Streetwise Professor

November 12, 2008

Suspicious Minds

Filed under: Commodities,Economics,Politics,Russia — The Professor @ 9:53 pm

I find it somewhat curious that the Russian government would bail out the oligarchs by giving them state funds to pay off their debts to Western banks. If the ultimate objective of Putin, Sechin, and other siloviki is to reverse loans-for-shares, and effectively re-nationalize large corporations, there is a much more cost effective way to do so.

The shares of Deripaska, Fridman, and the others are held as collateral against their FX borrowings from Western banks. The fact that these oligarchs are facing collateral calls in the aftermath of plummeting stock prices means that the amounts due on the loans exceeds the value of the shares, and almost certainly by a lot. Giving state funds to meet the collateral calls means that the state is effectively keeping the shares out of the bankers’ hands by paying the higher prices that prevailed at the time the loans were taken. If the oligarchs default on the loans from the state, sure, the shares will fall into the mitts of Sechin, etc., but a lot of cash will have gone out the door to achieve that end.

So, why not let the oligarchs twist in the wind, default on their loans, and deliver up the share collateral to the banks? I doubt the banks have the slightest interest in holding large positions in these companies on their books. They’ll want to sell. Then use the state funds to swoop in and buy the stock at the current, depressed prices.

That’s a lot more cost effective than effectively paying the high prices at which the oligarchs margined the shares.

To summarize: Loan to the oligarchs, oligarchs default–the state gets the shares and pays the high price at which the shares were margined. Let the oligarchs default to the banks, buy back the shares at the current low prices. Result: Russian government gets the shares under either scenario, but pays a lot less to get them in the second one.

Doesn’t seem like a hard call.

Which suggests something else is going on.

One surmise: if Western banks get a large position in these companies for even a short period of time, they’ll want to do due diligence before selling their positions. That would involve pesky accountants turning over rocks, investigating contracts, examining subsidiaries, and in general, finding out where the cash comes in and most importantly where the cash goes out. Sure, Russian courts would attempt to stymie the process, but there’s no doubt that said accountants would discover some very, very interesting things. And we can’t have that, can we?

So, this suspicious mind hypothesizes that the ulterior motive for keeping the oligarchs’ shares out of Western hands at any price is that by failing to do so, Putin, Sechin, et al would run a serious risk of having some major tunneling schemes laid bare. And any guesses as to where those tunnels lead?

As for the argument that these companies are Russia’s “crown jewels”–please. I would be embarrassed to admit such a thing. RusAl is an aluminum company, for crissakes. Is Alcoa an Ameican crown jewel? If that’s the kind of company that is Russia’s hope for the future, things are worse than even I thought. Norilsk Nickel? Well, that’s a little better than aluminum, but not much. Steel companies? Come on, this is 2008, not 1938 or even 1958.

It is always suspicious when somebody seems anxious to pay more for something than they have to. That’s what the Russian government is doing by bailing out the oligarchs. The only thing the bailout seems to accomplish is keep prying eyes away from the books and operations of the oligarchs’ companies. I have a very difficult time of thinking of any benign reason why anybody would pay such a high price to do that.

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