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Moscow News, February 13, 2004

Federal Center vs. St. Petersburg

By Boris Vishnevsky

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

Staggering 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 build a railway complex. The banks, SBC Warburg and Credit Agricole Indosuez, agreed to grant the loan only against a Russian government guarantee. The government, in turn, demanded from St. Petersburg a counter guarantee for the loan repayment.

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 Mikhail Kasyanov).

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.

Debt Suit

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.


Moscow News, February 13, 2004

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