Magazine DF, July 7 (44),
Objectives set in the programs of support for Vnesheconombank’s innovative projects go in line with the priorities of the government policy
Attention to the activities of Vnesheconombank in investment and innovation policy is well-timed not only because the bank has top rating positions on the market. Today, Vnesheconombank is one of the national development institutions, having received an official acknowledgement a few years ago when pursuant to the Federal Law «On the Bank for Development» it was granted a special status and became the State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’. Programs of support for small and medium-sized enterprises (SMEs) have been carried out for several years through the involvement of the Russian Development Bank (RDB), a subsidiary of Vnesheconombank. Recently, the Bank’s new programs of support for innovative projects have come to light. In addition, the announcement has been made about a new innovation and high-tech department that will operate within Vnesheconombank. The DF editors asked Mikhail Kopeikin, the Management Board Member and Vnesheconombank’s Deputy Chairman, to make a comment on the Bank’s innovation policies.
- Due to its program aimed at supporting small and medium-sized enterprises, Vnesheconombank has actually confirmed its status as a bank for development. VEB is viewed now not only as an institution involved in large-scale investment projects, interstate economic agreements but also as a crisis-management instrument for supporting the domestic economy as a whole including small and medium-sized enterprises. Are you ready to sum up the results of the activity in supporting SMEs for 2009 and specify plans for 2010? What’s the amount of financing already made and scheduled to be made? How many SMEs have received financing through Vnesheconombank’s schemes in cooperation with its subsidiary banks and regional partners?
-We were most active in our traditional work on supporting SMEs through the Russian Development Banks’ partner banks. For a period of one year 91 banks joined our program and as a result agreements were concluded for a total amount of 25.3 billion rubles. Up until now, SMEs have obtained 3 278 credits through banks.
The Russian Development Bank’s new line of activity aimed at supporting SMEs through infrastructure organizations yielded good results: 66 infrastructure organizations have become our partners and the value of agreements made is 8.7 billion rubles. Due to our active joint efforts infrastructure organizations entered into 1 390 agreements with SMEs.
Taking into account the objectives of promoting the development of the innovation sector set by the Russian Government, the Program of providing financial support for SMEs is scheduled to be increased to 100 billion rubles and instruments for providing financial support are also scheduled to be upgraded to transfer the Russian economy to the innovation and modernization path of development.
-As it became known, in its new strategy for 2010-2014 Vnesheconombank is to fundamentally change its attitude to modernization and innovation-oriented projects. Special emphasis is to be placed not only on projects linked to modernization of production facilities and import substitution but also on those, which are directly related to innovations. Do you also mean SMEs operating in the innovation sector? How is VEB going to draw up schemes of financing the said projects – would you like to use the existing channels by working with your subsidiary banks and regional partner-banks or would you like to devise a new scheme?
-This year Vnesheconombank’s subsidiary bank – the Russian Development Bank launched a Program “Financing for Innovations and Modernization”. Under this program, financing will be provided for both innovation projects (projects related to commercialization of SMEs’ own developments) and modernization projects (those providing for upgrading and renewing machinery, equipment and technological processes).
The Program is to be implemented by way of a two-tier scheme – through a network of the Russian Development Bank’s partner-banks. The information about the Program was communicated to all 97 partner-banks. At the moment, we are examining partner-banks’ proposals for implementing concrete projects.
As of today, we have received replies from 40% of banks and only 46% of banks that replied said that they were considering appropriate projects or that they were ready to submit them in the near future. Most of the projects submitted (all in all we received 71 project applications) are modernization projects, for which partner-banks would like to receive preferential terms of refinancing. Only 8 projects were innovation-oriented ones, that is, in line with the selection criteria. This fact reveals a serious problem Russian commercial banks are faced with: so far, they don’t have sufficient customer and credit technologies to finance innovation projects.
-What are the main objectives of the Program “Financing for Innovations and Modernization”? What terms of financing innovation projects do you mean?
-The Program “Financing for Innovations and Modernization” focuses on supporting small and medium-sized enterprises whose activities are in sync with top-priority development lines of science, technologies and machinery or top-priority lines of economic modernization.
In order to avoid financing perpetuum mobiles and various idealistic schemes we should select projects, which are at least moving from a startup stage to an expansion and growth stage. A criterion for innovation here is taken to be the availability of applicable patents, test data proving economic feasibility, ecological properties, energy efficiency and safety of technologies and products.
A two-tier financing scheme provides for funds to be made available to SMEs through partner-banks, which receive financial resources from the Russian Development Bank at an interest rate which is equivalent to ѕ of the Russian Central Bank’s refinancing rate (now it’s a bit less than 6% per annum) for a period of up to seven years. And pilot innovation projects could even be financed at an interest rate, which is equivalent to Ѕ of a refinancing rate.
Financial ratios of a project are as follows: the Russian Development Bank fully refinances a partner-bank’s credit to an SME provided that co-financing of the project through using the SME’s own funds should be no less than 15% thus being a guarantee that the borrower is serious in its intentions.
And in this situation, the Russian Development Bank works for the future: Russian banks, which are accustomed to taking real estate as security will gradually get used to working with more complex security for loans, for example, such as intellectual property.
Bank lending is of great importance for SMEs because it enables them to market their products faster, and given a significantly reduced new products development cycle in the world, it might prove to be critically important not only for identifying priorities but also for ensuring an enterprise’s survival.
-Another initiative by the Russian Development Bank is to set up a Fund of Direct Investments, which would enable the Bank to be directly involved in SMEs’ projects in the innovation sector thus minimizing risks and making these projects more attractive for investors. What resources are you going to raise for this Fund and how do you plan to operate this Fund?
-The Russian Development Bank’s strategy provided for establishing the said Fund of Direct Investments in order to provide non-credit support for innovation SMEs. This Fund’s competitive edge is in its close contacts with the Russian Development Bank’s partner banks in search for and monitoring investment projects. The Fund will be responsible for making long-term investments in innovation and modernization projects for a period of 5-7 years and as part of its current business among other things it will be also responsible for forming tier 2 capital. Under the existing terms, a partner-bank is to provide debt financing to the Fund’s customer throughout a period of investments (until the Fund exits from the capital of an innovation SME) in the amount of up to 60%of a project’s value. Financial ratios of a project also include the Fund’s investments in the amount of up to 25% of a project’s value. The amount of funds to be invested by a project’s initiator should be no less than 15%. The Russian Development Bank may consider participating in the capital and at the same time providing a partner-bank with financial resources to extend a long-term credit to an innovation SME.
The Fund’s size is scheduled to amount to 600 million rubles including 260 million to be invested by the Russian Development Bank. Organizational arrangements are to be completed and the Fund is to be launched till the end of 2010.
-What innovation fields does the Russian Development Bank regard as the most important ones? What requirements for projects does the Bank make when applying a credit financing scheme and upon financing through the Fund of Direct Investments?
-At the current stage of the Program’s implementation we are not planning to impose any strict sectoral restrictions. The main criterion for classifying a project as innovative is, as I’ve said before, the fact that an enterprise has applicable patents on the basis of which a batch production is planned to be launched. As far as modernization projects are concerned, top priority is to be given to projects designed to bring technological processes and equipment in line with the world’s standards and quality indexes for example ISO and GMP (Good Manufacturing Practice) standards.
Lending is designed to finance the set-up of batch production, purchase of new equipment, technologies as well as certification of products to bring them in line with the said standards.
A preferable stage of a project’s implementation is its transfer from a startup stage to an expansion and growth stage. An average amount of financing a project is 70-100 million rubles, given that the project’s initiator should invest no less than 15% of the project’s total value using its own funds.
As of today, the Russian Development Bank got down to implementing the first pilot projects of a number of mid-sized regional banks’ innovation and modernization customers in Voronezh, Chuvashia, Yakutia, Togliatti, Bashkortostan and Tatarstan. At present three first projects have approved for financing and another 16 projects are under consideration.
-What interest rate can we expect for final borrowers?
-We expect an interest rate for final borrowers to be no higher than 10% per annum in rubles. But to achieve this goal we have to resolve an issue of funding transactions within the Program. The Program “Financing for Innovations and Modernization” creates favorable conditions for improving quality of labor and productivity in the real SME sector. Thus, SMEs start to compete against foreign producers – importers. In order to encourage projects the Russian Development Bank should provide credit resources at minimum interest rates because innovation projects are very sensitive to the cost of funding.
