President and State Council to meet on economic support measures

President Medvedev is in Irkutsk on Friday to hold an extended meeting of the State Council on support for Russia's real economy. The government will pay special attention to the region's aircraft building industry.

The government started taking measures last autumn. Since than according to various estimates the state has pumped around $140 Billion into the economy. But Vladimir Tikhomirov, Economist at Uralsib say barely half has reached companies.

“Majority of funds that were given to the economy, they still remain on the cash balances of banks. And there are multiple reasons for that, but the general reason is that the banks have weakened very dramatically through the crisis, and they're not prepared to take additional risks.”

But bankers such as Andrey Kostin, Head of VTB, say they simply can't provide all the money that companies need right now.

“Originally, if you take, for example, investment programmes of the Russian companies, only 13% of the money came from the Russian banking sector. The rest came from IPO's, from foreign banks, from profits of the companies themselves. So we cant substitute all this money.”

Vladimir Tikhomirov says the Government has no choice but to funnel money to the economy via banks.

“While you give the money you should also analyse the risks associated with this transaction, and also ensure that the payment for the credit that you have issued is coming back. Just throwing the money and never thinking that the money would return back is a very damaging policy, obviously, for the Government.”

The recent agreement of Rosneft and Transneft with China raising a $25 billion loan is a signal that alternative money sources are available. Foreign creditors of Russian companies won't flee the market, but Elena Anankina, Economist at Standard & Poors, believes evidence of state support for large businesses is a factor for foreign lenders in Russia.

“One of the situations for us to watch is what will happen to Rusal. Whether the state will support it or not may influence the mood of the foreign creditors, and their appetite to lend to other big Russian names.”

The market expects the government to announce new measures to support the real economy during the State Council meeting in Irkutsk on Friday particularly the local production of civil aircraft.