Vnesheconombank Chairman Vladimir Dmitriev’s Interview to The Banker magazine
writer Philip Alexander
State-owned development bank Vnesheconombank became a vital tool for the Russian government to combat the financial crisis, not only at home but also in neighbouring countries. The bank’s chairman explains how it is exiting the assistance phase and preparing a long-term role in the economy.
Since Vnesheconombank (VEB) was reorganised in June 2007, absorbing Russian Development Bank and Roseximbank, its chairman, Vladimir Dmitriev, has barely had time to catch his breath. As the global financial crisis took hold in the third quarter of 2008, the bank became a vital policy tool for government intervention.
VEB took over a wide range of assets, including two distressed banks, Globex and Svyaz-Bank, and lent $4.5bn to Oleg Deripaska’s Rusal group (see Team of the Month, page 44). And beyond Russia’s borders, it bought Prominvestbank out of administration in Ukraine. Since the end of 2009, Mr Dmitriev has been able to take stock and plan an exit from the emergency assistance phase.
Visiting the bank’s London office, he turns to discussion of its post-crisis activities and how to fund them. He has just finished meeting bankers who provided a $700m and E100m three-year syndicated loan in January 2010. To continue diversifying the bank’s funding, the next step is a debut Eurobond, for which the bookrunners were chosen in February.
“We are looking forward to seeing how the sovereign will be met by investors, and then considering our own opportunity of tapping international capital markets,” says Mr Dmitriev.
Legacy ass ets
In December 2009, the bank’s supervisory board approved the creation of a new vehicle, VEB-Capital, to manage residual assets held by the bank following its rescue efforts. These include stakes in construction companies and real estate, and 100% of Amurmetall, the major steel plant in far eastern Russia, purchased in July 2009 to avoid its bankruptcy. Mr Dmitriev is keen to hire staff with investment banking and crisis management expertise to run these companies appropriately.
“The activity of VEB-Capital will be aimed at upgrading the added value of those assets, which will then be presented to the market or bought back by previous owners – as is the case with Amurmetall,” says Mr Dmitriev.
In contrast, the 3.15% stake that VEB purchased at the initial public offering (IPO) of Rusal in January is a strategic commitment in line with the bank’s status as the company’s largest single creditor. VEB has a seat on the Rusal board, although Mr Dmitriev does not rule out an eventual sale of the stake. He believes financial discipline and corporate governance at Rusal have already improved due to government assistance and the requirements of the company’s international creditors’ committee.
“Since we were engaged with this company, it was worthwhile to talk about marriage while refinancing its external indebtedness… Being a strategic investor at the company’s IPO, we have created additional strength in our relationship,” says Mr Dmitriev.
VEB has also worked hard to resurrect the banks it bailed out – Globex returned to profit by the end of 2009. The rescue operation costs VEB Rbs13bn ($444m) in interest payable annually on deposits from the Central Bank of Russia used to restore capital and liquidity to the two Russian banks. Consequently an IPO or sale to a strategic investor is definitely part of the plan.
The two banks will be repositioned to have sustainable business models, a process which Mr Dmitriev believes will take up to five years. As Svyaz-Bank already distributed products via Russia’s post office network, VEB has started tendering for a strategic partner to develop a full-service postal bank, which would have a vast nationwide retail presence.
Conversely, Globex had focused on large industrial and project lending, and it may now work more closely with VEB’s own clients. “In accordance with the law on Vnesheconombank, we are limited to funding major investment transactions, not to extend daily banking services like salary systems or financing working capital. So Globex activity might be a complementary business for the group,” says Mr Dmitriev.
There is a similar complementary intention behind the January 2009 purchase of a 75% stake in Ukraine’s Prominvestbank, which was later increased to 94% as part of its recapitalisation. The bank served about 40% to 50% of Ukraine’s core industrial companies, many with Russian trading links.
“We look at the transaction from this angle, to support Russian and Ukrainian companies to upgrade their co-operation and economic integration… and to gradually come over to bilateral transactions in roubles,” says Mr Dmitriev.