-It’s also known that in its activity to support the innovation sector Vnesheconombank cooperates with other development institutions both financial and industrial ones. They include Rosnano, the Russian Venture Company, the Fund to Support Small Enterprises in the Scientific and Technological Sphere, the Federal Agency for the Youth Affairs, the Moscow Interbank Currency Exchange and OPORA Rossii – they are all in one form or the other involved in supporting small and medium-sized enterprises in the innovation sector. What is the agreement they signed aimed at? What objectives are they supposed to achieve at their working group’s meetings, the first of which was held this May?
-The agreement signed aims to set up an organizational mechanism that would make it possible to promptly exchange information on the projects being implemented and chose a support instrument for each project that is best suited for a given stage of an innovation company’s development.
This sort of cooperation is underway now – many parties to the agreement cooperate with each other on a bilateral basis. The agreement would enable us to systematize this work, establish optimal procedures for cooperation and develop unified approaches to selecting, examining and structuring innovation projects.
The working group was formed from representatives of the parties to the agreement to promptly coordinate the parties’ efforts. The working group’s first meeting discussed issues of ensuring a prompt exchange of information between the organizations, which are parties to the agreement. The meeting’s participants reached an understanding on making a list of pilot projects that would be supported financially as part of implementing the agreement.
We plan to hold the working group’s meetings on a monthly basis. We are going to discuss issues of “transferring” specific projects from one development institution to the other, given the available support instruments, and we are also going to discuss issues of joint participation in implementing projects.
Vnesheconombank’s Chairman V.A. Dmitriev’s Interview to TV Channel Russia-24 (the Petersburg International Economic Forum)
HOST: We continue telling you about the Petersburg Economic Forum’s events and introducing its participants to you. Dmitry Shchugorev is on direct line with the studio. He is ready to introduce his next interviewee.
CORR: Good morning. We continue our discussions at Russia-24’s booth and right now in these morning hours before the start of the Forum’s regular sessions we are welcoming Vnesheconombank Chairman Vladimir Dmitriev.
Good morning, how are you doing on the Forum’s second day?
Vladimir Dmitriev, Vnesheconombank Chairman: I’m fine.
CORR: Did you enter into any agreements and take any principal decisions on the previous day?
Vladimir DMITRIEV: Yes, as always, because a Forum provides us with a unique opportunity not only to meet and discuss numerous current problems but also agrees upon concrete issues. And the current Forum is not an exception. We are close to signing several agreements and some agreements were signed yesterday. We are to formalize a number of agreements today, so we are happy about the results Vnesheconombank achieved at this Forum.
CORR: It must be said that in general the banking sector’s operation would greatly enhance innovation and modernization process that was launched in Russia. Vnesheconombank is known to have signed a number of agreements with state-run companies, non-government organizations on providing support for innovation projects. But the law does not give a definition of innovations. And how should you select appropriate projects in this uncertain situation and how should you support them?
Vladimir DMITRIEV: Things are easier for us because heads of such line ministries as the Economic Development Ministry, the Ministry of Industry and Trade, the Transport Industry are members of our Bank’s Supervisory Board. So, all innovation-oriented projects submitted to our Bank for expert examination are examined by experts in line ministries and it’s up to them to decide whether these projects are innovation ones or not. And on the basis of their recommendations we deal with purely financial aspects of various deals.
But on the other hand, it’s of course important to have a general idea as to what category a specific project falls into. I am aware that this is a very difficult task, but it was not by accident that Vnesheconombank proposed to join efforts of key companies and institutions involved in innovation activities. We have signed agreements with 9 companies including Rusnanotech and the Fund for the Promotion of Small Enterprises in the Science and Technology Sector, the Russian Venture Company and others. Under the signed agreements these companies make decisions as to what projects should be accepted for financing and to what extent they are in line with innovation line of business. And of course Vnesheconombank’s decisions to open financing are of primary importance.
CORR: So, now companies that submit their business plans to Vnesheconombank should prove that their business plans are innovation-oriented?
Vladimir DMITRIEV: Yes, of course, if we mean innovation projects. This is the task that was set before us by Vnesheconombank’s Supervisory Board Chairman Vladimir Putin when he said that a certain quota in Vnesheconombank’s loan portfolio should be allowed for innovation projects. Even now, 15 percent of our loan portfolio accounts for the innovation sector with its advanced breakthrough technologies.
CORR: We know that or about a year Vnesheconombank has been implementing the program aimed at supporting small and medium-sized enterprises. Am I right?
Vladimir DMITRIEV: The program has been under way for about a year, although it was launched at the last year’s start but actually the money was made available only in August. Here I mean 30 billion rubles we received from the National Wealth Fund. These funds were provided to the Russian Development Bank, our subsidiary bank, on a repayable but interest-free basis. The Russian Development Bank is responsible for implementing the program of supporting small and medium-sized enterprises through extending credits to regional banks, which in their turn provide credit resources to small and medium-sized enterprises. To this end, 40 billion rubles have been already committed, 30 billion rubles of which have already reached their final recipients, that is, small and medium-sized enterprises and we are constantly controlling and monitoring the situation. We are working in 72 constituent entities of the Russian Federation and this year we are going to expand this program to all constituent entities of the Russian Federation. More than 150 regional banks are involved in this project. In our opinion, the program is progressing successfully.
CORR: Vladimir Alexandrovich, its’ quite obvious that after a year and a half it’s too early to talk about any intermediate results and yet I’d like to ask you about intermediate results. Final results will be available years from now.
Vladimir DMITRIEV: If we are talking about small and medium-sized enterprises, the results speak for themselves. This program involves 72 constituent entities of the Russian Federation, the enterprises’ turnover worth 100 billion rubles, 10 billion rubles in taxes, more than 100 thousand workers are employed by small and medium-sized enterprises that enjoy Vnesheconombank’s support through a network of regional banks I mentioned earlier. We hope that by the year-end this program could be brought to 100 billion rubles, which is in line with an obligation we assumed. So, even our intermediate results show that the program is effective in terms of funds availability and a high demand for it.
CORR: I’d like to ask you whether Vnesheconombank is implementing any projects within the BRIC countries: Brazil, Russia, India and China. Have any practical decisions been taken in this respect?
Vladimir DMITRIEV: In fact, we made a proposal to establish a consortium of development banks within the BRIC countries and signed an agreement on cooperation at a BRIC summit in Brazil with the China State Development Bank, Brazilian bank BINDES and the India Eximbank. It’s too early to talk about concrete results; nevertheless, we take advantage of our experience in cooperating with banks of Shanghai Cooperation Organization member countries. It was our initiative to establish an Interbank Consortium. We made the most significant progress on a bilateral basis. We maintain constant and stable relations with the China State Development Bank. We are active in cooperating with the Kazakhstan Development Bank. As far as interbank cooperation is concerned in the BRIC countries, we are going to place great emphasis on developing bilateral ties. I’ve already mentioned our Chinese colleagues. We have long-time and already formalized relations with the Brazil Development Bank. We are sure to use this bank’s business experience in financing development projects in key industrial sectors. It’s not a secret that the Brazilian aviation industry developed successfully due to the Brazil Development Bank’s support. Now it’s a highly competitive industry on a global scale.
CORR: At present, the Long-Term Investors’ Club is quite a promising institution judging by the recent remarks about it. You’ve been elected to this Club’s Organizing Committee lately. What sort of institution is it? How does it help to enhance the innovation process?
Vladimir DMITRIEV: Nobody should be afraid of our participation in various international institutions. It’s not mere pro-forma participation. We view this sort of participation as an important instrument for raising foreign investments for the Russian economy. By the way, it was our initiative to join this elite institution - the Long-Term Investors’ Club. Among the initiators to establish this Club were also such prestigious institutions as KfW in Germany, and perhaps the largest development bank – the European Investment Bank, Caisse des Depots, one of the oldest financial institutions in France, it is 150 years old. They have a similar institution in Italy too. It is these four key national and international financial institutions that initiated the establishment of the Long-Term Investors’ Club. It incorporates representatives of 10 countries. For the most part, its members are development institutions including our Bank that represents Russia’s interests in this Club. This is the third international banking institution where we work together with the China State Development Bank. The Club’s main objective is for its members to join efforts to finance infrastructure projects, above all, projects in the innovation sector and this is undoubtedly an alternative to raising venture capital that to some extent brought about the global economic and financial crisis. So, this Club’s motto is to invest money in the real economy, in infrastructure projects in those sectors that could be of great interest to international investors.
CORR: We are now talking about long-term investments. Is this a promising line of business? And the most important thing is to what extent our Western partners are willing to make such investments?
Vladimir DMITRIEV: This is a very important and pressing issue because there is a lot of free money on the world financial and capital markets but it’s very important for investors to match their wishes with risks they assume and in this sense, the involvement of state banks, banks with state participation in funding projects, serves as a sort of guarantee to Western investors for the success of projects and repayment of funds.
