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Russia moves to rescue VEB

Russiahas made an initial move to recapitalize Vnesheconombank, the state development bank.

PremierDmitry Medvedev told VEB's supervisory board, which he heads, that the governmentwould inject 150 billion Russian rubles in fresh capital, Reuters said March 30.

Yeta series of leaks to Russian press suggested that Sergey Gorkov, who was onlyrecently recruitedfrom PAO Sberbank of Russiaas VEB chairman, believes 1.3 trillion rubles would be required by 2020 for thebank to meet its liabilities. He also reportedly thinks thatseveral state institutions should contribute to the rescue of VEB.

OlgaNaydenova, a bank analyst at BCS Financial Group in Russia, said in aninterview that the 150 billion rubles payment was designed to support thesustainability of VEB and would not "trigger any faster growth in VEBlending." Thus there should be no wider effect on the banking system.

OneRussia-based bank analyst speaking anonymously in an interview underscored thatthe wider banking system would not be affected by the VEB rescue: "VEB isnot part of the banking sector. It is a development bank. You could see it asan arm of the government as opposed to the part of the system. Any capital thatcomes toward it is moving capital around in the government accounts."

Severalproposals have been aired in Russian media. Russia's central bank, for example,might improve its credit conditions while state welfare and pension funds mightsubscribe to VEB debt. Nonperforming loans could be sold or disposed of toother state institutions while VEB could sell its 2.7% stake in Gazprom,Germany's Börsen-Zeitung reported.

Moscow Times, citing Russia's Vedomosti, suggested that the centralbank could swap debt for equity and that the welfare and pension funds mightdeposit cash with the bank while the asset sales would not only include theGazprom stake, but also VEB's bank holdings and leasing business.

Sinceits inception as a state bank for redevelopment in 2007, VEB has worked closelywith the Russian government. This saw it financing the country's 2014 WinterOlympics after participating in bank and industry rescues in 2008 to 2009; itfurther provided loans in excess of $8 billion to Russian investors to buyindustrial assets in eastern Ukraine, according to Moscow Times.

NowGorkov appears to have asked for the resulting ailing loans, particularly thoseassociated with the Olympic Games, to be moved off the bank's balance sheet.

Thedetails of the recapitalization are yet to be finalized, according to EvgenyKoshelev, an economist at Société Générale. "The [state] budget does nothave the 1.3 trillion rubles to recapitalize VEB," he said inan interview.

Koshelevthought that the 150 billion rubles when combined with asset sales and cashdeposits from the state funds as well as a restructuring of VEB could sufficeto deal with the capital issues.

Muchdepends on asset quality and the ability of VEB to shed its NPLs. The pressureon bank assets and the system generally looks certain to continue. Koshelevexpected Russia to experience a continuing recession in 2016, seeing a 1.0% GDPdecline after a 3.7% fall in 2015.

Overall,VEB's role and relationship to the Moscow government looks unlikely to change.

In aMarch 16 presentation,VEB described itself as a "time-proven agent of the Russian state."It stated that its assets correspond to 9% of Russian GDP. The bank has beenhit by international sanctions following the Ukraine invasion in 2014.

Thepresentation fails to include a P&L or balance sheet for VEB. Instead, itemphasizes the "proven track record of government support," thegrowth of the bank's balance sheet and reports: "Since VEB's establishmentin 2007 [until] 2015, there were 15 capital contributions."

As of March 30, US$1 wasequivalent to 67.38 Russian rubles.