Irina Makieva: The State, Society and Business are to Support Mono-Cities
The problem of mono-cities where life of an overwhelming majority of people is associated with a single city-forming enterprise exists not only in Russia. But in Russia there are more than 300 hundred mono-cities and they start experiencing similar difficulties as soon as an enterprise begins to lose orders including state ones, and in this case it’s not able to pay salaries on time, support social facilities and etc. The Government made a decision to work out a program of supporting mono-cities. State Corporation ‘Bank for Development and Foreign Economic Affairs (VEB)’ is responsible for coordinating this program. VEB Deputy Chairman Irina Makieva told about this program’s implementation in her interview to RIA Novosti.
-In 2010, the program of supporting mono-cities got off to a start. What is this program designed for?
-The program of supporting mono-cities as part of the government’s crisis management program has been implemented for already about a year. During this period we managed to make a significant headway from making a list of pilot projects, developing modernization comprehensive investment plans to extending funds for measures provided for by the said plans. The program’s goal is to create new jobs and diversify mono-cities’ economy. The goal was formulated by the President and the Government. This work in 2010 was performed as part of comprehensive plans for the most populated areas. The objective is to create production facilities alternative to a city-forming enterprise among other things in the SME sector in order to enable city residents to find jobs in case of job cuts at a mono-enterprise. And this forms the basis for sustainable economic growth of mono-cities and regions.
-What’s VEB’s role?
-As a national development institution, since December of 2009 Vnesheconombank has been responsible for coordinating efforts to support the modernization of mono-cities through the working group under the Governmental Commission on Economic Development and Integration headed by Vnesheconombank’s Deputy Chairman. Thus, as part of efforts to modernize mono-cities Vnesheconombank performs 2 key functions: the first function is to coordinate work on considering comprehensive investment plans and work out proposals for supporting projects for the Government and the second function is VEB’s activity as a credit institution. This activity is aimed at providing financial support for investment projects themselves, above all, large-scale ones meeting the Bank’s requirements and designed to diversify a mono-city’s economy and create new jobs. At present, the State Corporation is considering a number of such projects.
-As far as we know from other countries’ experience, such complicated, long-time problems can’t be resolved for a period of one year. What are the specifics of the Russian program?
-In 2010, we had to take urgent measures for individual mono-cities. So we chose a speedy mechanism for making budgetary resources available to regions. I’d like to stress that a comprehensive investment plan is a long-term instrument of regional investment development, in which budgetary money, made available, for example, only for a year, forms the basis for a subsequent launch of investment projects but this time with investors’ participation. We shouldn’t overlook another specific feature of the Russian situation, namely, the magnitude of the set task and the gravity of problems accumulated for many decades. We also cooperate and share experience with leading international financial institutions, for example, the World Bank, the UN Development Program and they confirm the gravity of the Russian problem: financial capabilities of local authorities are significantly limited, mono-cities themselves differ from one another and many mono-cities are located in sparsely populated areas and are isolated. International experience shows that only joint participation of the state, society and business in addressing mono-cities’ problems makes it possible to solve this serious problem though not so fast as we might desire.
-How many cities participate in the program and what are criteria for selecting them?
-In 2010, 35 mono-cities were provided with support: 25 pilot mono-cities, a list of which was approved by the Government in 2009, and 10 additional ones selected in mid 2010 when we realized that we could provide financial assistance to a greater number of mono-cities. The list includes Togliatti, Baikalsk, Pikalevo… As soon as the program was launched we received applications for 2010 from 25 cities worth several tens of billions of rubles. Our goal is not to automatically distribute limited budgetary resources. The main condition for providing support is the availability of well-prepared investment projects backed at the regional level. Moreover, projects should have real investors, business-plans.
-What’s the amount of funds allocated from the federal budget in 2010? What are the main forms and lines of supporting mono-cities in 2010?
-In total, 22.7 billion rubles were allocated from the federal budget. Out of which10 billion rubles are subsidies and another 5.7 billion rubles are budgetary credits intended for launching new investment projects. 5 billion rubles were committed for residential building renovation and for resettling citizens from shabby and dilapidated housing stock, and 2 – for supporting small and medium-sized enterprises. As early as in 2010, target funds were committed to implement programs aimed at reducing tensions on mono-cities’ labor markets. There are also funds provided for by functioning state programs and projects. Furthermore, one of a modernization comprehensive plan’s objectives is to substantiate all forms and lines of budgetary and non-budgetary support at a mono-city’s level as well as to link them to employment and retraining programs through labor force balances. We should be sure that after being downsized specialists will be able to find a job at production facilities being created.