It was for this reason that we decided to participate in implementing an ambitious but quite a realistic project aimed at building a major recreation and tourism cluster in the Northern Caucasus. The Russian President spoke at a plenary session yesterday and in fact backed this project politically. And this political backing is of great importance to Russian and foreign investors. It was not by accident that German Gref, I and foreign investors participated in the panel discussion. Foreign investors confirmed their intention to financially support this project in their letters of comfort that they gave to Akhmed Belalov. And in their conversations on the sidelines they stressed their intention to participate in the project because they are aware that it is backed by the country’s leaders and that such banks with state participation as Sberbank and Vnesheconombank will participate in the project and this is a serious guarantee for them.
CORR: Akhmed Belalov participated in our live broadcast telling about the prospects for this project. This sounds really fascinating. Thank you for answering our questions.
Vnesheconombank Chairman Vladimir Dmitriev’s Interview to the Post of Russia Magazine
Large-Scale Projects Like the One to Establish a Postal Bank Do Not Require Haste
Interviewed by Konstantin Suvorov
-What role a Postal Bank is going to play for your Bank, the Post of Russia and the country as a whole?
For the Bank for Development the project to establish a Postal Bank will be a top-priority one designed to modernize the Russian banking sector. By our estimates this project is going to be one of the largest projects in the Russian banking sector in the coming years. It should be noted that due to the current regional imbalances, the bulk of the Russian population, millions of Russians, have problem receiving top-quality banking services. Since it costs a lot of money to open and operate bank offices, the number of credit institutions operating on the Russian territory is much lesser than in European and even Latin American and Asian countries. For example, the number of banking service outlets per a million of people is 192 in Russia as compared to 806 in Brazil and the number of sales outlets per one bank in Russia is 22 whereas in Europe, America and Asia this indicator is twice higher. The following statistical data show that our primary objective is to make financial and banking services more affordable for general public. Only 20-25% of Russians have bank time deposits, less than a third use consumer credits and three percent use mortgage credits. Moreover, the Russian banking network is developing in the cities (for the most part in regional and provincial centers) where main financial flows are concentrated whereas in rural and remote areas these flows are diminishing. The Postal Bank joint investment project to be implemented by Vnesheconombank on the basis of OJSC Svyaz-Bank with the participation of the Post of Russia is designed to promptly rectify the current unfavorable situation and effectively remove the bottlenecks. I would single out two main objectives: first, we should remove constraints in making financial and communications services affordable to people in the regions through creating an appropriate infrastructure, second, we should fundamentally upgrade the Post of Russia technologically and expand its range of services. In our opinion, improved infrastructure of financial services would encourage Russians to save money in banks thus making it possible to raise additional money for the banking sector. I’d like to add that in implementing such a big investment project in the banking sector we hope to achieve synergetic effect: a Postal Bank to be established in cooperation with the Post of Russia would provide Russian citizens with new offices offering them access to various financial and communications services and by way of spreading banking infrastructure across the whole Russian territory the state would raise additional money of the Russian people for the Russian economy outside the banking sector. This would expand the project’s participants customer base and sales volume in part through providing new services.
The establishment of a new Postal Bank that would apply advanced financial technologies is sure to further automate banking services through introducing electronic payments, reducing cash flow in favor of non-cash transactions, using electronic card products and electronic payments. As a result, we’ll be able to create favorable conditions for improving the quality of banking services, especially in the regions where the said services are in short supply. In our opinion one of Vnesheconombank’s main tasks in the Postal Bank project is its participation in financing the Post of Russia’s modernization and technical re-equipment of it offices. By preliminary estimates, the said modernization under the Post of Russia’s Program “Development of the Postal Services Sector “ would cost more than 100 billion rubles in investments including on the terms of public private partnership. The Project’s implementation would make it possible to boost postal services efficiency as well as increase the Post of Russia’s earnings and profits.
-At present, The Post of Russia is a state-run enterprise which does not by law have the right to own bank shares. Should this problem be addressed by converting the Post of Russia into a joint stock company or by introducing changes to applicable legislation?
-You are quite right. The implementation of the project to establish a Postal Bank is complicated by a number of legal problems. So, if we are to integrate Svyaz-Bank with the Post of Russia we have to resolve a number of legal issues including those associated with the need to change applicable legislation, which regulates activities of unitary enterprises (the fact is that the Post of Russia is a Federal Unitary Enterprise). We’ll have to introduce changes to a number of Bank of Russia regulatory documents.
It’s quite obvious, that given the magnitude and complexity of our tasks, it’s not possible to change applicable legislation right now. So, a number of intermediate steps and stages are being considered now to move the project forward.
If we are to put in place an appropriate legal and institutional network for a Postal Bank to function, we’ll have to introduce relevant changes to five regulatory acts including such laws as “On State and Municipal Unitary Enterprises”, “On Postal Services”, as well as the government’s regulations “On Terminating the State’s Participation in Credit Institutions’ Charter Capitals” and two Bank of Russia Instructions – “On the Rules of Issuing and Registering Securities by Credit Institutions on the Territory of the Russian Federation” and “On the Procedure for Making Decisions by the Bank of Russia on State Registration of Credit Institutions and on Issuing Licenses for Conducting Banking Transactions.” This work is now being performed by the ministries and departments on the instructions of Deputy Prime Minister Segrei Ivanov. He heads the working group responsible for working out comprehensive measures for establishing a Postal Bank of the Russian Federation on the basis of OJS Svyaz-Bank.
-Postal banks operate in many countries of the world. Let’s for example remember success stories of Italy and Japan. A postal bank there is either a division of the postal service or is not incorporated in it formally. Which option is more preferable for Russia?
-Under Russia’s banking legislation (the Federal Law “On Banks and Banking”) a credit institution shall be a separate legal entity. It can’t be a division of other organization.
At the same time, a strategy and a business model of a Postal Bank is being worked out on the basis of foreign postal banks’ business experience including the successful experience of postal banks in Germany, Italy and Japan.
As a rule, postal banks abroad were established on the basis of postal service departments that offered financial services. But recent standard practice was to implement joint projects by the Post in tandem with banks to establish a separate legal entity responsible for offering banking services. Moreover, international practice shows that there is a tendency to separate banks from the Post. And there are a number of reasons for it including significant differences in terms of managing the Post and banking business, and the fact that a bank as a specialized institution is better at selling financial services.
-You said that the first stage of establishing a Postal Bank would cost 30 billion rubles. How much would it cost to establish a “turnkey” Postal Bank?
-Depending on a chosen strategy, formats and the number of Postal Bank offices, total investment costs (buildings, technologies, equipment) are to be finalized. We’ll be able to answer this question in a more exact way after holding talks with our partner banks, which are to submit detailed financial project models for establishing a Postal Bank until June 15, 2010.
-What’s the percentage of state and private outside investments to be made for establishing a Postal Bank?
-I don’t know so far. This issue is being comprehensively analyzed and will be ultimately settled in the coming months.
-How long will it take to establish a Postal Bank?
-The project to establish a Postal Bank is tentatively scheduled to be launched no later than on January 1, 2011. The date of putting all Postal Bank divisions in place depends on the scale of the project and the terms of financing it. In our opinion a period of up to three years is optimal. Such large-scale projects do not require haste.
- What about the Postal Bank’s potential customers, are they going to be private individuals, small and medium-sized enterprises, big business?
-To my mind, general public, small and medium-sized enterprises, and of course the Post of Russia. Telecommunications sector companies including those serviced by OJSC Svyaz-Bank might become our target customers. This issue is being considered by specialists dealing with the project to establish a Postal Bank.
-What services are going to be popular with Postal Bank customers?
-International practice shows that for the most part post banks operate as ordinary universal banking institutions servicing various categories of customers and offering a wide range of banking products. As a rule, postal banks conduct various kinds of transactional operations (transfers and payments), opening and maintaining of current and savings accounts, extending small-size credits to private individuals and small and medium-sized enterprises. So, potential customers are most likely to be offered basic financial services. At the same time, if we are to more exactly determine a range of Postal Bank potential services, we need to conduct special marketing research. And taking into account the said research results, we’ll be able finalize the Bank’s product line.
-What conclusions did you arrive at after examining applications by claimants for participating in the project to establish a Postal Bank?
