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23.09.2008 - MDM Comment: VAT, RUB, SATURN's default

This morning we have two items of good news and one item bad news.


Starting with the good news, Alexey Kudrin, the Russian finance minister, said yesterday that his ministry had proposed an amendment in VAT legislation to lawmakers. Mr. Kudrin explained that they want to allow corporates to delay quarterly VAT payments by up to three months.

In our view, the proposal is good for two reasons. First, it should effectively provide additional funding for the corporate sector, which is extremely important in the current environment. Second, it will help smooth the VAT-related cash outflows and relieve the banking system. Importantly, not only the largest banks will benefit from the move, but all banks will feel the advantages, pro rata to their business with corporates. The total amount of VAT paid every quarter by Russian corporates is estimated at RUB400-500 bn, i.e. USD16-20 bn.

The critical issue now is how quickly the proposed amendments will be approved and enforced. Mr. Kudrin’s plan is to make them effective from October 1. As things stand, the next quarterly VAT payment is due by mid-October – lawmakers will have to make haste.


The ruble strengthened slightly this morning vs. the bi-currency basket (the latter moved from 30.40 down to 30.30-30.35). Just as the strengthening US dollar spelled trouble for the ruble in August and early September, a weakening dollar is now good providing some support. Oil prices have corrected upwards, while exporters, which are mainly paid in dollars, are more inclined to quickly get rid of them.

Ruble strength should be positive for the liquidity of the local banking system, as chances increase that the Central Bank will buy dollars (and issue rubles) as opposed to being a seller.


NPO Saturn, one of Russia’s leading producers of engines for civil aircraft, has reportedly failed to pay a coupon on its 12.5% RUB2 bn bond issue. The company explained this failure as due to purely technical delays in receiving payment from one of its clients, and promised to repay coupon in full by the end of this week.

Saturn is widely believed to be one of the strategically important entities for the state. The government owns a 37% stake in Saturn, while state-controlled banks have historically been the key lenders to the company.

With this in mind, the first news one would expect after hearing the news is liquidations of exposure to all other state-related defense machinery companies. These companies are all highly leveraged and a core pillar against which their investment case has always been built was the high likelihood of state support. Now state support appears not to be there. We, however, recommend that investors take a closer look at the event before panicking.

First, Saturn is in fact not a state-controlled company. Over 50% of the common stock is owned by Saturn’s management, which, together with another aircraft engine-builder, KMPO, has been of late opposing the ‘master plan’ of consolidation of the Russian engine-building industry, approved by the government and implemented by the state-owned conglomerate Rosoboronexport.

For this reason we would recommend distinguishing between the truly state-controlled defense companies (United Aircraft Corporation, MIG, Irkut, Perm Motors, Sukhoi, et al), and those still independent.

Second, even in Saturn’s case, the problems may prove to be not a case of lack of state support or no further access to funding at Sberbank, VTB or the Bank for Development, but rather an example of simple liquidity mismanagement. We think that the state banks will not easily allow this company to go bust and reflect significant bad loan exposure on their books. Rather, the banks may choose to continue refinancing Saturn (the company generates cash flows and has large contracts), but may well use the vulnerability of the company to persuade its management give up independence and consolidate into Rosoboronexport.

The ability of Saturn and other abovementioned companies to stay current on their outstanding bonds and the government support case will be tested quite soon (all issues are relatively short-dated).

23.09.2008 14:12
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