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Ref: T.Komarova, V. Kovalenko. Trojan Tranche Corporate Secret, May 4, 2009; D. Shabashov, E. Godlevskaya. Deripaska qualified as non-payer. RBC Daily, November 12, 2009.

Briefing by V. Dmitriev, Vnesheconombank President, on the outcomes of the Supervisory Board meeting on February 5, 2009, (http://www.veb.ru/ru/about/press/ns/index.phpfrom32=2&id32=5449).

Briefing by V. Dmitriev, Vnesheconombank President, on the outcomes of the Supervisory Board meeting on June 1, 2009, (http://www.veb.ru/ru/about/press/ns/index.phpfrom32=2&id32=5450) Federal Law No.361-FZ of December 27, 2009 On Amendments to the Federal Law On Additional Measures to Support the Finance System of the Russian Federation.

RUSSIAN ECONOMY IN trends and outlooks After pretty strict initial screening of obligations qualified for refinancing, Vnesheconombank demonstrated a rather liberal attitude to the debtors further down the way: it extended the loan period practically for each company undergoing difficulties with redemption of obligations (and those were more than 50%).

Government loan guarantees to strategic companiesThe legal grounds for providing government loan guarantees to strategic companies were defined as early as in 2008 the respective amendments were made into the Federal Law on 2009 Budget2 one week after the List of Strategic Companies had been approved. It was anticipated that the coverage for this area of government support would make RB 200 bn in 2009. In mid-February the RF Government approved the Rules for Granting Government Guarantees3.

Let us note here that 6-week delay with enacting the delegated legislation (probably, caused by lengthy inert-departmental coordination) was criticized by the RF President4. Further on top Russian leaders repeatedly turned to the topic of government guarantees, which may be viewed as an evidence of high political value of this particular instrument.

Initially the following basic conditions for government guarantees were defined:

(1) Guaranteed loan terms:

loan shall be used for funding the core business operations of the company and of the related capital projects;

loan shall be received from Russian banks (including the revolving credit facilities);

loan period shall be between six months and five years;

(2) Guarantees parameters requirements and limitations:

guarantee shall be provided to a company to secure its loan pay-back obligations in the amount up to 50% of the received loan (the principal);

It is necessary to state that along with the reviewed mechanism of providing guarantees to strategic companies, another similar mechanism was formed in late 2008 early 2009. It stipulated government guarantees to strategic companies within the defense industry: the above mentioned Federal Law No.324-FZ of December 30, 2008, stipulated government guarantees to such companies for the total amount of RB 100 bn (further on it was decreased down to RB 75 bn). The respective Rules were approved by the RF Government Resolution No.104 of February 14, 2009. At the same time a number of companies included into the List of Strategic Companies complied with the criteria set for strategic defense companies, due to which some of them received government guarantees in 2009 under the second mechanism. However, due to significant specifics of this area of government guarantee support, relatively modest coverage and insufficient data about it in public sources we will refrain from reviewing it here.

Federal Law No.324-FZ of December 30, 2008, On Amendments to the Federal Law On 2009 Federal Budget and 2010 - 2011 Plan.

RF Government Resolution No.103 of February 14, 2009, On Provision of Government Loan Guarantees for 2009 to Companies Selected as per the Procedure Set by the RF Government Borrowing for Supporting Core Business Operations and capital Projects.

Strictly speaking, neither this document, nor the previously enacted law explicitly stated that the recipients of such guarantees should be qualified as strategic companies they refer to companies selected as per the procedure set by the RF Government. However, government officials repeatedly emphasized in their various comments and presentations, that this mechanism was focused on strategic companies ref., V. Putin: RB 326.3 bn provisioned for support to the RF economy, Prime-TASS, December 30, 2008.

Ref. Abstracts from the veRbatim records of the extended Presidium session of the Government Council for Improving the Efficiency of Government Support to Real Sector held on February 20, 2009, in Irkutsk (http://www.kremlin.ru/transcripts/3258).

Section Institutional Problems guarantee period shall be defined based on the obligation discharge deadline set by t he Loan Agreement extended by 1 year, and in case the company's obligations are also secured by real property collateral by 2 years;

guarantee shall be provided for the amount of no less than RB 150 mln; the total amount of guarantees provided to one company shall not exceed RB 10 bn;

(3) Terms and limitations for providing guarantees:

guarantee shall not be used to secure obligations to payout interest on the loan, other interest, commission, forfeit (fines and penalties), as well as responsibility of a company for failure to fulfill or for unduly fulfillment of its obligations under the Loan Agreement and for infliction of loss;

guarantee shall not be provided to a company with outstanding (unsettled) debt to the Russian Federation (mandatory payments), nor to a company subject to insolvency law suit and/or bankruptcy procedure;

availability of counter-security for the company's obligations under Loan Agreement shall be the mandatory condition for receiving government guarantees. With that the total amount of the security for the companys obligations, guarantee inclusive, shall comprise no less than 100% of the loan amount (the principal);

(4) Conditions for exercising guarantee:

guarantee shall be exercised in the amount not to exceed 90% of the amount of nonfulfilled company obligations for payback of the principal;

the Russian Federation shall bear subsidiary liability for the guarantees; guarantee shall be subject for exercise after other security for the company obligations under Loan Agreement is fully exercised;

Creditor's receivables under Loan Agreement in part equal to the guarantee amount shall be subject to cession in favor of the Russian Federation represented by the RF Ministry of Finance before the guarantee is exercised.