-In March of 2010, Vnesheconombank’s Supervisory Board as advised by the interagency working group reviewed five applications for partnership with Vnesheconombank in the project to establish a Postal Bank of the Russian Federation. I must say that we didn’t receive any ideal proposals. All applications had their pluses and minuses. On the short list of candidate partner banks are such leaders of retail banking as JSC Russian Standard Bank, JSC UniCredit Bank, OJSC NOMOS-Bank together with LLC HKF Bank.
Judging by the commercial banks’ proposals the general concept of the Postal Bank project hasn’t changed. By June 15, 2010, the listed banks are to submit their revised project implementation budget plans and determine the format and share of their participation in the project. After examining the said documents Vnesheconombank’s Supervisory Board will make a decision as to which bank to involve in the project on the terms of public private partnership.
-What’s the strongest point of the Postal Bank project?
-I’d like to say once more what I’ve already said at the start of my interview describing the importance of establishing a Postal Bank. The project’s primary goal is to offer affordable customer-friendly financial services to large sections of the population in all Russia’s regions. In order to achieve this objective the bank to be established would have an extensive network of more than 40 thousand offices as well as advanced technologies and expertise to be received from a chosen partner bank. So, we believe that the establishment of a Postal Bank is an important socially meaningful, state-run project.
Dmitriev Vladimir Alexandrovich
- Born August 25, 1953, in Moscow
- In 1975, graduated from the Moscow Finance Institute, specialty – “International Economic Relations”
- Doctor of Economics
- Corresponding member, Russian Academy of Natural Sciences
- 1975-1979 - State Committee of USSR Council of Ministers for Foreign Economic Relations, engineer
- 1979-1986 – Attachй, third secretary, USSR Foreign Ministry Department
- 1986-1987 - Institute of World Economics and International Relations, USSR Academy of Sciences, research worker
- 1987-1992 - USSR Embassy of USSR Ministry for Foreign Affairs, Second, First Secretary
- 1992-1993 - Russian Embassy of Russian Ministry for Foreign Affairs, First Secretary
- 1993-1997 – Deputy Chief Executive Officer, Russian Finance Ministry Department
- 1997-2002 - Bank for Foreign Economic Affairs of the USSR, First Deputy Chairman
- 2002-2004 - Bank for Foreign Trade of the USSR (OJSC), Deputy President - Chairman of the Board
- 2004-2007 - Bank for Foreign Economic Affairs of the USSR, Chairman
- From June 2007 – State Corporation “Bank for Development and Foreign Economic Affairs (Vnesheconombank)”, Chairman
- For his great contribution to the development of the Russian financial and banking system and many years of dedicated work Mr. Dmitriev was awarded the Order of Honor; the Medal of the Order “For Services to the Fatherland”, second degree; the Association of Russian Banks Badge of Honor “For Services to the Banking Community”; “Excellent Employee of Vnesheconombank” Badge’, his name is recorded in Vnesheconombank’s Book of Honor.
Vnesheconombank Chairman Vladimir Dmitriev’s Interview to the Newspaper Vedomosti
03.06.2010, 100 (2618)
“We can’t satisfy everybody”, - Vladimir Dmitriev, Chairman of Bank for Development and Foreign Economic Affairs (Vnesheconombank)
How did Vnesheconombank change after the crisis? Why did the Bank buy UC Rusal’s shares? Is it going to retain its status as a state corporation? Vnesheconombank Chairman Vladimir Dmitriev told Vedomosti about all this.
In May, Vnesheconombank marked a university: three years ago the Law on the Bank for Development was passed. Under this Law the successor of Vnesheconombank of the USSR was transformed into a state corporation. At the beginning of his interview to Vedomosti Vladimir Dmitriev mentioned the recent anniversary. The truth is that according to him they didn’t hold any special celebrations: “Our life is so dynamic that we start forgetting about celebrations. There are so many problems and new tasks… So, we marked the anniversary in a simple, family manner without any pathos”.
-The crisis made your life very dynamic. But now the Bank appears to be waiting for a reverse reincarnation from a rescue bank into a bank for development. These changes are sure to require you to work out a new strategy?
-Indeed, the crisis pressure is falling, VEB is becoming less relevant as a crisis management instrument and we are just implementing the measures which were taken earlier. We keep on working with our borrowers US Rusal, ECO Telecom and Gazprom Neft as part of refinancing their foreign debts. Subordinated loans in the total amount of 404 billion rubles were extended by VEB to 17 banks and the Mortgage Housing Lending Agency for a period of up to 2019 and 2020. We continue to participate in the program for extending state guarantees to banks for credits to top-priority enterprises. Their amount has increased from 100 billion to 175 billion rubles. We also carry on increasing the capitalization of Globex Bank and Svyaz-Bank which we have already put on a break-even level of development. We still act as the creditor of subordinated loans and the participant in the mortgage lending program of the Housing Lending Agency. But you are right; we have been thinking about adjusting our activity and have started preparing a new strategy of our corporation.
-Are you going to include crisis management functions in the new strategy?
-Of course, we’ll include some crisis management functions. But this is not the most important thing. The crisis put many programs of our potential borrowers in jeopardy. The Investment Fund’s financing amounts are falling including for the projects we are supposed to co-finance. So, we are going to reconsider our previous priorities and determine new ones.
-New priorities, you mean innovations? Last week you told the President about them.
-Our current strategy expires in 2012 and we want our new strategy to be used until 2014. And we’ll place special emphasis in our new strategy on modernization and innovations. We’ll change strategic indicators of performance. We are going to reduce the number of indicators and introduce two new indicators – an amount of funds to support the national economy and a share of innovation projects in our Bank’s loan portfolio.
Moreover, during the crisis we acquired many subsidiary banks and not only Globex Bank and Svyaz-Bank but also VEB Engineering, VEB Capital and Prominvestbank. Our special department, which is called the Department of Subsidiary Banks, is responsible for monitoring if our six subsidiary banks fulfill their plans and comply with the strategy of development.
VEB has acquired a new function – engineering. Jointly with the Canadian engineering company, SNC-Lavalin, we set up a joint company VEB-Engineering, in which we own a 51% stake. Our business has expanded and at the same time the Bank’s objectives have become more complicated. We are going to be responsible for monitoring investment projects, and we are also going to upgrade monitoring for the proper use of funds and technological compliance.
VEB’s new strategy is to outline the state corporation’s completely new level of strategic development in the former Soviet republics with due regard to the fact that we are in control of system-forming banks of Belarus and Ukraine. We have to rethink our role in terms of integration processes. VEB establishes interstate relations in the SCO zone.
-The crisis hardened VEB. The talk is that in the most difficult crisis periods your employees spent sleepless nights dealing with credits. But you benefited from this challenge. You are emerging stronger, more powerful and richer from the crisis.
-You are quite right; we are emerging a lot stronger from the crisis. When the Bank for Development was established in June of 2007 its charter capital was 180 billion rubles. Since then the bank’s charter capital has been replenished by the Government five times and now it is 383.5 billion rubles. According to preliminary estimates net profit amounted to 31 billion rubles for the last year, more than thrice the figure for 2008. And for the first quarter of the current year our net profit was 23.1 billion rubles - 20 times higher from the same period of 2009.
Of course, when our Bank was being established we didn’t think that we would be responsible for implementing crisis management measures and at that time nobody knew that a crisis of such magnitude would break out. But during the crisis life showed that if there had been no VEB it should have been set up.
-VEB was the Government’s fast response instrument.
-We proved to be in demand but the most important thing is that we became a credible bank. We were in demand and we were up to the task set before us. Fortunately, our Bank’s employees confirmed their professionalism.
- Have you increased your staff?
-No, we haven’t. In 2008, our Supervisory Board decided against increasing the number of employees. For the most part we addressed our human resources problems through regrouping our personnel inside the corporation. Only now we say that we have to hire people for working in our new lines of activity. For example, we have set up a new innovation and high-technology department.
-Did you find it hard to say no to wealthy and well-known businessmen who formed queues for your credits during the crisis?
-In this sense, my task was made easier. Everything is to be in line with Federal Law № 173 “On Additional Measures for Supporting the Financial System of the Russian Federation”, the Law “On the Bank for Development” and the Memorandum. It’s very easy to say no referring to these documents. Moreover, all the decisions on crisis management measures were taken collegially by employees of line ministries and departments, commercial banks, independent experts, professional auditors. Only after such a thorough examination, decisions were submitted to consideration by the Supervisory Board.
-And those whose applications were not accepted talked about injustice. Some developers complained that PIK was authorized for credits and they were not. A huge credit was extended to US Rusal despite the fact that it was registered in the offshore zone and other companies’ applications were not accepted because of their foreign jurisdiction.
