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Approximately at the same time the number of approved requests for guarantees started growing fast. However, we believe that amendments to the regulations were not the only fac RF Government Resolution No.542 of June 30, 2009. Remarkably, the respective amendments into the Federal Law On 2009 Federal Budget and 2010-2011 Plan (except for the norm expanding the list of possible purposes of using the borrowed funds) were introduced later still in early October (Federal Law No.230-FZ of October 3, 2009).

Opening remarks by Prime-Minister V. Putin at the conference on preliminary key parameters of federal budget and 2011-2012 plan and on the principles of budget expenditure formation on June 29, (http://premier.gov.ru/events/news/4529/) RUSSIAN ECONOMY IN trends and outlooks tor underpinning such growth. The political message to major banks with government stake on behalf of the Prime-Minister about the need to increase issue of loans was extremely important, as well as relative economic recovery (significant retardation of the decline and reduction of uncertainty level).

According to some official statements, by the end of October 2009 requests from strategic companies for government guarantees for the total amount of RB 189 bn were approved making approximately 95% of the amount allocated within 2009 federal budget. The practice of granting government guarantees was also improved: in early October the total amount of government guarantees granted to strategic companies was RB 8.2 bn, and by the end of this month this amount was already RB 41.8 bn1 a bit more than 20% of the amount allocated in 2009 budget.

By early December 2009 the overall amount of the approved requests was making Rb 199.4 bn almost achieving the limit set by the federal budget (RB 200 bn). Most likely due to this fact this limit was increased by Rb 25 bn2. Before the end of the year all the allocated funds were disbursed. The key government guarantees recipients were companies from metallurgy sector, agriculture and food processing, automotive industry, and construction.

At the same time, the process of granting government guarantees was still lagging behind:

thus, by mid-December the amount of guarantees effectively provided to strategic companies was only about Rb 70 bn3. All the paper work and issuance of the guarantees approved in 2009 was to be continued in the next coming year.

We need to pay attention to certain specifics of the structure of government guarantees mechanism and of its applications:

- guarantees were provided to the companies with significant backlog: first loans against government guarantees were issued only in August 2009 6 months after the legal framework and organizational of the planned amount was actually provided. Thus, this mechanism did not result in the required economic effect with regards to provision of long-term financing to the companies in the most acute phase of the crisis early in 2009 (which was especially valuable in the context of delaying other government support measures such as government procurement, budget subsidies, etc). At the same time, the intensive process of coordinating the interests of various stakeholders, settlement of claims and agreeing on the obligations for future borrowing against government guarantees became an important stabilizing factor for the economy suffering from the crisis;

- the key reason for the delay in issuing loans secured by government guarantees was the banks disagreement with the established procedure for exercising guarantees by the government. Modification of this mechanism in mid-2009 was undertaken mostly in the interests of the banks;

Ref.: E. Pismennaya. Guarantees for modernization. Vedomosti, October 30, 2009, and also materials for parliamentary hearings of the Council of Federation Commission for interaction with the RF Accounting Chamber on the topic: Modernization of the Economy as Major Anti-Crisis Measure, December 17, 2009.

Federal Law No.309-FZ of December 2, 2009 On Amending Federal Law On Federal 2009 Budget and 2010-2011 Plan. At the same time the amount of government guarantees to strategic companies of defense industry was decreased by Rb 25 bn A.Gudkov, O. Sapozhkov. Government Guarantees Are Growing. Kommersant, December 18, It is necessary to say that by the end of 2009 the aggregate amount of government guarantees provided to both strategic companies and defense sector companies made Rb 145.9 bn. M.Tovkaylo, V. Kholmogorova. Coming Late report. Vedomosti, February 4, 2010.

Section Institutional Problems - initially the government guarantees mechanism was focused on loans for funding the core business operations and investment activity of companies. Including restructuring of previous debt into the list of possible borrowing purposes, on one hand, was in line with the companies needs, but on the other had it converted government guarantees from the mechanism for business development into the method of delaying urgent problem solving;

- the complexity and the duration of procedures to prepare the request and get it approved, in particular the difficulties of executing Loan Agreements with the banks resulted in the fact that some companies initially looking for government guarantees further rejected the idea after several attempts to get everything right;

- the important feature of the mechanism was approving the requests stipulating for provision of government guarantees to several principal companies simultaneously. One of the reasons for that was the officially established ceiling for government guarantee to an individual company Rb 10 bn. Distributing the requested amount of government guarantee between several affiliated companies allowed business groups for receiving government support in much bigger amounts than Rb 10 bn.

The new law on the federal budget1, just like the previous one, stipulated provision of government guarantees in 2010 to companies selected in accordance with the procedure established by the RF Government to assure their borrowing for the purposes of maintaining their core business operations and capital projects, as well as for redemption of previous loans and bonded loans. In 2010 the total amount of government guarantees is planned to be RB 200 bn, while as this specific type of government support is not planned at all for 2011 and 2012. The legal framework remained the same except for one additional requirement setting that guarantees shall be provided to organizations selected in 2009 in case such guarantees were not actually issued in 2009. It is also worth noting that the rules for providing government guarantees applied in 2009 were extended onto 2010, but solely with regards to the companies, whose requests had been already approved in 20092.

In addition to traditional mechanism of providing government guarantees to strategic companies the new law of the federal budget stipulated for another version of providing government guarantees to the companies selected in accordance with the procedure set by the RF Government for loans issued to fund investment projects. In 2010 the amount of such guarantees is to make Rb 100 bn ($3.3 bn), and they are not planned for 2011 and 2012. With that the legal norms established with regards to this new mechanism of providing government guarantees are visible different from those regulating the traditional mechanism described above.