-Subsidies are factually free money for regions…
-First, subsidies are directly tied to investment projects, that is, activities for which a subsidy is requested must be directly linked to implementing large-scale investment projects on a mono-city’s territory, with these projects making a significant contribution to diversifying economy, manufacturing high value-added products and creating new jobs. We proceed from the premise that the state’s main objective in mono-cities is to build infrastructure to subsequently launch investment projects. Second, it was the state that built in the past these mono-cities and laid down problems these cities are facing today, so the state is somewhat responsible for changing the situation in these cities for the better. Third, mono-cities’ modernization results depend to a great extent on regional and municipal authorities’ pro-active position including their efforts to create favorable conditions for developing business in mono-cities. So, the state’s mission is to push mono-cities to take steps to reduce and overcome their dependence on mono-enterprises.
-Could you tell us in more detail about small and medium-sized enterprises in mono-cities, what requirements are imposed for programs of SMEs development in mono-cities?
-The proportion of SMEs in most mono-cities ranges from 1 to 13% and this indicator is a lot lower than on average in Russia. We witness the lowest SMEs development indicators in such major cities as Nizhny-Tagil, Togliatti, Leninsk-Kuznetsky. SMEs insufficient participation in mono-cities’ economy is due to the low level of business activity and low production specialization of mono-enterprises. Another problem is that local authorities are not active enough to provide entrepreneurs with information support as well as the fact that providing support for SMEs is not always a priority in the municipality’s development. So, upon working out comprehensive investment plans we sought to make municipalities which got involved in comprehensive investment plans to assume certain obligations. The measures for providing government support for SMEs were implemented as part of municipal programs. Main forms of providing support here are to extend grants to novice businessmen, compensate for interest rates, hold training sessions and create business-incubators as well as other forms of assistance.
-You’ve just said that they got involved in comprehensive investment plans but aren’t municipalities required to implement them?
-Comprehensive investment plans are to be agreed upon not only at a municipal level but they are also to be approved by a region’s government. This increases responsibility of a city and region for their assumed obligations including the ones to implement measures incorporated in comprehensive investment plans and achieve target objectives. In the course of our activity we arrived at a conclusion that regional and municipal authorities’ role in improving investment climate, creating favorable conditions for developing business is dominant in mono-cities’ successful modernization.
-How do you work with investors?
-I’d like to stress a few lines of activity. First, it’s the activity of regional authorities. Local authorities are to provide investors with administrative and organizational support with regard not only to big business but also to small and medium-sized enterprises. It’s also very important to identify a package of measures to financially encourage investment activity. This issue can be addressed as part of regional investment activity legislation including creating zones with a special economic climate, extending state guarantees, special tax regimes, leasing privileges, subsidizing interest rates. Second, we have to set up information activity with regions. The investor should have full and credible information about business environment in the regions. Third, it is investors’ active cooperation with development institutions, state banks in the regions including Vnesheconombank. We got to know that there were a lot of business ideas in the regions but at the same time there were no well-prepared investment projects that banks could finance. The problem is exacerbated by the shortage of labor resources at a regional level capable of structuring investment projects as well as high labor costs on developing projects resulting in high financial costs which neither investors nor regions are prepared to incur in the uncertain atmosphere of investment prospects.
-The fact is that money is allocated to regions. Are there any tangible results from providing support that can be felt by people and business in mono-cities?
-Yes, there are. In 2010, mono-cities received funds under SMEs, employment and communal services programs. New jobs were created including temporary ones thus reducing social tensions in the cities. But these are short-term measures. The funds received in 2010 in the form of subsidies and budgetary credits designed to build infrastructure enabled regions to implement new long-term projects. I’d like to say it once more that funds were transferred to all cities and we have already received first results: in November a motorway “The Southern Approach to Nizhny Tagil” was opened. The motorway’s reconstruction will make it possible to build the second stage of the integrated logistics facility on the principles of public private partnership as part of supporting mono-cities of the Sverdlovsk region. Extensive work is being carried out in the Kemerovo region, the Republic of Tatarstan and other regions. In the coming one-two years the modernization program in mono-cities is sure to prove to be effective. Nevertheless, I should admit that we have to push many regions to fulfill work on time. It should be noted that we have launched an active search for and a public discussion of investment solutions – in effect instruments of long-term development for reducing cities’ mono-dependence. The program’s implementation would make it possible to create more than 200 thousand new permanent jobs in mono-cities and the proportion of mono-products would shrink from 60% to 40% and each budgetary ruble would raise 5 rubles in private investments. Our performance in 2010 revealed that the most popular form of mono-cities’ economic modernization was the creation of industrial and technological parks with private investors’ active participation (Nizhny-Tagil, Togliatti, Leninsk-Kuznetsky, Chistopol, Vyatskie Polyany and etc.) on the territories of large enterprises with outdated technology. We also plan to develop cluster solutions in the future.
