| On February 24, the Arbitration Court of St. Petersburg
will hear an unprecedented case in which the Finance Ministry accuses the
city of disclaiming its debts |
The RF Finance Ministry is suing St. Petersburg in an attempt to get
the northern capital to admit its responsibility for the enormous debts
incurred by High Speed Rail Co. (RAO Vysokoskorostnyye Magistrali, or
RAO VSM). The debts total 2.6 billion rubles or $90 million - that appears
to be the cost of digging a mammoth foundation pit in downtown St. Pete.
A Bad Compromise
Seven years ago, RAO VSM took out a $200 million investment loan to
railway complex. The banks, SBC Warburg and Credit Agricole Indosuez,
to grant the loan only against a Russian government guarantee. The government,
in turn, demanded from St. Petersburg a counter guarantee for the loan
A contract of guarantee was drawn up, but it was null and void in law
as it was not endorsed by the city Legislative Assembly. (Curiously, it
was signed on the Finance Ministrys behalf by then Deputy Finance Minister
The St. Petersburg legislators knew full well that the railway complex,
even if it were built, would never pay off, and that the loan would have
to be repaid from the city budget. A top official who also knew that was
the then First Deputy Governor Igor
Artemyev, who was in charge of the citys finances. By openly opposing
the granting of a loan guarantee to RAO VSM, Artemyev in effect defied
his boss, the Governor of St. Petersburg at the time Vladimir Yakovlev,
who had vigorously lobbied for the high-speed rail project.
Artemyev’s resignation seemed inevitable, but when the debt default
of August 1998 shook the country, the matter of granting a loan guarantee
to RAO VSM went out the window. But the Russian government must have thought
otherwise. It continued to insist that St. Petersburg was liable for the
RAO VSM debts. A relevant entry appeared in the 2001 federal budget, and
in 2003, the ministry blocked budget allocations to the city until it
acknowledged its debts.
Those attacks were successfully beaten back. The said entry was crossed
off the federal budget through the efforts of St. Petersburg deputies
in the State Duma, while the attempt to block state budget funds due to
the city was frustrated by the city’s strongly worded appeal to
Prime Minister Kasyanov, demanding that he bring to account Finance Minister
Alexei Kudrin and his deputy, Sergei Vyazalov. But the Finance Ministry
stuck to its guns and got down to business.
For a start, in 2003 the Finance Ministry tried once again to persuade
the northern city to "voluntarily" assume liability for the
debts. It proposed a compromise whereby St. Petersburg would formally
undertake to pay RAO VSM’s debts, while the Finance Ministry "would
help the city administration restructure assumed obligations." In
other words, the city would acknowledge as its own another entity’s
debts in exchange for an extension on debt repayments over a 12-year period.
The city authorities, with good reason, rejected the deal, and the Finance
Ministry went to court. How will the litigation go?
"There are no grounds for shifting RAO VSM’s debts onto the
city," Artemyev, ex-first deputy governor, says. "That is something
any court must recognize. I am surprised that no criminal case has been
opened over the misuse of the multimillion loan. I would like the court
to establish what role, if any, Mr. Yakovlev played in all this."
If the dispute were resolved by strictly legal means, the northern capital
would have no problems, as the city administration would have the law
on its side. The only argument that the Finance Ministry has been citing
all along is that the contract of guarantee bears Vladimir Yakovlev’s
signature. But under St. Petersburg legislation, that document has no
legal force, as it was never endorsed by the city’s parliament.
Given the "power vertical" in place in this country, can we
expect the court to pass an unbiased ruling on the conflict of interest
between the Federation and its constituent region? In the first place,
there is a lot of money involved. Secondly, a judicial victory for St.
Petersburg would signify a humiliating defeat for the "Moscow-based
Petersburgers" who head the Finance Ministry.
St. Petersburg administration spokesmen say they will not acknowledge
the debts in court. Mikhail Oseevsky, the city’s deputy governor
for the economy and finances, believes the city is bound to win the suit,
as it bears no liability for RAO VSM’s debts. Most interestingly,
though, Governor Valentina Matviyenko has so far made no public statement
on the case.
It is no secret that the lady governor had the federal centre’s
backing in her election campaign. And now she finds herself stuck between
a rock and a hard place. If she sides with the centre, the city budget
will lose at least 2.6 billion roubles (that is, 500 roubles per citizen).
If she disclaims the debts, she will infuriate those to whom she owes
her governorship. Not an enviable position, to put it mildly.