MOSCOW • For years, Mr Vladimir Putin used Vnesheconombank (VEB) to pay for "special projects", from the Sochi Olympics to covert acquisitions in Ukraine to oligarch bailouts. Now, the state bank needs a rescue of its own and it could be the Kremlin's costliest yet.
VEB was supposed to be the financial supercharger of the Russian President's state-directed capitalism, using its government backing to raise billions at low rates on Western markets and pumping them into ventures the Kremlin wanted funded.
Hit by Western sanctions last year, VEB has stopped new lending. The cost of its bailout could reach 1.3 trillion roubles (S$25.2 billion), according to several senior government officials, ballooning the budget deficit at a time when plunging oil prices are forcing spending cuts.
"The government can't just leave it alone to face the problems caused by the financial and economic situation in the country," Prime Minister Dmitry Medvedev told a VEB board meeting discussing rescue options on Dec 22, referring to the various kinds of sanction pressures.
Over the past eight years, VEB came to epitomise Mr Putin's hybrid system that combined elements of market financing with tight Kremlin control, funding billions in industrial and infrastructure projects back in the days when oil prices were high and foreign credit was easy.
But the United States and European Union sanctions imposed last year over the Ukraine crisis cut off VEB's access to international financial markets, leaving it without a source of cheap funding and facing as much as US$16 billion (S$22.6 billion) in foreign-currency debt just as the rouble began its plunge.
At the same time, falling oil prices accelerated Russia's slide into recession, pushing many of VEB's projects deeper into the red.
Earlier this month, Mr Putin said many development agencies "have turned into garbage dumps for bad debts", in what officials said was a clear reference to VEB.
Losses on the bank's huge catalogue of Kremlin-mandated projects could reach 1.2 trillion roubles, according to the Finance Ministry, or nearly half the expected budget deficit for next year. VEB faces US$7.3 billion in debt repayments over the next few years and, effectively, has only one source of significant funding - the state.
"It's an SPV", or special-purpose vehicle, for pet projects, said Mr Andrei Movchan, economist at the Carnegie Moscow Centre. "It was an institution for saving bankrupt businesses. Alas, by taking on those risks, it went bankrupt itself."
Neither VEB nor a Kremlin spokesman responded to requests for comment for this article.
Now the government is considering scrapping VEB's original hybrid model as part of the bailout.
"With each passing year, VEB was used less as the government's agent for development and more as an off-budget fund for the state to pay for its special projects," said Mr Karen Vartapetov, analyst at Standard & Poor's. "These projects were effectively budget expenditures, only put off into the future," he added. "That future has now come and the government will have to pay."