Russia might resort to converting its stakes in international financial institutions into debt to shield them from sanctions

MOSCOW. Dec 15 (Interfax) - Russia might resort to converting its stakes in international financial institutions into debt obligations in order to protect these institutions from the risk of sanctions.

The government has submitted an amendment to the Budget Code to the State Duma that would give it the right, upon reaching such agreements with international financial institutions, to make decisions in 2023 to convert Russia's stakes in these institutions into their financial obligations to the country, a source familiar with the bill told Interfax.

The bill also gives the government the option to convert these obligations back into stakes on terms that are no worse than the initial ones.

The Finance Ministry told Interfax that Russia is prepared to reduce its stakes in a number of international financial institutions in order to prevent the restrictions of sanctions from being automatically extended to them.

"The activities of these institutions are intended to facilitate international economic development, which plays an important role in the current conditions. The prepared amendments will allow international institutions engaged in promoting economic development to create the conditions for full-fledged operations," the ministry said.

Russia has stakes in many international financial institutions, but some of them are "unfriendly" so sanctions against Russia are no threat to them, such as the International Monetary Fund and World Bank, while in the Asian Infrastructure Investment Bank (AIIB), Russia's stake is small and therefore not "toxic."

Russia plays a bigger role at the New Development Bank (NDB) founded by BRICS countries and International Investment Bank, which was established in the Soviet era with former Comecon countries. Russia has a particularly large role at the Eurasian Development Bank, in which it holds a 65% stake.

During consideration of the amendment at Thursday's State Duma budget committee meeting, where it was adopted, Oleg Podomatko, deputy director of the Finance Ministry's International Financial Relations Department, explained that the issue in question is primarily regarding the International Investment Bank (IIB).

"This initiative is related to the fact that this year international financial institutions in which Russia has a share of participation and, in particular, multilateral development banks, have come under considerable pressure in the form of financial sanctions that have been imposed or that European countries are trying to impose on them. The Finance Ministry has been working this year, maneuvering under difficult conditions, to get these institutions out from under these sanctions. The two institutions that have been hit the hardest are the International Bank for Economic Cooperation and the International Investment Bank. The latter is headquartered in Hungary and has a rather complicated shareholding structure that includes the Czech Republic, Slovakia, Bulgaria and Romania. At this moment the Russian share in this institution is 47%, with Russian representatives present in all the management bodies at both board and director level and the management is headed by our compatriot Nikolay Kosov. And due to the fact that two countries have already declared their intention to withdraw as IIB shareholders, we expect that in January, the Russian share will automatically increase from 47% and exceed 50%, which will create formal conditions for imposing sanctions against this institution," he said.

This amendment, Podomatko said, will allow the Finance Ministry, in agreement with the government, to carry out a rapid response, and in particular, for a time to convert part of the interest in the subordinated debt of the IIB to Russia. "In the future, when the issue of increasing Hungary's share in this institution and, possibly, entry of Serbian shareholders, will be resolved, accordingly, a reversal will take place on terms no worse than the current ones. This measure will allow us to avoid a critical situation for this bank," he said.