-We can’t satisfy everybody. And it’s no big deal that those who failed to obtain credits got hurt. All decisions were based on clear-cut criteria approved by the Supervisory Board: a threat of losing an asset, damage to regional economies. This list of criteria is sacred for us.
-VEB has an established reputation of the Government’s purse. Bureaucrats told you what projects you should finance and they don’t care if you want to fund them or not. It’s worth mentioning the way you opposed a forced offer to buy out AvtoVAZ’s convertible bonds worth 40 billion rubles.
-Unfortunately, we receive this kind of offers. I must admit that it’s very tempting to regard VEB as a sort of quasibudget. But it is quite safe to say that this sort of offers tend not to be submitted to consideration by the Supervisory Board. Any participation in capital whether it be a direct participation or a debt equity swap is an issue within the Supervisory Board’s competence. All proposals are subject to a thorough expert’s examination as early as at a discussion stage. The Supervisory Board just can’t approve doubtful projects because its members realize that any diversion of VEB’s resources to finance such transactions would impede the Bank’s capability to finance its core activity.
-And what about the case with the United Aviation Corporation when VEB bought out an additional share issue worth 21 billion rubles? Isn’t it an example when VEB acted as a quasibudget?
-No, it isn’t. It was a direct budgetary support and VEB acted as an intermediary. The Government was looking for ways to settle debts and decided that an additional capitalization of the company would benefit it. So, our capital was increased by 21 billion rubles and we, in our turn, bought out the United Aviation Corporation’s additional share issue.
-Do you mean that VEB does not fund transactions lobbied by officials and their attempts are nipped in the bud?
-I would say that in any case common sense and economic feasibility gain the upper hand over individuals’ wishes.
-What about capital adequacy ratio in your Bank?
-Everything is O’K here, it’s 20% and the capital adequacy requirement is 10%.
-Now you are active in taking foreign exchange credits. But in the current unstable economic situation it’s quite a risky business. The fact is that you take credits in foreign currency and extend them in rubles and for long periods. How do you insure risks?
-You are quite right; our Bank is an active borrower in terms of club transactions, bilateral credits and syndicated loans. Our foreign exchange credits are in line with foreign currency credits we tend to extend to export-oriented companies. By the way, but to a lesser extent, we hedge our risks by way of making foreign exchange swaps. We are also borrowing actively in rubles. We hope that a new program of ruble borrowings will be approved soon. This program is to be implemented through several bond tranches.
-And what about international placements? We know that you are going to place eurobonds following the Russian Federation. The country floated its bonds pretty well giving you a good benchmark. But judging by the situation in the world market, Russia boarded the last carriage of the departing train while floating its bonds. Sberbank appears to be going to wait for a better situation to float its bonds. And what about you?
-When making a decision to enter the market, an issuer looks at its current condition. If there is no strong need for borrowing an issuer decides whether it’s worth making a borrowing: it makes no sense at all to enter the market with a premium of several hundreds of basis points to the sovereign issue.
-Why did VEB participate in UC Rusal’s IPO in January and became the largest investor in this transaction (it purchased 30% of the shares floated, 3.15% of the company’s shares for 663 million dollars, the second largest purchaser was Libyan Investment Authority, it purchased 1.43% of the shares for 300 million dollars)? Who initiated this decision – VEB itself or was it UC Rusal’s proposal? Why did you buy such a big stake?
For what period was the investment made? Aren’t you afraid that you will have to work with US Rusal for a long time and in a serious way as the company’s shares price fell 1.5 times since the date of floatation?
-In fact, it was the company that offered such a big stake. We regarded this stake as a pretty balanced one. In doesn’t really guarantee our Bank’s representative’s participation in UC Rusal’s governance bodies, but we have a current credit agreement with the company that provides for our Bank’s representative to be included in the company’s Board of Directors
As far as the fall in the shares quoted prices is concerned, after their floatation, we have a sober view of the situation. The fact that the company’s shares got cheaper since the IPO does not mean that our investment in UC Rusal’s shares was a wrong decision. The current situation is linked not with particular shares but with the general situation on the market. The current fluctuations in share prices are not indicative. We view the current and above all mid and long-term situation as being not bad, we see clearly what processes are taking place in the company and that the situation is improving as a whole.
-Last year VEB established a specialized company VEB-Capital to manage its assets. How is this company doing?
-Some time ago we set up a company VEB-Invest to work with the assets we bought out from Globex during its reorganization. VEB owns a 19% stake in this company. The reason for establishing this company was to restructure problem credits in the construction and development sectors. For example, quite a large facility on the territory of the former Slava Watch Factory, the Zolotye Kupola Cottage Township in the Solnechnogorsk district of the Moscow region and several facilities in Novosibirsk. But as VEB went deeper into implementing crisis management measures, we started to receive various pledges and began to buy out significant industrial assets on the REPO terms, for example, Amurmetall, we became aware that we needed a complex asset management system. Moreover, our subsidiary banks (for the most part Svyaz-Bank) had industrial assets besides their construction projects either in the form of pledges or in the form of credits that required great attention and restructuring. Management of these assets is not a core line of activity for banks. VEB is ready to pass over a number of stakes to VEB-Capital.
-For example, our stake in the Illyushin Finance Corporation. We might hand over not only our stake in this company but also raise the question of consolidating the entire leasing activity. There are also a number of core and non-core assets that should be managed by professionals.
-Who is going to manage them?
-We are going to recruit a team of managers including those from the market. About 100 people will work in the team. The company’s management team has been already put together and main divisions have been formed. There will be a construction division, which will incorporate VEB-Invest. There will be an industrial division too. The latter might be divided into several branches.
-How much is VEB-Capital worth?
-400 million rubles were committed to the company for it to start its activity. We are now completing the valuation of assets to be either purchased or transferred under VEB-Capital’s management. Subject to the Supervisory Board’s decision of March 31, a number of assets worth more than 7 billion rubles are planned to be transferred to VEB-Capital. At present, a legal registration of the transfer of assets is taking place. These assets include industrial enterprises’ shares, real estate assets and financial instruments. We must admit that so far we don’t even know what we should do with some assets. For example, we should put Tractornye Zavody Concern into normal operational condition. The Concern has huge debts which are to be restructured and its assets should be upgraded. But Tractonye Zavody Concern incorporates hundreds of enterprises and not only in Russia but also in Europe and South-East Asia. We have to valuate all the assets, put them in order and then decide on the date of sale.
-Is VEB-Capital going to sell assets?
-VEB-Capital’s activity is designed to professionally manage these assets, increase their capitalization and dispose of them in the long run.
-This means that they won’t be sold soon.
-No, they won’t, of course. Only in the mid and long-term. Let’s for example look at the project on the territory of the former Slava Watch Factory: first, we have to demolish the existing production facilities under the town planning design, then develop a new project , get it approved by the Moscow government, build new facilities and only after all this sell it favorably.
-Maybe, it’s better to sell the faculty on the Slava territory right away without searching for profits?
-The fact is that we discussed this issue in the context of reorganizing Globex Bank. I’d like to remind you that 212 billion rubles were made available for reorganizing Globex and Svyaz-Bank for the most part, by way of raising deposits of the Central Bank of Russia and we are supposed to return them. We spend more than 10 billion rubles to serve them annually. So, our aim is to increase Globex Bank’s capitalization and sell it a few years from now either to a strategic investor or through IPO disposing of construction assets at the same time. By our estimate this would enable us to return deposits to the Central Bank We have to maximally capitalize the assets, which will be managed or owned by VEB-Capital, in order to close the balance sheet then.
-This means that you are not going to sell Globex now?
-We proceed from the Supervisory Board’s decision to reorganize subsidiary banks and get them to subsequently enter the market. The decision provides for a five-year horizon. Over this period of time we hope to significantly enhance the banks’ capital base. At present, Globex’s capital is 17.5 billion rubles. In the current complicated market situation no mergers, takeovers and to say nothing of acquisitions are taking place.
-You don’t even consider buyers’ proposals?
-No, we don’t. There are no proposals. By the way, I believe that in the current situation any bank would be undervaluated. We can’t apply pre-crisis multipliers to capital now. But we have grounds to believe that the situation would get back or become similar to the pre-crisis one. And then it would be a lot more profitable to sell the commercial banks. And now we are going to simply strengthen Globex and build up its branch network, capital and customer base. Our task is to transform it into its former position of a strong player on the market for banking services. It makes no sense to talk of selling Globex without returning the deposits to the Central Bank.
-How are things with Svyaz-Bank, which is to be transformed into a Postal Bank in cooperation with the Post of Russia?
