Moscow long-tolerance

(Photo: Max Novikov )

The economy of Moscow, like that of the entire Russian state, is largely supported by borrowed funds - from Russian and Western banks, investment companies, and the population. After the 1998 default, many regions were unable to fulfill their debt obligations. Until the beginning of this year, economists and investors predicted an inevitable default on external debts for Moscow. But in the spring the city was able to repay a large Eurobond loan of $500 million, and then some others. The total amount of debt in 2000 was 62.5 billion rubles as of October 17, and the capital's budget revenues, according to calculations, should have amounted to just over 200 billion rubles. Which is not bad at all: according to all international indicators, as well as the restrictions set by the Ministry of Finance, the ratio of debt to annual revenue is quite acceptable.

However, the city has no time for fat. The situation became more complicated last summer, when a new version of the second part of the Tax Code was adopted, redistributing tax revenues in favor of the center. Then in the summer, during a discussion in the Duma of amendments to the Tax Code, the Moscow mayor tried to directly resist tax reform, in the heat of the moment proposing to shift the burden of responsibility for the city’s external obligations to the federal budget. Having received a rebuke from the Minister of Finance, Luzhkov wanted to organize the issue of Euroloans for $700 million to refinance external debts. But the city authorities had to abandon these ambitious plans for a while: market conditions are such that they would have to borrow at 15-16% per annum (in US dollars) - this is very expensive. In addition, the Moscow authorities probably foresaw difficulties in placing such large issues, comparable in size to some issues of Russian Eurobonds, and were afraid that they would not find investors. We had to urgently look for alternative sources of income replacement. As the mayor promised, from January the sales tax increased from 4 to 5% and the income tax increased by 5%. Utility bills are constantly increasing (a week ago another such increase was announced). In December last year, the Russian government issued a decree on the procedure for the gratuitous transfer of shares of federally owned enterprises into the ownership of the capital, “in order to partially compensate for the costs of carrying out the functions of the capital.” And Moscow officials managed to force a solution to this problem (city authorities fought primarily for AZLK). In any case, the first deputy head of the Department of Science and Industrial Policy of the Moscow Government, Liveriy Semenov, said last week that the issue of transferring the shares of Moskvich JSC into city ownership had moved forward “from a dead point.”

Six months ago, city officials argued that the federal center’s “seizure” of a significant portion of tax funds could have catastrophic consequences for payments on Moscow’s external debts. In April and May of this year, the capital will have to repay Eurobonds in the amount of 500 million German marks and 400 billion Italian lire. According to some market participants, the Moscow authorities have been saving money for six months to pay off debts, concentrating all possible and impossible financial resources (reserves such as money from privatization, rent, and revenue from parking lots can also be used).

But Moscow's difficulties as a borrower remain - after the crisis, the city had to borrow money for a short period of time and at high interest rates. In addition, the structure of the debt leaves much to be desired (foreign currency loans from banks predominate); Moscow obligations are practically not resold on the secondary market. Therefore, today the strategy of the Moscow authorities, apparently, implies the need to improve the debt structure, that is, to re-borrow money on more favorable terms. According to the general director of the Mosfinagentstvo, Mikhail Kalinushkin, the capital has a desire to refinance Moscow’s external debt this year through the placement of Eurobonds. However, “much will depend on the conditions that investors offer us. We will not take expensive money,” a Moscow official said last week.

The situation has nevertheless changed for the better in six months: on the eve of the new year, the Standard & Poors rating agency raised Moscow’s rating to an all-Russian one (usually regional loans are rated lower than national ones), which allows the capital to count on “cheaper” borrowed funds. True, the city authorities need to try to be on time with the issue of Eurobonds this year: according to the Budget Code, Moscow can attract external borrowings only to refinance external debt or reduce it, and only in the current budget year, and no more than the amount spent on repaying debts. That is, if Moscow, as planned, pays off a debt of about $700 million, it will be able to borrow the same amount on the foreign market by placing, for example, Eurobonds.

While plans to place Eurobonds remain plans for now, Moscow has already put up a large bond issue for sale on the domestic market. After a long walk through the Ministry of Finance offices, settling various legal requirements, Moscow officials managed to register the terms of the issue of seven internal city bond loans totaling 5 billion rubles. The volume of each loan is from 500 million to 1 billion rubles for a period of 1 to 3 years and a yield of 23 to 28%. The Moscow government plans to spend all the money received on the domestic market to pay off old debts. Large banks may need new capital securities for further “retail” sales to smaller investors, including the public. It is likely that these securities will find demand - simply due to the shortage of financial instruments. Private placements between large banks have already begun; in January, the MICEX included these securities in its listing (the list of securities admitted to trading on the exchange). When asked about new capital bonds, the ATON investment company stated that they do not work with non-marketable securities. The specialists at the Troika-Dialog investment company turned out to be more talkative. According to debt securities analyst Alexander Ovchinnikov, in terms of profitability, Moscow debt securities are more attractive than comparable types of government securities. The reliability of the city as an issuer is not yet in doubt, but investors are confused by the opaque pricing procedure (instead of organizing open auctions, the city authorities agreed on a private placement of securities) and low liquidity on the secondary market.

The Moscow authorities today have to show tolerance. Having met the tax reform with hostility, the city authorities now, if they complain about the federal center, do so somehow out of inertia and not very angrily. “The Moscow government lost 10 billion rubles due to the liquidation of the Road Fund,” the capital’s vice-mayor Valery Shantsev complained last week on Echo of Moscow. According to him, due to the liquidation of the Road Fund, the capital's government will be forced to reduce construction programs, primarily the construction of the third transport ring. “We planned to complete the third ring by 2006, but we will have to make adjustments, since the pace of construction will slow down every year due to a decrease in funding,” said the vice mayor.

The mayor began to behave more cautiously. He demonstrates loyalty to the president by supporting all his initiatives - the anthem, dividing the country into seven districts, etc., etc. The city authorities are focusing on oligarchs close to the Kremlin - during the New Year holidays, the capital authorities entered into an agreement on a broad socio-economic partnership with Siberian Aluminum, which is owned by Roman Abramovich and Oleg Deripaska. At the same time, Luzhkov is in no hurry to drown the disgraced businessmen: Moscow financiers say that they are not going to demand from Media-Most early repayment of the bills into which Most-Bank's debts to the capital were reissued. A source in the mayor's office told Interfax that at the time of the conclusion of the agreement, the bills were secured by the assets of the Media-Most group, which was confirmed by one of the largest international auditing companies. At the same time, a representative of the Moscow government did not rule out that the liquidity of the company’s assets could decrease: “The situation is negatively affected by the actions of the Prosecutor General’s Office, which complicate negotiations on the sale of shares of the companies included in Media-Most.” The sale of the holding's securities would allow it to pay off creditors, including the Moscow government, a source from the Moscow government believes.


(Photo: Pavel Gorshkov )