The key specifics of guarantees-based support to the investment projects are the following:

Guarantees shall cover 100% of the principal of the loan borrowed by strategic company to fund an investment project. At the same time, the amount of guarantee shall not exceed 50% of the investment project budget;

The minimal amount of government guarantee shall be Rb 1 bn or $30 mln;

The loan period covered by the guarantee shall be from 4 to 20 years, with that exercise of the guarantee shall not be possible before 2014;

Federal Law No.308-FZ of December 2, 2009, On Federal 2010 Budget and 2011-2012 Plan RF Government Resolution No.1181 of December 31, RUSSIAN ECONOMY IN trends and outlooks Securing of the government obligations shall not be required with regards to recourse issued to the company is case of exercising the government guarantee.

We need to emphasize that in case the new mechanism for providing government guarantees is also applied mostly to strategic companies, the aggregate amount of guarantee-based support in 2010 may reach Rb 400 bn more than 50% of the government guarantees stipulated within the law on the federal budget for the current year.

The following comments should be made with regards to the new mechanism for providing government guarantees:

- The investment focus and long-term nature of this mechanism are, most likely, defined (at least partially) by the fact that the traditional mechanism was excessively focused on solving the current financial challenges of strategic companies;

- The fact that at least 50% of government guarantees for the investment-targeted loans shall be provided in US dollars allows for assuming that implementation of such projects will be to a great extent linked to importing equipment and technology;

- The fact that government guarantees are to cover 100% of the principal is a sign of the government planning within the framework of this mechanism to accept practically all the risks of banks financing such investment projects (and thus assure incentives for them to participate in such projects), however, this may result in less attentive review of investment projects on behalf of banks;

- Limiting the total amount of guarantee to 50% of the overall investment project budget in general allows for counting on the respective risks being shared by the government and the business, however, it may turn out very difficult to access the real contribution of business;

- Lack of the established ceiling for provided government guarantees contributes to significant increase of the interest on behalf of different stakeholders to lobbying very big, lengthy and respectively very risky investment projects, which requires material improvement of project evaluation infrastructure.

Subsidizing part of interest rates paid by strategic companies on their loans Eventually the RF Government Anti-Crisis Program for 2009 stipulated the following areas of subsidizing the interest rates of real sector companies loans (under which strategic companies could be the recipients of borrowed funds)1:

Subsidizing interest rates for the loans issued to manufactured goods exporters (RB 6 bn allocated for such purposes within the budget);

Subsidizing interest rates for the loans issued to meat-and-dairy companies (Rb 7 bn);

Subsidizing interest rates for the loans issued to Subsidizing interest rates for the loans issued to other agricultural companies (Rb 10 bn);

Subsidizing interest rates for the loans issued to forestry enterprises to set-up shoulderseason stock of timber, feedstock and fuel (Rb 0.325 bn);

In addition to the listed areas the RF Government Anti-Crisis Program also stipulated subsidies of interest rates on the loans received by fisheries in the amount of Rb 1.07 bn, however, such companies are not represented in the List of Strategic Companies. On top of that, 3 measures were stipulating subsidizing of the shortfall in revenues associated with carrying out government assignments, and 1 measure providing subsidies to strategic defense companies to prevent their bankruptcy Section Institutional Problems Subsidizing interest rates for the loans issued to automotive and transport engineering companies for their technical refurbishment (Rb 2.5 bn);

Subsidizing interest rates for the loans issued to defense industry companies being the prime contractors (contractors) for the government defense procurement (Rb 15 bn);

Subsidizing interest rates for the loans issued to defense industry companies for implementing innovations and investment projects targeted at hi-tech products (Rb 1 bn).

We will briefly review here those of the above listed measures that were practically implemented in 2009.

Subsidizing manufactured goods exporters The mechanism for partial reimbursement out of the Federal Budget of the interest rates on the loans received by Russian exporters of manufactured goods was formed back in 20051 and has remained practically unchanged. The norms set the following key conditions for receiving such budget subsidies:

- A company should be exporting manufactured goods for at least 3 years;

- The loans received by a company should be used for exporting goods with high degree of processing2.

Two thirds of the interest rate of such loans is subject to reimbursement- not to exceed two thirds of the Central Bank refinancing rate.

Early in 2009 the RF Government3 allocated Rb 6 bn to subsidize interest rates on the loans issued to Russian exporters4. This amount was used during the first 9 months of the year. Moreover, the exporters eventually received a slightly bigger amount of Rb 6.135 bn, and 90% of it (Rb 5.709 bn) was distributed among them during H1 20095.

In December 2009 the amount of budget allocations for implementing this measure of government support was increased up to Rb 9 bn6.

Over 100 Russian exporters received interest rate subsidies during 2009 for the overall amount of RB 9.135 bn. It is worth noting that only 1/3 of them belonged to the List of Strategic Companies or were subsidiaries of strategic companies, however, in terms of the amount of budget subsidies they received about of it. With that the major bulk of the subsidies were granted to various strategic companies from the defense sector (primarily to space rocket engineering and aviation), as well as nuclear sector and automotive industry.

The key areas of the RF Government anti-crisis measures for 20101 stipulate budget subsidizing of exporters to reimburse part of their interest rate on the loans they received from Russian credit institution in 20052012 in the amount of Rb 7 bn.

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