-So far, we are waiting for June 15, when Russkii Standard, UniCredit Bank and Nomos are to submit their revised business plans in which they are to determine the format and scope of their participation in the project. They were selected among five participants. I should say that there were no ideal proposals.
-The word is that the two participants, UniCredit and Nomos with HKF Bank have already fallen out of the race. And the reason for this is their foreign roots. They say that such a strategically important entity as the Post of Russia should not be handed over to foreigners. Is this really true?
-No, it isn’t. Although I don’t rule out that their foreign roots are taken into consideration. But on the other hand, no Russian banks are experienced in establishing a postal bank. I’m sure that a favorite will not be chosen until July. A great amount of work is being done on this issue, a special working group has been set up, and we have meetings with the banks on a constant basis.
-Has the concept of establishing a postal bank changed during this period of time?
-The concept has remained unchanged. The Post of Russia is to become a shareholder of a Postal Bank. But the Federal State Unitary Enterprise (the Post of Russia) should either become a joint stock company or be granted the right to participate in the capital of other organizations. 40,000 thousand post offices make it possible to increase the amount banking services and earnings. To this end, we should differentiate the product line depending on the format of post office and in a number of cases we should involve personnel of post offices in selling banking services on commercial terms. We have to perform a great deal of technological work and create an advanced IT-platform and ensure maximum IT monitoring of banking services.
-How did you benefit from participating in the capital of Prominvestbank and Belvnesheconombank?
-Systematically speaking, both banks are pivotal for the banking systems of their countries. Both Belvnesheconombank and Prominvestbank are among six largest banks in their countries in terms of basic indicators. But as opposed to Belvnehseconombank, Prominvestbank was hit harder by the crisis. In summer and autumn of 2008, the bank was subjected to a serious raider attack in Ukraine. It can be said that Russia’s intervention rescued not only Prominvestbank itself but to a great extent ensured the stability of Ukraine’s banking system.
-I wonder why you decided to buy Prominvestbank. Did Ukrainians ask you or did the Supervisory Board make a decision to buy the bank on its own?
-I won’t give you any surnames. Our colleagues from Prominvestbank made a proposal to us. We found this proposal pretty attractive. In order to purchase a stake in Prominvestbank and to subsequently reorganize it we spent 750 million dollars last year. The bank’s solvency was restored, since the middle of 2009; the bank has been meeting all the regulations of the Ukraine National Bank. But we purchased Prominvestbank out of pragmatic considerations. Many Russian industrial enterprises have long-time partners in Ukraine and significant commercial interests. And they find it safer to conduct transactions through a bank with Russian participation. In order to enhance Prominvestbank’s positions we extended a credit worth 1 billion dollars to it. Today, the bank is the sixth largest bank in terms of capital size and in terms of assets amount among Ukrainian banks.
-Now, Russia and Ukraine are going through a period of political revival. Does it mean that VEB will step up its activity in Ukraine?
-There is no doubt about it. We have been given a clear political vector and we view it as a guide for action. Of course, we are happy that Ukraine’s leaders have in fact radically changed their attitude to Russia, Russian-Ukrainian relations, Russia’s business participation in the investment activity in Ukraine. Compared with the attitudes of the country’s former leaders it’s a day and night difference. The situation has changed dramatically and the role of banks has increased.
-Ukraine’s former leaders appear to have viewed VEB as a double agent and the current leaders – as an instrument for economic development.
-Ukrainian leaders’ attitude to banks and companies with Russian capital is a litmus test for both countries’ intentions to improve relations and encourage mutual investments. By the way, we are now making strenuous efforts to improve Prominvestbank’s technological base. For example, we have introduced a book-entry payment system. In the long run this helps to accomplish a primary objective of moving to payments in national currencies. Some Russian and Ukrainian companies have already moved to offering banking services through Prominvestbank in national currencies – above all in rubles because they are more stable than grivnas. Promnvestank extends guarantees in rubles. As far as Belarus is concerned, VEB has an agreement with the Cabinet of Ministers. The agreement provides for transferring to payments in national currencies. It’s a very important step on the way of establishing an international financial center in Moscow. By creating payment mechanisms in rubles, we are making the ruble more attractive as such and increasing the appeal of Moscow as an international financial center, above all, by way of connecting neighboring countries to it.
-What’s the percentage of payments made in these banks in rubles?
-We have just started making payments in rubles. The amount of such payments is quite limited. To increase the amount of such payments we need to create a significant infrastructure. This is a reason for establishing an interstate bank which could act as a clearing center and service trade between CIS countries in rubles. Belvnesheconombank and Prominvestbank could be driving forces for such a mechanism.
-How do you feel about a possible reduction in the interest rate on subordinated loans? The Government appears to be ready to reduce the rate but we don’t know by how much it wants to reduce the rate.
- I don’t know by how much either. There is an example when the interest on the credit of the Housing Mortgage Agency was reduced – in that case our credit margin was reduced from 1 to 0.25%. How can I feel about it? VEB is a bank responsible for performing state functions and tasks. If the state deems it necessary to reduce interest rates including our credit margin then we should do it. Therefore our income would fall.
-By the way, one option is to reduce VEB’s credit margin from 1 to 0.25%.
-I know. This means that our income would diminish by 3 billion rubles.
-Aren’t you going to struggle for your income?
-One percentage point of income on subordinated loans included risks of that period of time when nobody knew how the economic situation would develop. In particular, we included administrative costs in this percentage point. They were associated with the presence of our employees in boards of directors, the monitoring of appropriate obligations assumed by the banks, including the maintaining of interest rates on credits extended to the real sector of the economy at a level no higher than 3 percentage points to the refinancing rate. Undoubtedly, the situation has changed - credits have become more affordable, banks have high liquidity levels, the Central Bank has reduced the refinancing rate to 8%. To tell you the truth, this is short money, but banks are capable of raising it. I think that it’s quite understandable that banks call for reducing interest rates on subordinated loans, especially with regard to mortgage lending where final borrowers should pay no more that 11%. Of course, we would like VEB’s credit margin to remain unchanged but if the analysis shows that reduced interest rates will help increase the amount of credits in top-priority sectors we would say “Yes”, of course.
-Why haven’t you established an export insurance agency? All the deadlines have already passed. At first, they said that it would be set up at the end of 2009, then in March, April.
- As for this agency, there are two approaches. The first approach is to set up a comprehensive export support system. This means that along with a banking institution there also should be an export credit insurance agency. Basically, these two institutions perform different functions. A bank (Roseximbank in our case) is to become an agent bank responsible for servicing state guarantees used by commercial banks. The agency operates on the insurance market and its activity is based on market laws. The agency is responsible for insuring risks rather than insuring credits. In many countries they have a two-tier export support system. And in our practical activity we are coming up against problems caused by the absence of an export insurance agency. For example, in the well-known Sukhoi Superjet project more than half of components are supplied from abroad and manufactured in joint ventures. The partners in this project are Italian and French companies. We agreed with them to promote the jet on the markets of third countries and it’s not possible to export to third countries without the state’s support. We are told by our Italian and French partners that their export insurance agencies work only with identical institutions responsible for insuring against commercial and political risks. And we don’t have such an institution. Italian and French institutions signed of course a memorandum of understanding but they continue to insist on the need to work with an export insurance agency rather than VEB or Roseximbank.
-You’ve mentioned the second approach. Can you specify it?
-Yes, of course. It’s very simple. Roseximbank should be tasked with performing the agent’s functions to provide export guarantee support, and nothing more is needed.
-Minister of Economic Development Elvira Nabiullina has said recently that the regulations on the agency have been prepared. This means that she is in favor of the first approach.
-We share her opinion.
-And Prime Minister Vladimir Putin called on taking a decision on the agency as soon as possible.
-It is of primary importance that the Chairman of the Supervisory Board, the Prime Minister is of the opinion that we should set up an integrated system of supporting industrial exports that is comprised of a bank and an export credit insurance agency.
-Does this mean that the Supervisory Board should approve this concept at its next meeting?
-This issue is not to be discussed at the Supervisory Board’s next meeting. But we continue to work with interested ministries to agree upon a common position. And it should be noted that funds for setting up and launching this agency are allowed for in VEB’s budget and agreed upon with the Supervisory Board.
-Subject to the schedule of the Economic Development Ministry, VEB is to change the pattern of ownership. You are to turn into a legal entity of public law. In the past, you were skeptical about such a change. Have you changed your stand now?