-First Vice Premier Igor Shuvalov said that a list of mono-cities to be supported by the state in 2011 had been expanded. Is this list already known?
-There are 335 mono-cities in Russia. There are no sufficient budgetary funds to support all of them. So, we are going to select among those cities which will submit well-defined modernization plans. All mono-cities are different, so, we have to adopt different approaches to address problems of mono-dependence. Our objective is to work out several standard and successful solutions on modernizing mono-cities to spread this experience to other mono-cities. Another 15 cities are expected to be supported by the state in 2011 (in addition to 35 provided with support in 2010), a list of cities is be made in the first quarter of 2011.
-You said that social tensions were decreasing. Is this going to change forms and principles of state support for mono-cities in 2011?
-In fact, the outflow of personnel has stopped at many city-forming enterprises, they received orders and their financial standing stabilized. But their better financial standing does not mean reduction in mono-dependence. We shouldn’t be waiting for the next financial crisis to start addressing this sort of problems all together as if we could freeze them for the time being. As far as principles and forms of support are concerned I believe that our main principle should remain the same: budgetary funds should be used to build and reconstruct municipal and regional infrastructure and private investors should finance projects themselves. But this activity should be undertaken not as part of anti-crisis measures but as a systematic planned activity.
Vnesheconombank Chairman V.A. Dmitriev’s Interview to the TV Channel Russia 24
TV Channel Russia 24
Host: Evelina Zakamskaya
HOST: Good evening, Vladimir Alexandrovich.
Vladimir DMITRIEV, Vnesheconombank Chairman: Good evening.
HOST: I am glad to see you, thank you for finding time for us. The Russian economy is said to have come out of the crisis. Is this really the case and what impact did it have on Vnesheconombank’s operation?
Vladimir DMITRIEV: Not all crisis developments have been overcome, a lot of problems still remain. But as far as Vnesheconombank is concerned, we are confidently moving from taking crisis management measures to undertaking our core activity as a Bank for Development. We have new projects, new borrowers, and new ambitious plans. To tell you the truth, we didn’t actually stop operating as a Bank for Development even in the time of the crisis but undoubtedly a top priority was given to engaging the Bank into taking crisis management measures.
HOST: So, you’ve stopped acting as a red knob and started operating on a routine basis?
Vladimir DMITRIEV: To a large extent we are still taking anti-crisis measures. We shouldn’t forget about subordinated loans which we extended for a period of 10 years. We should keep in mind that we are reorganizing two large commercial banks; we became “happy” owners of a number of non-core assets: Amurmetal and the Traktornye Zavody Concern. To this end, we have the VEB Capital Company that helps us to manage these diverse business entities thus performing functions not always typical for the Bank.
HOST: The Russian Economic Development Ministry proposed to develop a program of privatizing non-core assets did you agree upon this program with the Ministry and what do you think on this account?
Vladimir DMITRIEV: We agreed upon this program as far back as last year when decisions on reorganizing Globex Bank and Svyaz-Bank and on working with their assets were being taken. At present, these banks are in safe hands but all this required strenuous efforts and considerable financial resources. In order to settle Globex Bank’s problem debts we received a deposit worth 87 billion rubles from the Central Bank and we have to repay the deposit. Clearly, at the moment we can’t sell our non-core assets by which I also mean commercial banks because the market is undervalued. We discussed this issue at our meetings of the Bank’s Supervisory Board and in our conversations with its members including the Economic Development Minister and we arrived at a conclusion that these assets could be sold in a few years when Globex Bank is well capitalized. And we can count on applying pre-crisis ratios or at least close to them when a bank’s capital is multiplied by several times. We also include in these non-core assets the property, incompleted constructions and facilities we received from Globex Bank. They include the former Slava watch factory. There are a number of operating construction projects but we have to complete them before talking about selling them.
HOST: As to development projects supported by Vnesheconombank we should single out modernization projects. What projects would you describe as truly state-of-the-art ones?
