By Thomas Grove and Alan Cullison
MOSCOW -- When U.S. sanctions forced Western banks to call in
more than $200 million in loans from Oleg Deripaska's automobile
manufacturer last year, the Russian tycoon turned to a
deep-pocketed backer to bail him out: the Kremlin.
Mr. Deripaska's car maker GAZ took out a raft of loans from
Russian state-controlled banks, including VTB Bank and Sberbank, to
pay off his Western creditors. Today, he says, the company has no
loans with the West -- while its debt to the Russian state has
swelled to $1.4 billion.
"In the end, there's a lender of last resort and investor of
last resort, " Mr. Deripaska said in an interview.
Mr. Deripaska's debt shuffle is part of a shift in the Russian
economy that accelerated when the West began to impose sanctions on
Russia in 2014 after Moscow annexed the Crimean Peninsula and
launched a covert military operation in eastern Ukraine.
Though some sanctions were meant to split Russia's economic
elite from the Kremlin, they have pushed sanctioned individuals
closer to the Russian government -- which has become the largest
creditor in the country.
The Kremlin's growing role in the economy is part of a
longer-running trend under President Vladimir Putin, who vastly
expanded state ownership of industries in his 20-year reign, and
often appointed longtime allies as managers. Many of those now
facing sanctions grew rich under his rule.
Even before the U.S. began piling sanctions on Russian
oligarchs, Mr. Deripaska had difficulty getting a visa to the U.S.
because of alleged ties to criminal groups, a charge that Mr.
Deripaska denies.
Mr. Deripaska's onetime aluminum company United Co. Rusal PLC
was blacklisted together with GAZ by the Treasury Department last
year for what the U.S. said was his supporting role in malign
Russian activities abroad.
Sanctions on Rusal were eventually retracted, but Mr. Deripaska,
anticipating the effects of sanctions on GAZ sales, said the auto
maker's management of GAZ asked the government for 30 billion
rubles (over $450 million) of support. Such a move would likely
give the state a new and significant stake in one of Russia's most
competitive automotive companies.
Mr. Deripaska dismissed accusations of his role in Russia's
activities abroad and said he wasn't involved in any Russian
attempts to influence the 2016 U.S. presidential election.
Western banks now tend to edge away from lending to Russian
corporations of any kind, fearing that the complications are too
great. That has pushed Russian companies closer to native banks,
the largest of which are state-run.
Even unsanctioned state-owned companies have joined in the
trend, moving toward state banks instead of international banks,
said William Jackson, emerging-markets economist at Capital
Economics, a research consulting firm based in London. Sanctions
have accelerated the growth of the state's role in the Russian
economy, he said.
Of all bank loans in Russia last year, 70% were provided by
state banks, up from around 64% in 2016, according to data from
Fitch. Russia's top 10 private banks' share of the loan market fell
to 11% from 17% for the same period. Government funding of the
banking system more than doubled to 8.44 billion rubles in 2018
from 3.55 billion rubles in 2016.
The state's growing stake represents a reversal after an era of
privatizations in the 1990s that were intended to dismantle the
vestiges of Soviet-era state control.
Mr. Deripaska calls the government's growing reach into the
economy through loans and credit deals "soft nationalization."
"We are a private group, we operate on the market and any
government subsidy is not free cake," he said, pointing to the
government's growing influence in the private sector through
one-off aid packages.
Daniel Fried, a former U.S. assistant secretary of state who
helped implement sanctions policy before his retirement in 2017,
disputed criticism that sanctions are giving the Russian government
an advantage.
"I am sure [sanctions] are not flawless, but they have put
pressure on Putinism," he said.
Tycoons who are benefiting from Mr. Putin's rule, Mr. Fried
said, "are learning that they will be stuck in the system that they
are supporting -- they may be super rich there, but they are
isolated."
Mr. Fried said sanctions against individuals and their companies
and broader ones against sectors of the Russian economy have shaved
more than 1% off Russia's annual economic growth, which the
International Monetary Fund has forecast this year to be 1.2%. Real
incomes, meanwhile, have declined steadily in recent years, fueling
discontent with Mr. Putin's rule.
The Kremlin is taking pains to reward some tycoons for their
loyalty when they are named by the U.S., Mr. Fried said. For
example, after Washington announced sanctions against longtime
Putin ally Arkady Rotenberg in 2014, the Kremlin awarded a contract
to collect taxes on truckers to a company controlled by Mr.
Rotenberg's son. The contract and the taxes prompted public
criticism and protests in Russia.
Mr. Deripaska isn't alone in looking to the state for support.
The U.S. sanctioned six other Russian businessmen last year,
including Viktor Vekselberg. Mr. Vekselberg's holding company,
Renova Group, asked for almost $900 million from state banks to
make up for loans called by Western banks, Russian media reported
in May 2018.
In the defense sector, more companies facing sanctions are being
bought up by Russia's state arms contractor, Rostec. Rostec bought
United Aircraft Corp. last year, after years of losses at the
U.S.-sanctioned aerospace and defense manufacturer.
U.S. measures have also hit banks close to the state, forcing
the government to come to their rescue.
Russia's bailout of development bank VEB is perhaps the largest
example. The lender was sanctioned by the U.S. in 2014 for its role
in supporting Russia's military interventions in Ukraine.
At the time, the bank had more than $10 billion in debts, much
of it foreign, after it footed much of the bill to construct
stadiums and arenas in Sochi, where Russia hosted the 2014 Winter
Olympics. When sanctions cut the bank off from Western lending, the
state helped refinance the loans and plowed cash into the bank to
help it meet debt payments, according to people in Russian
finance.
Mr. Deripaska said his businesses could limp along for years in
the face of U.S. sanctions, and thanks to state-backed loans.
Although U.S. sanctions targeted Russian state-run banks, the
government is awash in cash from oil and metals revenues, and the
Russian central bank has more than $500 billion -- one-third of the
country's GDP -- in currency reserves and gold, according to
central bank data.
If GAZ is slapped with sanctions, the company would likely be
forced to shed part of its 65,000-person workforce, said Mr.
Deripaska. GAZ has already been hit by falling demand for
automobiles in Russia as the economy has stagnated.
Mr. Deripaska said the cost of borrowing on the domestic market
for him, as a sanctioned individual, comes with a 20% premium.
The businessman managed last year to get sanctions on Rusal
lifted by giving up control of the company. He said he has offered
the same plan to the U.S. Treasury for GAZ but has received no
response from the Office of Foreign Assets Control, which
administers and enforces sanctions.
"They just don't want to hear it; they're not interested," he
said. The Treasury didn't comment on his account.
The U.S. Treasury has given GAZ a series of extensions before
finally imposing sanctions, to allow foreign partners to divest
their interests from the auto maker. The next extension is due to
end on Nov. 8.
Volkswagen AG, which has contracts with GAZ, has indicated its
operations will stop if sanctions come into effect, Mr. Deripaska
said. Daimler AG, which also works with GAZ, suspended its
operation with the manufacturer in anticipation of sanctions, he
said.
Write to Thomas Grove at thomas.grove@wsj.com and Alan Cullison
at alan.cullison@wsj.com
(END) Dow Jones Newswires
September 11, 2019 05:44 ET (09:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.