-As part of carrying out the government instructions we sent our opinion about turning VEB into a joint stock company. Our stand remains unchanged: if a decision on changing the pattern of ownership is taken we’ll abide by it. And in this case, in addition to changing the form of incorporation we’ll have to make serious transformations. We’ll have to decide what we should do with many of our divisions. If VEB is turned into a joint stock company it will have to meet Central Bank regulations. We depart from certain regulations significantly for example, in case of one–borrower limit regulations. Furthermore, we are also performing crisis management functions and these functions are not typical for commercial banks. For example, we extend subordinated credits for as many as 10 years. On the basis of figures we can say that the Bank might be turned into a joint stock company but only on certain terms. Our Bank finances long-term projects and thus it’s not worth turning it into a joint stock company in the short term. The APEC summit is to be held in 2012 and the Olympic projects will take more years to implement. VEB also performs some agent’s functions for example it acts as a state trust management company responsible for managing pension funds, it is also responsible for managing domestic and foreign government debts. Under the Government’s resolutions these functions are to be transferred in 2014 and 2015 respectively. So, we have to decide as to whom we should transfer these functions as well as change regulations and set up new institutions. So, the issue of reorganizing VEB is not as simple as it may seem. For example, the China State Development Bank was transformed into a joint stock company some time ago. It functioned as a sort of special institution for several years and now it has been operating for two years as a joint stock company with 100% state participation.
-So, you need 1 trillion in your charter capital?
- Yes, something close to this figure.
- Now that the Government is tackling the budget deficit it’s not in a position to provide such a huge sum of money. But if you received the money how long would it take you to make transformations?
- It would take a year to make transformations given that some of VEB’s functions were transferred to other institutions. But there is another scenario. The Ministry of Economic Development says that VEB and the Deposit Insurance Agency are special institutions, which might be transformed into legal entities of public law. This scenario requires changes in applicable legislation.
-This means you’ve got a chance to remain a state corporation?
-In any case as long as they determine what a legal entity of public law is.
-At its last meeting the Supervisory Board approved a new remuneration system and bonuses for VEB’s employees. Will you tell us about it?
-The new system provides for a fixed and bonus part of salary. The first depends on the position grading and on the place of an employee’s position in the hierarchy of positions. Basic salary will be positioned at a level of the reference labor market median. The second part is an annual bonus. Its size depends on key performance indicators. An annual bonus will be positioned at a lower level of annual bonus offered by commercial banks.
-JSFC Sistema signed an agreement on selling 25% plus 1 share of Svyazinvest to Rostelecom. Earlier, VEB was expected to buy this stake. Why didn’t it happen? Is VEB interested in purchasing Svyazinvest’s blocking stake?
-Thank goodness that it didn’t happen. If it had we would have spent 26 billion rubles for a non-core activity.
-In 2008, VEB opened a credit line for the Zelinograd microelectronics manufacturer Angstrem-T for an amount of 815 million euros out of which the company made use of 292 million euros. Then the crisis broke out and Angstrem-T failed to service the credit. As a result VEB started to explore the possibility of taking over ownership of Angstrem-T’s shares (pledged against the credit). How would you describe the situation?
-We’ll take over ownership of the shares. We have appropriate meetings with the Government where a decision was made that VEB would become a shareholder to salvage and consolidate the project. Factually, VEB will be an owner of the project. The project is emblematic and ambitious. It was delayed because of the crisis. Now we are in active talks with Angstrem-T but it’s hard to say when the issue would be settled.
-Svyazinvest and VEB, the two largest co-owners of Rostelecom, are in talks on signing a shareholder agreement under which Svyazinvest would buy out VEB’s stake (9.8%) at a price of no lower than 230 rubles per share and in its turn VEB would vote on key issues in consolidation with Svyazinvest. Have you reached an understanding? If you have then at what price and when will VEB’s stake in Rostelecom be bought out? And on what issues did VEB and Svyazinvest agree to vote in consolidation?
-So far, we haven’t reached such an agreement. But do not forget that the Law provides for VEB to operate on a break-even basis. So, the shares we bought for 230 rubles per share should be sold so that the transaction is break even.
-Why do almost all pension funds remain in government bonds after the pension investment declaration was expanded half a year ago?
-The proportion of government bonds in our expanded portfolio as you can see it in our quarterly financial statements fell from more than 90 to 61%. As far as corporate and mortgage-backed bonds are concerned, we have our own strategy with regard to them and we don’t hurry to invest all funds right away, we try to take substantiated balanced investment decisions. Moreover, we have investment obligations under the program approved by the Supervisory Board which provides for investing Vnesheconombank’s funds in the mortgage lending projects and projects aimed at building affordable housing in 2010-2012and this is 160 billion rubles. Moreover, in this half a year we participated in almost all issuers’ IPOs that were in line with the investment declaration requirements and our risk management system and such IPOs were not numerous. I hope that in the second half of the year the number and the amount of IPOs will increase significantly and we’ll be able to increase the proportion of new instruments ensuring decent yield rates upon investing citizens’ pension savings funds.
Magazine Aviatransport Review
Infrastructure development requires large, long-term investments and infrastructure projects should be financed on special terms. There isn’t a bank in Russia, which is specializing in the transport sector, but this function is performed by Bank for Development and Foreign Economic Affairs (VEB). Specifically, VEB finances the development of as many as five airports: Sheremetjevo, Pulkovo and airports in Sochi, Yekaterinburg and Vladivostok. VEB’s Infrastructure Department Director Mikhail Poluboyarinov is telling us about the specifics of financing such projects, their current status and prospects.
CORR: Mikhail Igorevich, what is the proportion of transport projects in VEB’s loan portfolio?
M.P.: In total, transport projects account for almost a fourth of Vnesheconombank’s loan portfolio and 15%, that is, 32 billion rubles are directly linked with aviation including infrastructure of airports, aircraft construction, and air transportation. Moreover, we invest funds under a certain strategy agreed upon with the government and line ministries. And I’d like to add that we have our memorandum on VEB’s financial policies along with the Federal Law “On the Bank for Development” that sets forth our bank’s activity.
In accordance with our main sectoral priorities we establish centers of competence within the Bank, that is, departments and directorates. In particular, we have our infrastructure department and transport directorate that are also involved in aviation projects. We have qualified experts specializing in the air transport sector or to use a Western term an aviation team.
VEB’s activity is based on special principles set forth by the Law and different from any other legal entity. So, with our special legal competence we are in a position to finance long-term transport projects with low loan pricing.
CORR: What’s the money worth to VEB? Does it have any exclusive conditions?
M.P.: We have a mixed funding structure, we have our charter capital we also borrow some funds on the market as an ordinary bank. We have no exclusive conditions, besides the state’s contribution to our charter capital and it has already been distributed among projects. So, now we fund almost all projects through using borrowed funds but as Vnesheconombank is a large state-run bank with a sovereign rating, we can borrow at lower rates than others and lend on better terms and for longer periods than commercial banks and in doing so, we can finance projects that commercial banks are not willing to fund at all because they are not ready to assume project risks.
What the borrower cares about is an interest rate at which it can get money; it doesn’t care what the money is worth to VEB. The Law states that VEB is not a commercial institution and our interest rates are set to be only at a break-even point. Moreover, the cost of money is influenced by two more factors.
First, these are project risks. A large company, a shareholder of a major project, can take credits on its own on the international market but it very often carries a great debt burden and is not ready to assume additional risks. In this case, an issue of the so-called project financing comes to the fore, in which case a bank does not require this major shareholder to provide it with any sureties and guarantees and if a project fails, we won’t be alble to lay claims to anybody. Project financing involves very complicated transactions, especially infrastructure ones, that is why, it is pretty expensive all over the world as a bank has to assume higher risks and envisage higher interest rates.
The second factor is a tenor of credit. At present, there are no commercial banks in Russia that are prepared to finance infrastructure projects which take 10-15 years to implement. This is the case because commercial banks have short liabilities. And under the Central Bank’s regulations, banks are to proportion their liabilities to their assets. In other words, commercial banks do not extend long-term credits due to their ill nature –they simply have to work under such conditions and these regulations are designed to protect depositors’ money. A unique and remarkable feature of VEB as an infrastructure bank is that we are completely separated from natural persons. We are not limited by the Central Bank’s regulations and we risk only our own funds.
As a result, with due regard to a complicated nature of project financing transactions and tenors of credits we can’t say whether VEB extends inexpensive or expensive credits. It does extend log-term credits and other banks do not do it at all. It makes no sense to compare our interest rates with those of other banks as we operate in absolutely different fields of activity.
CORR: Putting the state’s money at risk, VEB assumes a certain responsibility. There is no doubt that there are many of those who wish to gain access to this money?