It was also established that the Joint Inter-Departmental Committee set up by the RF Ministry for Economic Development shall select the companies for providing guarantees in the amount not to exceed Rb 5 bn, and that companies for providing guarantees in the amount above Rb 5 bn shall be selected by the RF Government Commission on improving Russian economy sustainability. Provided the decision of the respective Commission is positive, the company shall submit a package of documents to the RF Ministry of Finance no later than December 1, 2009. This package needed to include, among others, the original copy of the Loan Agreement with the bank. The RF Ministry of Finance together with Vnesheconombank shall perform the compliance check of the presented documents against the established requirements and shall within 10 days make a decision about providing or not providing government guarantees.

Simultaneously with developing the legal framework for government guarantees mechanism the required organizational infrastructure was formed in late 2008 early 2009. The already mentioned RF Government Commission on improving Russian economy sustainability1 and the Inter-Departmental Work Group for monitoring financial and economic status of The Commission was established by the RF Government Resolution No.957 of December 15, 2008. The scope of the Commission was not at all limited to reviewing the issues and making decisions on support to strategic companies. By now this Commission has been liquidated due to establishing the Government Commission for Economic Development and Integration (RF Government Resolution No.1166 of December 30, 2009).

RUSSIAN ECONOMY IN trends and outlooks organizations included into the List of Strategic Companies1 (starting from March 2009 it was transformed into a Commission with the same name2) became the key elements of such infrastructure.

The first requests for government guarantees from strategic companies had been preliminary approved before the RF Government adopted the above described Rules.

Thus, according to mass media, on February 4, 2009, the Inter-Departmental Work Group approved provision of government guarantees to OJSC KAMAZ in the amount of Rb 4.6 bn3.

However, after that during about half a year the requests for guarantees were reviewed and approved in an extremely slow manner, and government guarantees were not provided to strategic companies at all. The key reason pertained not to bureaucratic delays, but rather to the difficulties of executing Loan Agreements with banks. Banks disagreement with one of the key conditions for providing guarantees became the main stumbling stone in negotiations.

This was the condition according to which the government was obliged to exercise the guarantee only after all other security for the loan had been exercised in full. On top of that, the banks were very much dissatisfied with the norm providing for the government guarantee to cover no more than 90% of the outstanding company obligations4.

By March-April of 2009 lack of any visible progress in provision of government guarantees raised certain concerns in the top echelons of power5 resulting in declarations of possible modifications to this mechanism in the interests of the banks: it was planned to establish the norm that the banks shall receive money against government guarantees immediately upon guarantee event occurrence prior to exercising other security6.

The first amendments were introduced into the legal framework for the mechanism of government guarantees to strategic companies in late April. They, however, did not change the procedure for granting and exercising the government guarantees, but just expanded the list of possible grounds for provision of guarantees: in addition to funding the core operations and capital projects it was allowed to use loans issued against government guarantees for redemption of loans and bonded loans previously raised by the companies for supporting their core operations and capital projects 7.

In May 2009 the topic of government guarantees for credit facilities to strategic companies again was put into the focus of the top government officials8. Soon the RF Ministry of Fi Order No. 7 by the RF Ministry for Economic Development of January 17, Order No. 83 by the RF Ministry for Economic Development of March 16, G. Stolyarov. Guarantee for KAMAZ Vedomosti, February 5, Ref.: Yu. Chaykina, T. Alyoshkina. Guarantees are not profitable for SbeRbank Kommersant of March 30.

Ref. Materials for the working meeting of the RF President D. Medvedev with the First Vice-Premier I. Shuvalov on March 16, 2009 (http://www.kremlin.ru/transcripts/3454).

Opening remarks by Prime Minister Putin at the economic conference on April 22, (http://premier.gov.ru/events/news/3936/).

Federal Law No.76-FZ of April 28, 2009, On Amendments to the Federal Law On 2009 Federal Budget and 2010-2011 Plan Thus, in his Opening Remarks at the conference on banking system development on May 13, 2009, President D. Medvedev acknowledged that the idea of providing government guarantees had failed in its initial format. He proposed to make the government jointly and severally responsible for its guarantees (http://www.kremlin.ru/transcripts/4048).

Section Institutional Problems nance submitted draft amendments to the legal framework for granting government guarantees, and they were adopted at the end of June1.

The key changes to the norms regulating government guarantees provision were as follows:

redemption of loans and bonded loans previously raised by the companies for supporting their core operations and capital projects was included into the list of possible borrowing objectives along with funding core business operations and associated capital projects (as has been stated above, the respective changes were prior to that introduced into the Budget Law);

additional requirements were set for the companies seeking government guarantees, including the following:

- top management bonuses cancellation;

- transparency of financial and business operations;

- discharge of employers obligations during layouts, maintaining jobs for the disabled and other socially disadvantaged categories of employees;

elimination of the norm about government guarantees covering not more than 90% of the companys outstanding obligations to the bank;

elimination of the norm about exercising government guarantees only upon other companys securitization is fully exercised. Instead it was set that the bank in case the borrower does not perform against its loan payback obligations issue the respective claim to this company, and in case the latter is not fully settled within 30 days the bank is qualified for claiming the respective guarantee to be exercised by the Ministry of Finance.

We need to state here that the main objective of modifying government guarantees mechanism was to provide additional incentives to the banks for issuing loans secured by government guarantees. Commenting this measure Prime-Minister V. Putin called for banks leadership to make a counter-move by increasing the issue of loans to priority businesses and to reduce borrowing costs2.

In August 2009 the process of issuing loans to strategic companies against government guarantees finally got on rolling.

In the end of August 2009 VTB announced issuing the first tranches to OJSC KAMAZ (total loan amount Rb 2.9 bn, government guarantee amount Rb 1.45 bn), OJSC Sollers (Rb 1 bn and Rb 500 mln respectively) and OJSC Sollers Naberezhnye Chelny (Rb 700 mln and Rb 350 mln).

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