Mr Dmitriev is now able to renew his focus on VEB’s core activities, such as export promotion and investment in infrastructure and new technologies. VEB also manages about Rbs480bn in state pension funds, and has been authorised to diversify these from government bonds into assets such as infrastructure bonds and mortgage-backed securities.
The bank’s anchor investment in the Macquarie Renaissance Infrastructure Fund is another key vehicle that he hopes will attract foreign investors. “We are looking at potential partnerships with sovereign wealth funds and development institutions in the Middle East and the Far East, and some private investors who are interested in diversifying their investment activity and are keen to come to Russia, but still too cautious to do it without support, assistance and guidance from such an institution as VEB,” he says.
Vnesheconombank Chairman Vladimir Dmitriev’s Interview to TV Channel Russia-24 (Davos, the World Economic Forum)
TV Channel Russia-24
HOST: Russia is already ready to scale down programs of providing the state’s support for the economy. Most private companies have started to repay their debts on credits on their own and resume production. Now foreign investors are again becoming increasingly interested in the Russia energy sector and infrastructure. Vnesheconombank Chairman Vladimir Dmitriev told our channel about it on the first day of the Forum in Davos and now we are offering you a full version of his interview.
CORR: I am pleased to see you again in Davos. My understanding is that this Forum is a post-crisis one again. What issues in your opinion should be discussed to make an exit out of the crisis more or less tangible?
Vladimir DMITRIEV: Another Forum in Davos but this time the main theme is not to tackle the crisis but exit the crisis and identify ways of the world economy and the world financial banking system development. A year ago when we met here the main theme was to find ways of responding to the crisis at its worst level. At present, there are some weak signs and they are not even reflecting a trend so far that the world economy, the world banking system has started to recover a bit but this is not a reason for excessive optimism. That is why it is very important for the Davos Forum to identify appropriate priorities and reach required consensuses. Traditionally well-known politicians and leading specialists in the economy, the world financial and banking system come to Davos. So, the issues discussed by the business elite and politicians during the whole year should be further dealt with at this Davos meeting and result in formulating proposals for exiting the crisis (the recession). And the new order in the business world, in the financial and banking system that was under discussion throughout the year should take on a concrete shape in Davos.
CORR: As far as I can see, there are representatives of different countries here and while some countries suffer economic slump and others face reduced economic growth, almost everywhere they stimulate economy through significant financial infusions. When do you think they will start scaling down these measures and how should they do it to make this process less painful and smoother?
Vladimir DMITRIEV: A lot will depend to what extent major banks and financial corporations will prove to be disciplined and responsive to the state’s measures for getting out of the crisis. I believe that President of the Central European Bank Trichet was quite right saying that leading international banks cannot help taking into account the fact that the world’s leading countries spent about 25 percent of their gross domestic product to rescue them. This was a significant contribution to the survival of the banking system. And now the world’s leading banks should grasp the need for taking adequate measures to get out of the crisis dynamically. I also share the opinion that high priority in the banking sector (and I can understand it pretty well because for us, for Vnesheconombank this is our core activity) should be given to financing the real economy rather than to taking a keen interest in banking derivatives, derivative products and in creating the so-called pyramids. I think that the call we have heard today at the opening of the Davos Forum: “Rethink, redesign, rebuild” is fully applicable to international financial institutions, to those regulators that are involved in formulating international regulations for banks. But this call is to the same extent addressed to banks themselves, major corporations that are supposed to pursue a more restraint, more reasonable policy aimed at enhancing the real economy.
CORR: What do you think are the ways of putting this call into effect? You’ve mentioned derivatives. There existed a really devilish system when they actually acted as traders and sellers of nothing. How do you feel about the American President’s initiative to reform the banking system, limit both the size of banks and the amount of financial instruments? By the way Wall Street bankers are not happy about the initiative and so they are going to debate on it extensively.
Vladimir DMITRIEV: I can understand Wall Street’s frame of mind. It did well for decades by inflating these pyramids, creating derivatives and selling almost nothing generating multi-million bonuses and in general was not adequately liable for the products it created.
