $7 billion tax bill against the Yukos oil company and the eventual imprisonment of its owner. The company was eventually broken up and sold to creditors, but was later found to have been overcharged by over $3 billion.

Meanwhile, Yukos owner Mikhail Khodorkovsky, who funded a number of political parties opposing Putin, was arrested. He remains in prison in Siberia.

According to the International Herald Tribune, Mikhail Gutseriev, another oil company owner, spoke out against the Kremlin last year, alleging that they had pressured him to sell the company to a political loyalist. He was soon charged with tax evasion and fraud, but fled the country before his arrest, leaving his company to be sold without his involvement.

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