Set-up to nurture innovation and help diversify the Russian economy, state-owned Rusnano was this week facing the possibility of a default. Rusnano managers were reportedly locked in debt restructure negotiations with investors after trading of the company’s bonds was suspended. The saga has led to questions about whether state-driven innovation in Russia can ever be successful.

• The Central Bank ordered the Moscow Stock Exchange to suspend trading in Rusnano bonds last Friday. The corporation later explained that it was in discussions with creditors about restructuring, admitting that it had accumulated a “disproportionate debt”.
• Rusnano has completed nine bond issues worth a total of over 70 billion rubles ($938 million). It owes a coupon on five of these next month.
• Trading of Rusnano bonds resumed Monday, and — to no-one’s surprise — quotes for the corporation’s bonds fell sharply. The situation will test the state’s willingness to incur financial losses on high-risk investments, according to Konstantin Anglichanov, senior director at ratings agency Fitch (the only Western agency with a rating for Rusnano). “It’s almost impossible to discern what Rusnano is doing with the mandate it received from the state,” he said.
• The Finance Ministry said Tuesday that Rusnano would continue to fulfil its debt obligations, but only on securities with a state guarantee (at the start of 2021, just 75 percent of Rusnano’s total debt was backed by state guarantees). Notably, media outlet RBC reported that a quarter of the non-guaranteed bonds, worth about 10 billion rubles, are held by Promsvyazbank, the primary bank for Russia’s defense sector. The Finance Ministry also said Rusnano’s board of directors would be replaced to improve efficiency.
• Fitch placed Rusnano’s credit rating under review Wednesday. Rusnano currently has a BBB rating — if the company is downgraded one notch it would mean joining the lowest investment category, BBB-. Anything lower falls into the category of speculative or non-investment: companies with these ratings are typically characterized by an increased risk of default and greater vulnerability to changes in the business environment.
• While the situation is unprecedented, a default is far less likely than a restructuring, according to Konstantin Svyatny, CEO of Aton Management, who dismissed the idea that Rusnano’s problems cause wider economic problems. “The problems of one issuer will not have a significant impact on the yield of government securities,” he said.
• However, even if the situation is quickly resolved, some believe Rusnano’s problems are a blow to all state-owned companies. Events raise questions about the investment axiom that quasi-sovereign companies always enjoy higher credit ratings (as they are backed by the state).
• Fitch wrote just a year ago that a Rusnano default would “adversely affect the Russian capital market, and also harm investor confidence in the reliability of government support, especially in the light of the increasing issuance of debt without government guarantees”.
• Rusnano was set-up in 2007 and was led for thirteen years by Anatoly Chubais, the architect of Russia’s post-Soviet privatization drive and one of the last of the reformers of the 1990s left in a top government post. Chubais took on a new role last year as presidential envoy for climate change.
• There have long been concerns about the management of Rusnano. The Audit Chamber highlighted ineffective management and expenditure in 2013, while opposition leader and anti-corruption campaigner Alexei Navalny regularly accused the company of misusing state funds. Chubais has even been blamed for the recent debt problems. But others believe Rusnano’s fate was sealed from the start. Economist Maxim Averbukh argued in a column for newspaper Novaya Gazeta that there is a chronic lack of interest in innovation in Russia while the economy revolves around raw material exports and state spending.

Why the world should care: The story of Rusnano is a reminder that a company’s ‘state connections’ should not be a substitute for a proper analysis of its financial health. From now on, investors are unlikely to take state support for such companies as a given.