CORR: As I can see it, we are getting back to a debate on whether we should have commercial or investment banks?
Vladimir Dmitriev: These debates are as cyclic as economic development itself. Let’s take Japan for example. After the war they totally eliminated cartels and split companies in order to avoid creating giants that could monopolize the market. Now we can see the opposite. During this period we witnessed various approaches to vertically integrated banking and industrial structures etc. And in the current situation the calls made in Washington and by the way backed in Europe as a whole as well as Russia’s participation in international financial institutions, namely, the Group of Eight, the Group of Twenty make us introduce reasonable initiative and support all those measures that can be implemented on the Russian soil. In this respect, I believe that the Russian authorities’ actions are as adequate as anywhere else and they might have helped more effectively than anywhere else to prevent catastrophic consequences that could have followed without this adequate response to the situation. As for your question about when the state’s financial support will be scaled down, I can tell you about our Bank’s experience. I think that the measures taken by the government to support the stock market and diversify investments of the National Wealth Fund are successfully completed. We have gained valuable experience and the 175 billion rubles that were made available to Vnesheconombank with the accrued interest - 188 billion rubles in total, were returned to the National Wealth Fund. The amount of financial assistance provided by the state through Vnesheconombank to those companies that were not able to repay their debts to foreign creditors in 2008 was also reduced. Some of them repaid their debts in full and others obtained credits from commercial banks. We can say that this measure also proved to be successful in a very complicated situation.
CORR: As far as I can see in the times of crisis there is a great temptation to regulate the market and to prevent capital from moving across the borders. This is what the state can afford to do by law or in some other ways. These measures are very popular. Do you think that we should take these measures or they might prove harmful in the long run?
Vladimir DMITRIEV: In my opinion, limitations and strict control are not the main things, we should focus on developing rules of the game. I participated in a number of international forums and debates on how regulators and the state should act in order to prevent negative trends from penetrating into Russia on the one hand and on the other not to leave the path of economic liberalization and social democratization as a whole, reduce the state’s role as an owner and strengthen its functions as a regulator. In this respect I would like to say that I have no doubts that our authorities are pursuing this sort of policy designed to implement reforms, modernize the economy and develop well-defined rules of the game both for banks and for corporations.
CORR: Formulating such rules of the game here in Davos, what concrete proposals can Russia make? What about making proposals for raising investments for our country. In the times of crisis investors tend to run away. What can we do now to make them come back or at least decide against running away from Russia?
Vladimir DMITRIEV: I think that the more favorable conditions in the capital markets for the countries with developing economy make it appropriate and maybe necessary to step up efforts to raise foreign investments for the Russian economy. Even the composition of the team headed by Vice Premier and Finance Minister Alexei Kudrin where we can see not only employees from the Finance Ministry but also young specialists who established themselves as good businessmen as well as experts from the Ministry of Economic Development that worked abroad, representatives of Russian big business, heads of state-run banks, Russia’s state-run and private investment companies testifies to the fact that the Forum’s participants are interested not only in the Forum itself but also in helping to raise foreign investments for the Russian economy in the course of their meetings and discussions.
CORR: Do investors still view Russia as a member of the BRIC Group including four countries that offer some hope? As far as the West is concerned everything is clear: we know the way the economy is going to develop, the way it is functioning now but as for the BRIC countries they hope for some prospects. Is Russia still being viewed as a member of this Group, because there were skeptics that claimed that the BRICs turned into the BICs?
Vladimir DMITRIEV: I don’t feel like performing an abbreviation-decoding exercise, I would like to simply look at the reality. Rusal’s latest initial public offering showed that there were a number of investors interested in making investments in Russia including such large companies as Rusal and this is a sign of their trust in Russia. I think the most important thing is investors’ trust in the state. The state supported one of the largest Russian and international companies, one of the largest Russian corporate customers and this was not only financial assistance but the state’s socio-economic responsibility and this was the benchmark setting for one of the largest Russian borrowers. Our Bank’s participation approved by the Supervisory Board in Rusal’s initial public offering on the Hong Kong Stock Exchange when Vnesheconombank became one of the largest key, core investors in Rusal testifies to the fact that the state trusts its companies thus attracting foreign investors and demonstrating Russia’s investment appeal.