M.P.: We managed to put together a very good team of specialists capable of funding projects on the basis of project financing and guaranteeing recoverability of funds. And we can make it happen not only due to our highly qualified team but also due to our unrestricted access to the Government. We are in direct contact with the Transport Ministry, the Russian Government Office. We’ve got all the reference data which we can analyze.
It is up to the Government to decide what projects should be implemented. The Bank is not supposed to decide what kind of airport should be built and where it should be built. Nevertheless, we examine projects, look into passenger flows, calculate cash flows and then come to a conclusion that the Bank can extend a credit, hypothetically saying, of 10 rubles rather than 100 rubles, otherwise the funds would be irretrievably lost. Where can we get the remaining 90 rubles? Therefore, not everything is determined by cash return as is the case in a bank, the government also gives high priority to social objectives. If required, it can somehow subsidize a project, but in any case the Bank’s expert examination makes us take a more sober look at things. An airport is always a point of growth but the budget is not limitless and the government has to decide as to what extent this point of growth is prioritized in a given place. And in this respect, our main role as an investment adviser is to tell the government what can be done to guarantee recoverability of funds and what can’t be done. So, we have an agreement with the Transport Ministry on investment consulting.
CORR: What are the criteria for selecting projects?
M.P.: All requirements are specified in our memorandum and other documents. Most importantly, a project must be of high quality. If a business idea is not substantiated by project calculations, a project is not suitable to us. You should do preparatory work before offering a project. Some even get surprised saying that as a development bank, we must support them instead of acting as an ordinary bank. But any airport project is worth tens of billions of rubles; we can’t play a lottery and just put the money at risk. As of today, the number of unsubstantiated applications is diminishing as people can see that VEB is not a source of easy money. So, VEB is not ready to consider some projects in principle and not because of its ill nature but because sometimes there isn’t a project as such – there is only a sort of business idea.
CORR: Let’s move from business ideas to the reality. What’s the current status of the most significant projects?
M.P.: As far as Sheremetjevo is concerned, First Vice Premier Igor Shuvalov said that the airport should be a unified complex. Now we are considering options of how to do it, our preliminary basic concept is a merger between OJSC Terminal and OJSC International Airport Sheremetjevo. Together with consultants, which are being chosen now, we are going to work on preparing an optimal financial model of merging the companies. This merger is a benefit for us as credits extended to OJSC Terminal would be passed over to a large legal entity with great financial flows. The development of a merger model is to be completed within three months. The main prospects for Sheremetjevo are to increase its terminals’ capacity and build the third runway. This is a task set by the Transport Ministry and it is being fulfilled now. So, an issue of drawing a management company into the Sheremetjevo Airport has come up. It is to assume investment obligations for the construction of a new major complex on the northern side.
In technical terms, the Sochi Airport project had to be reworked to a greater extent and made us rehabilitate the financial situation. There is some insignificant schedule overrun but the problem can be sorted out on a routine basis Basel Aero put together quite an active management team. There are two problems there which have to be addressed: a delimitation of land is to be carried out as it wasn’t carried out in the course of privatization and the construction schedule is to be adjusted taking into account the airport’s Olympic status. The fact is that requirements for servicing the Olympics provide for such a peak capacity that the airport would never need operating on a routine basis. This airport’s excessive capacity makes neither us as a financing bank nor shareholders happy but this can’t be helped. The airport’s Board of Directors suggests that the date of starting the construction of an additional gallery with jet ways should be moved to 2011 and we go along with this suggestion. It will be completed by the end of 2012 and there will be no need to freeze investments.
Active work is also going on in Pulkovo. As planned by the schedule, we’ll close a financial transaction by the end of April. VTB acts as a shareholder in this transaction and is not seen as a creditor. VEB acts as a creditor from the Russian side and the European Bank for Reconstruction and Development together with the European Investment Bank act as leaders of the pool of foreign banks including commercial ones. A distinguishing feature of the Pulkovo airport project is that it is the first project that is being funded by so many international financial institutions. Half of the project is funded by VEB in rubles and the other part - by foreigners in foreign currency, with due consideration of exchange rate risks as one of the airport’s non-aviation lines of activity, leasing floor space on the terms of commercial concession, is denominated in foreign currency. We have already carried out all mandatory inspections and are very optimistic about this project. It should become an exemplary project for Russia.
CORR: Will the project be influenced by the recently announced plans to place GTK Rossiya under the jurisdiction of Aeroflot? What impact will it have on passenger flows as it’s not going to be economically feasible for Aeroflot to build the second hub in Saint-Petersburg?
M.P.: You are quite right. GTK Rossiya accounts for 40% of the Pulkovo airport’s traffic. But we, together with EBRD and EIB, prepared an extremely conservative forecast in order to make the project attractive to foreign commercial banks because they are very timid. So, our financial model works even in the worst case scenario and it would be a good thing if Aeroflot succeeds in encouraging the development of GTK Rossiya.
CORR: The next project in the list is Yekaterinburg.
M.P.: Just before the SCO summit, Renova commissioned in Koltsovo an international terminal that we had financed and we can say that the active stage of the project has come to an end. But it should be noted that we have another strategically important project linked with Koltsovo, which is aimed at supporting Region-Avia Company. We regard Koltsovo as one of Russian hubs where pretty large passengers flows are concentrated including transit one. Now about 18 flights are made from Koltsovo to Moscow per day. For this airport to be cost-effective and for the region to develop, the airport should handle regional flights of up to 1000 km that would cover cities located around Yekaterinburg. This would keep Region Avia busy ad it would concentrate additional regional flows and after entering into relevant code-sharing agreements with Urals Airlines, Koltsovo’s basic airline, it would be transferring passengers to it.
We also help to finance an infrastructure project in so far as it relates to purchasing Embraer aircraft by Region-Avia - 50 turboprop aircraft with a seating capacity of up to 50 passengers. Due to a marginal nature of regional air transportation, this project is a long-term one and commercial banks view it negatively because turboprops bought on the secondary market have rather low collateral value, and if the business fails they would be of no use to anyone. To some extent, this project is risky for us, but being aware of our mission we support it. Someone should make a start. The regional air transportation sector is in a difficult situation and our aviation industry has almost nothing to offer to this sector. So, if the regional air transportation network proves to be successful in the future, regional aircraft might be assembled here and an aircraft factory might be built with our help and this is also an infrastructure project as it creates new jobs and builds up business. At present, this project enjoys the support of the Transport Ministry and the regional administration. If regional transportations prove to be unprofitable at an initial stage, the region might somehow subsidize the project and if the project is a success it might be expanded to other regions.
CORR: What other projects is Vnesheconombank interested in?
M.P.: A new project is already under way in the Vladivostok airport; a new terminal to be completed in time for an APEC Summit is being built. We are also talking with the Novosibirsk and Samar airports about possible options of our participation in their reconstruction. Another infrastructure project that we regard as very interesting and important is an interchange transport hub at Kalanchevskaya station that would connect three airports. At the moment, this project is at an initial stage but it’s difficult to overestimate a synergy effect from its implementation for the entire Moscow air hub. We are also considering our participation in leasing Russian-made aircraft. The Bank might purchase an additional stake in IFK Leasing Company for its further capitalization. We haven’t made a decision yet but the plan is under consideration.
CORR: Did the financial crisis somehow affect VEB’s activity in infrastructure development?
M.P.: We are trying our best to prevent any negative changes. If we stop lending it will deliver a heavy blow to our economy, that is why, the Government has always insisted that we should not reduce infrastructure lending rates. In the period of the crisis, commercial banks commercial banks were largely involved in rehabilitating their projects simply trying to rescue whatever was left and so, they didn’t have any long money to invest in infrastructure development. So, in the period of the crisis we continued conducting current lending transactions and took positive decisions on new projects, for example the Vladivostok airport project.
CORR: To what extent is it true to say that there is more money in the world than quality projects to invest it in?
M.P.: This was the case before the crisis. To a large extent, the crisis was caused by irresponsible and incomprehensible lending. There is an excess of short-term money available for lending for a period of up to three years in the economy and not only in the Russian one. But there isn’t any long-term money now as there wasn’t any before. But there are initial signs now that the situation is improving and the Russian market two-three years from now might see at least 7-10-year money if not 25-year money. But so far, only VEB is capable of extending credits for such long periods. Buy the way, there all kinds of projects but we are specializing in the transport sector and view the situation this way. And if there emerges a quality, proper project and if we prove its efficiency the state could finance it through increasing our charter capital. This is an instrument the government has at its disposal and it’s not just budget financing but financing of projects on a repayable basis. The Bank keeps track of such projects. All infrastructure projects are very complicated, there are no easy ones. It is commercial banks that are interested in easy projects.
Interviewed by Alexei SINITSKY