Vladimir DMITRIEV: At present, about 15% of our loan portfolio accounts for innovation projects but as far as modernization projects are concerned the percentage is a lot higher. We are actively searching for innovation and modernization projects. One of our lines of activity is related to supporting Russian shipbuilding; here we have brand new projects that have no analogues in our country and in the world in the shipbuilding sector. We provided financing for Sovcomflot to construct two high-powered icebreakers with deadweight of 70 thousand tons each. These heavy-duty oil-carrying vessels transported oil through Northern Sea Route to South-East Asian countries. As to modernization and innovations our Management Board and Supervisory Board made a decision to finance a company which will be responsible for implementing a project aimed at creating supercomputers and their software. This is T-Platforms Company. It is energetically tapping into European markets and leading companies in the computer and supercomputer sector are interested in entering this company’s capital. We pride ourselves on launching two significant projects this year. The projects are aimed at modernizing our oil-refining sector and they are implemented by Tobolsk-Polymer Ltd. This was a very large transaction, a very complicated one in terms of financing its financial model, in which the largest European banks as well as banks from other continents and leading insurance agencies participated. Our participation share is about one and a half billion dollars.
HOST: Vladimir Alexandrovich, this is a question most frequently asked by experts when they discuss the future of the Russian economy: where to get money for innovations? What are Vnesheconombank’s capabilities in this respect and what new instruments for financing new projects are under discussion?
Vladimir DMITRIEV: Here we can’t come up with something new, we have to raise money in the market. This year we have completed several transactions, with some of them being truly breakthrough deals. None of Russian borrowers, and the more so, after the crisis, borrowed money for such a long period of time and made so many investors from various countries purchase bonds issued by Vnesheconombank or participate in tied transactions where we are supported by foreign state insurance agencies and banks that engage in supporting national industrial exports. By our estimates, only this year alone we have raised about 9 billion dollars including three tranches of eurobonds. The latest tranche is a fifteen-year bond issue. No one has ever raised such a big amount of funds for such long periods of time. And this is not the most important thing. The most important thing is that we have raised financial resources this year and this means that foreign investors started to regard Russia as being solvent and creditworthy and they believe that there are reliable borrowers in Russia and they trust not only state banks but also banks with private stock capital. Surely, it is important for investors that the state backs this sort of placements.
HOST: And what about a proposal to invest pension savings funds in innovation projects?
Vladimir DMITRIEV: This is a special interesting issue but in its capacity of the trust management company Vnesheconombank adopts a conservative approach to managing pension savings funds. We should have a clear idea as to what risks exist because innovation business is highly risky. Recently I have participated in international and Russian forums and discussions on providing support for innovation business. Nowadays everybody believes that innovations are risky. And out of ten projects only two or three could prove to be successful but it is their success that justifies investments in innovation business. That is why it is theoretically possible especially when projects are not at a start-up stage but at a more advanced stage and when it is evident that these projects could be commercialized we can think of using pension savings funds. But we should keep in mind that in accordance with our expanded declaration we can purchase debt instruments secured by state guarantees. And to my mind this mechanism is to be used to consider an issue of using pension savings funds to finance innovation business.
HOST: What are this year’s results of managing pension savings funds in a conservative way?
Vladimir DMITRIEV: According to established practice, we are to make public information on our performance. Unfortunately, but this is beyond our control, the total return on pension funds investments is most likely a bit lower than inflation rate due to the significant price growth in the third and fourth quarters. But this results from the fact that actually we have started to form our investment portfolio in accordance with the expanded declaration. A lot of funds were invested, for understandable reasons, in government bonds and they didn’t perform the way we expected. But it was not worthwhile withdrawing from these bonds without having an alternative. Nevertheless, we hope that government-guaranteed bonds issued by Rusnanotech, the United Aircraft Construction Corporation and a number other reliable borrowers would help us to balance investment yields and achieve acceptable results.
HOST: Economic modernization, among other things, in the risky high technology sector is not possible without developing small and medium-sized enterprises (SMEs). Aren’t you afraid of running risks here? And what SME projects do you finance today?
Vladimir DMITRIEV: Fortunately, small and medium-sized enterprises demonstrate positive dynamics. This year alone the banking system extended funds to small and medium-sized enterprises in the amount that exceeds last years’ sum by 1 trillion rubles.
HOST: And this supply exceeds the demand?