Funds created by Russian investment companies, Russian state-run and commercial banks, the fund that Vnesheconombank created with the participation of Macquarie Capital, Renaissance Capital, IFC, the EBRD, the Eurasian Development Bank, the Kazakhstan Sustainable Development Fund, the Infrastructure Development Fund was scheduled to accumulate about 1 billion dollars , with our current liabilities amounting to 550 million dollars with a potential for growth and attracting private investors, demonstrate our keen interest in investments in the Russian infrastructure – ports, roads, bridges, the energy sector, communal services infrastructure. All these sectors are of great interest for foreign investors because they have a good potential for growth.
CORR: This time you are giving such an optimistic picture. So, what sectors do you expect to grow in the new economic year?
Vladimir DMITRIEV: In this case, I rely on the expert’s opinions by the Economic Development Ministry, the Finance Ministry, our macroeconomists, without arguing with them because I am not a macroeconomist and I am not competent enough to discuss macroeconomic and economic growth issues. But being involved in this process, I have no grounds not to trust expert’s opinions by the Economic Development Ministry. And I have no doubts that prospects for growth of some assets and certain economic sectors are of interest for foreign investors.
CORR: And now my final question: will you have enough time to go skiing in Davos?
Vladimir DMITRIEV: I am afraid not. I have a very busy afternoon work schedule here. And the best time for skiing is afternoon. The Davos Forum offers a unique opportunity to work for the benefit of the Bank and of the state so I just can’t miss this chance. I can go skiing when I have free time in the future.
COR: Let’s hope that you will have it. Thank you very much.
Vnesheconombank Chairman Vladimir Dmitriev’s Interview to the Information Channel Vesti
TV Channel Vesti-24
HOST: Good morning, Vladimir Alexandrovich. The year is coming to an end. VEB has done a great job rescuing the Russian economy. What results can you sum up?
Vladimir DMITRIEV, Vnesheconombank Chairman: Summing up the results of the outgoing year it is safe to say that Vnesheconombank has fulfilled its obligations and plans in almost all lines of its activity. I make no secret that this year we have received significant financial resources from the state and our capital has been increased to more than 360 billion rubles. But we have also been building up our own funds dramatically and by the year-end we have increased them by almost 2.5 times to 445 billion rubles. This is a massive increase.
In terms of our performance efficiency and profitability indicators Vnesheconombank is also among the leaders of the Russian banking market. In the last nine months our profit has grown to more than 24 billion rubles from the same period last year when we posted a loss of 2 billion rubles. In terms of profitability we are now among the leading Russian banks. And by the profitability indicator we were undoubtedly in the lead in the past 9 months.
So, a great amount of work we have done in the context of taking crisis management measures, building up our own portfolio and undertaking our core activity allowed us to confidently achieve positive indicators this year. Here I also mean relative indicators of our performance efficiency, that is, return on capital and return on assets, which are also reflected in positive values.
HOST: It’s no secret that VEB’s action, to be more precise, the talk about VEB’s transactions on the stock market is troubling all investors. Some sort of see a hand of VEB in every market movement. What’s the state of affairs in this sector, what’s VEB’s strategy in this line of its activity? Are you going to sell everything or keep a part of shares for yourselves?
Vladimir DMITRIEV: I make no secret that some believed that VEB’s work on the stock market could seem to be its non-core activity. I even know some financiers who found out to their surprise that VEB had its own treasury. But for many decades VEB has been active in operating both on the Russian and international stock market trading floors and its treasury acting even as a market player in terms of certain instruments is pursuing an active policy on the securities market. The highest class professionals work there, and it was for this reason on the one hand, the state chose VEB as its basic instrument for supporting the financial system in the stock market’s most difficult crisis period and on the other it allowed us to operate on the stock market in such a way as to actually perform a task we were charged with and at the same time generate additional income. And take my word for it that our employees did their job quite professionally by our own estimates and by estimates of analysts and experts.
