OREANDA-NEWS. June 29, 2010. Standard & Poor's Ratings Services said today that it was assigning its preliminary 'BBB' rating to the first series of proposed global U.S. dollar bonds to be issued by Russian Vnesheconombank (VEB) (foreign currency BBB/Stable/A-3; local currency BBB+/Stable/A-2) as a part of its large loan-participation note program.

The amount to be placed, maturity, and interest rate will be defined as a result of a road show, which VEB expects to launch on June 28, 2010.

"The preliminary rating on the bond coincides with the issuer credit rating on VEB," said Standard & Poor's credit analyst Felix Ejgel. "However, we could revise the rating on the bond should its final conditions significantly deviate from preliminary expectations."

The ratings on VEB are the same as those on the Russian Federation (foreign currency BBB/Stable/A-3; local currency BBB+/Stable/A-2; Russia national scale 'ruAAA'), reflecting our view of an "almost certain" likelihood that the Russian government would provide timely and sufficient extraordinary support to VEB if necessary.

In accordance with our criteria for government-related entities, our view of an "almost certain" likelihood of extraordinary government support is based on our assessment of VEB's: "Critical" role as the official financing arm for large public infrastructure projects, underscored by the institution's mandate to stabilize the Russian banking system during the global economic crisis; and

"Integral" link with the Russian Federation, because the prominence of its board members, its 100% state ownership, and Russia's institutional settings make it the most important instrument for directed lending.

Due to this support, we rate VEB higher than its stand-alone credit profile would suggest. We assess VEB's stand-alone credit profile at 'BB-', reflecting the bank's concentration in the troubled metallurgy, machinery, defense, and construction sectors. Strong ongoing support in the form of regular capital and liquidity injections from both the government and the central bank, coupled with tight supervision from the federal government, support VEB's role as the state's preeminent development institution.

De facto, VEB can provide most loans only following a decision by the Russian government, whose lending to commercial entities is severely restricted by the Budget Code. VEB remains almost the only source of long-term bank funding to complex projects in machinery and other strategic sectors.

VEB is a state corporation and its activity is regulated by a special law. VEB's investing decisions are authorized by the supervisory board, which is headed by the prime minister and comprises members of the federal government and the chairman of VEB. Were VEB to lose its legal status as a state corporation, which is an eventual possibility but seems unlikely over the next 10 years, we would view it as a weakening of the government's link to VEB, and hence a possible negative rating trigger.

Risks emanating from directed lending also remain a factor affecting VEB's asset quality. By the end of 2009, the bank's assets reached Russian ruble 1.9 trillion (USD 63 billion), having more than tripled since year-end 2007. The bank's strategy for loan growth for 2010-2012 will largely depend on government decisions in response to economic activity. VEB's asset quality is also affected by large loan concentrations in metallurgy, machinery, and construction, which have all been hurt by the crisis and represent about 54% of the bank's loan portfolio.

The stable outlook on VEB mirrors that on the Russian Federation.

"Future rating actions on VEB will likely follow those on the Russian Federation, assuming that the institution's fundamentals and public policy functions are maintained," said Mr. Ejgel.

Diminishing government support or a radical change to VEB's mandate could create a differential between the ratings on VEB and those on the Russian Federation.

VEB's stand-alone credit profile could also vary, depending on the health of its key lending sectors.