Vladimir DMITRIEV: The demand is enormous as is the demand for credits. Still, we are well aware that we have to make targeted systemic efforts to support small and medium-sized enterprises. In this respect, there is a program of supporting small and medium sized enterprises. We are implementing this program through the Russian Development Bank. A credit worth 30 billion rubles was extended to the Russian Development Bank to support small and medium-sized enterprises. Credits to SMEs are also refinanced through the Central Bank. There are also programs of co-financing SMEs under which regional banks participate in supporting SMEs. The program of supporting SMEs is to amount to a hundred billion rubles by the year-end. With our subsidiary banks namely, Globex Bank and Svyaz-Bank we expect the total amount to reach 125 billion rubles. By our estimates, this amount would reach up to 250 billion rubles till 2015. There are various programs but it should be stressed that we extend long-term credits to SMEs. The most important thing is that about 60 percent is linked to the real economy. I’ve been talking about financing, haven’t I? Financial resources to support SMEs are extended not only by our Banks but also by banks participating in the program. In this case, we reduce interest rates and increase credit periods. We have launched programs aimed at financing innovations and modernization where interest rates are a lot lower. As a whole, we managed to reduce interest rates to about 12 percent and this to a great extent helps to promote the development of SMEs against the backdrop of 25-30 percent interest rates in the crisis years.
HOST: I can’t help asking you a question about Vnesheconombank’s support for the mortgage market. How is this market going to develop in the future? And how large is this market now?
Vladimir DMITRIEV: It is well known that Vnesheconombank commits 250 billion rubles to implement the program of supporting the mortgage market. Here we use the Bank’s own funds generated from our transactions on the stock market. One part of this income was committed to implement Olympic projects and the other in the amount of 50 billion rubles to support mortgage lending. The National Wealth Fund is also involved in this program. It committed 40 billion rubles to the Housing Mortgage Lending Agency. We also use the funded portion of pension savings funds to finance the program of supporting mortgage lending. So, we employed all the instruments and I am glad to say that commercial banks have already extended credits worth nine billion rubles. We have applications for all 150 billion rubles intended for these purposes. I’ve already mentioned 40 billion rubles committed to support the Housing Mortgage Lending Agency. 50 billion rubles out of the Bank’s own funds will be used to buy out three-percent bonds. For this money to start working even now our Supervisory Board took a decision to use it to refinance credits to be extended by commercial banks to their borrowers for economy-class housing construction. The problem is that a pool of credits to be used to lay the basis for issuing bonds is being formed only now. So we expect the program to be fully launched next year and here I mean a buyout of bonds. But I’d like to stress it once more that we have received applications from commercial banks for an amount of 150 billion rubles and the program is being unfolded.
HOST: And Olympic construction projects. Construction projects in Sochi. Furthermore, the 2018 Soccer World Cup in Russia. And here they have to rely on VEB support?
Vladimir DMITRIEV: The Sochi Olympics put us to a serious test. But to my own satisfaction I’d like to underline my employees’ contribution and close interaction with Olympstroi and our investors as a result of which we managed to do a lot. Even now the amount of Vnesheconombank’s credits approved by our bodies of corporate governance has in reality approached to 70 billion rubles. And another several new projects are on the way. These Olympic facilities taught us a lot; we learnt a lot useful things and gained valuable experience in cooperating with investors. And there is no doubt this experience is the best precondition for us to participate in financing 2018 Soccer World Cup projects.
HOST: As you can see Vladimir Alexandrovich, Vnesheconombank is at all times and in all places: innovations, small and medium-sized enterprises, Olympic construction projects, mortgage lending. Your Bank was called a Rescue Bank in the time of the crisis. Do you know the most frequently asked question about Vnesheconombank? The question is: when will Vnesheconombank run out of money?
Vladimir DMITRIEV: In fact, VEB’s capital is formed through budgetary contributions alone as opposed to commercial banks which are in a position to enter the market and conduct IPOs. We belong to a different category just like our partners from other countries. For example, the German Bank for Development raises annually about 60 billion euros to finance its projects. This year we have raised a much lesser amount of 9 billion dollars on the market. And market is above all trust. Here I mean trust in a bank, trust in Russia, our country’s investment appeal. If the overall situation remains favorable the market is going to be huge. At present, we are seriously working on regional projects, establishing a fund of direct investments for the Far East and the Baikal region. Our fund of infrastructure investments started to operate together with the Macquarie Renaissance Company. As soon as we completed a transaction to purchase a transport company VTB Capital and another investment company followed the suit. At present we are seriously considering an issue of engaging major foreign investors in both sovereign funds and companies of private direct investments to participate in large-scale projects in Russia. And we can see a growing interest to invest in Russia on the part Europeans, Persian Gulf countries, South-East Asia and America. And this is a genuine interest. And we should to capitalize on this situation by all means.
HOST: I wish you every success. Thank you.
Vladimir DMITRIEV: Thank you.