As to 175 billion rubles that were placed on deposit with our Bank and were used for maintaining liquidity and sustainability of the stock market, they were returned in full including interest income received by the National Wealth Fund to the Finance Ministry.
You know a decision was made that all incomes minus payments on the deposit received by Vnesheconombank from investing them in the stock market would remain with the Bank and would be used to finance top-priority projects in the mortgage lending sector and would be invested in certain instruments by a decision of the Supervisory Board. So, at present just like in the last year we are not considering selling immediately those securities in which we invested financial resources of the National Wealth Fund. We are going to act the way we have done so far, that is, operating on the stock market appropriately, generating incomes and maintaining its liquidity sustainability.
HOST: After completing transactions with the funds of the National Wealth Fund, are you going to operate actively on the stock market? You said you had been involved in this business before and this information is really very interesting. I’m getting an impression that VEB was asked specially to perform this function in the difficult times. Basically, this is an important source of income for you, am I right?
Vladimir DMITRIEV: It’s one of income sources. Moreover, before VEB was transformed into a development institution and started to be active in financing major long-term capital-intensive projects, Vnesheconombank’s main source of income was its operation on the stock market and yields from securities – both shares and bonds. Now income is divided roughly into halves, namely, yield from securities and interest and comission income. This was possible through increasing significantly our loan portfolio, which by owner’s transactions is in excess of 200 billion rubles. Of course, we are going to continue to operate on the stock market. I’d like to stress it once more that 175 billion rubles taken on deposit from the treasury were returned to the Finance Ministry and now we are conducting transactions with our own funds and we are going to use them reasonably for selling and purchasing stock market instruments as well as for maintaining sustainability of the stock market as a whole and certain securities in which we invested our funds.
HOST: As far as your activity on financial markets is concerned your bank is a trust management company responsible for managing pension savings funds. How would you describe the situation in this line of your activity, what income could would-be pensioners receive putting their money under your Bank’s management?
Vladimir DMITRIEV: In fact, by the total amount of would-be pensioners’ funds under management, our Bank is the main trust management company. There are about 450 billion rubles under our management. We expect this figure to be brought to 690 billion rubles next year. These are considerable resources which, given amendments introduced into applicable legislation, would allow us to generate high yields from investing them as opposed to those generated by us until this November. At present, we can invest pension funds within our extended investment portfolio in corporate securities and in mortgage-backed bonds, in debt instruments of international financial institutions. The investments that were already made in securities since November 1 of this year allow us to expect profitability indicators to exceed inflation in the first quarter of 2010, which has not been the case so far. And in fact, the conservative investment portfolio accounts for a negligible share of the portfolio that can be invested within the extended investment declaration. Government securities account for less 1 percent, to be more exact, 0.15% in the investment portfolio.
HOST: Such companies as Rusal received a lot of money. At the moment, Rusal is going to conduct IPO and it was authorized to do it. As far as I know you would like to purchase a certain stake in the company. Are you still planning to do it or are you going to change your plans?
Vladimir DMITRIEV: In this respect, our plans have not changed; they have been approved by our Supervisory Board. First, under the Supervisory Board’s decision we rolled over the credit worth 4.5 billion dollars extended to Rusal last year. The Supervisory Board made a decision on the possibility of Vnesheconombank’s participation in Rusal’s IPO on the Hong Kong Stock Exchange. We believe that this participation is strategic for us in terms of maintaining this company’s liquidity and raising substantial financial resources for it. And Rusal plans to raise from 2 to 2.5 billion dollars. These funds will be used to partly repay debts to foreign creditors and of course to ease the company’s debt burden. This is very important for us as our Bank is the largest individual creditor of Rusal. And for this reason a decision was made on Vnesheconombank’s participation in Rusal’s IPO.
HOST: A Post Bank is scheduled to be established on the Basis of Svyaz-Bank, a large bank, a sort of alternative to Sberbank (The Savings Bank). Is this a realistic possibility in the current situation? And how much money will it take?
Vladimir DMITRIEV: Here we proceed from several principal premises that make this idea quite feasible. First, Svyaz-Bank cooperates traditionally and with the Post of Russia on a regular basis. Svyaz-Bank is not only a bank with the great number of its own branches - there are more than 50 of them but most importantly, the bank relies and can rely on the Post of Russia’s branch network of about 42 thousand post offices across the country.
HOST: Twice as many as Sberbank has.
Vladimir DMITRIEV: It’s twice as many as Sberbank’s bank departments. For example, only five percent of the country’s population has plastic cards. In our country the unacceptably low number of people uses banking services. So, relying on the Post of Russia’s extensive network we should develop retail universal banking products which include utility bills, lending, providing support for small and medium-sized enterprises, pension payments. By the way, about 15 million pensioners receive their pension payments through Svyaz-Bank. In principle, this is great potential for using and boosting the already existing cooperation between Svyaz-Bank and the Post of Russia to establish a Post Bank. The Supervisory Board charged us, Svyaz-Bank and line ministries and departments with developing a coherent concept of Svyaz-Bank further development and the creation of a Post Bank by next spring.
HOST: What other plans does Vnesheconombank have in addition to its current and previous efforts made in the difficult times to rescue Russian enterprises? Didn’t you forget about you core activity. VEB was established to develop the economy. What other plans do you have for the next year?
Vladimir DMITRIEV: We find it important and we made consistent efforts in this respect, we find it important to restore engineering business competences. Our practical experience shows that we have to do it because in a number of sectors these competences were lost. If we have a look at the projects we are implementing we can see that many of them, I wouldn’t say most of them, but many of them are implemented on the basis of foreign technological equipment and on the basis of foreign companies’ expertise. Moreover, by supervising the targeted use of the funds extended by us in our routine activity we arrived at a conclusion that we need to exercise stringent professional technological, financial control here. Engineering companies are capable of doing all this, they consolidate projects, bring them into operation and in some cases manage projects and exercise control over the compliance with process procedures as well as over the targeted use of funds.
HOST: And now my last question Vladimir Alexandrovich. The Bank can become a joint stock company. How soon can it happen and how will it influence the Bank’s activity?
Vladimir DMITRIEV: The idea of transforming Vnesheconombank into a joint stock company does not scare us. In this case I mean only Vnesheconombank. First, some foreign development institutions went along an evolutionary path to becoming joint stock companies. Among them for example, is the China State Development Bank. During a period of ten years the bank accumulated assets worth 500 billion dollars becoming a major bank capable of addressing issues of development in the format of a joint stock company. We can see that Vnesheconombank keeps on receiving many new tasks. Sometimes they are of extraordinary nature and the crisis demonstrated that it is through such development institutions that the state can fulfill extraordinary tasks that have to be addressed in an individual way.
For example, let’s consider a single borrower’s limit. For a number of borrowers this limit in our Bank exceeds 80 percent. But these were well-thought-out, individual decisions that were taken by the Government backed by our partners and creditors. There are some imbalances in our regulatory framework and balance that won’t allow us to transform our non-profit institution and state corporation into a joint stock company.
To tell you the truth, recent comments by specialists and government officials who are linked to Vnesheconombank do not leave any doubts that an issue of transforming Vnesheconombank into a joint stock company will be addressed extremely cautiously applying a do-no-harm principle and common sense because our partners and creditors are very sensitive to any such decisions and even to a talk on this account. Suffice it to say that a number of deals Vnesheconombank arranged for our corporate customers were frozen for the time being until an issue of Vnesheconombank’s transformation into a stock joint company has been finally resolved. At present, it’s quite evident that nobody will be in a hurry to transform Vnesheconombank into a joint stock company.
In this respect, I would like to remind you of the words said by Arkady Dvorkovich at the international conference timed to coincide with the 85th anniversary of the Bank. He said that Vnesheconombank were not among those companies to be transformed into joint stock companies in the near future.
I’d like to say it once more that the Government instructed us to prepare our proposals by March 1. We’ll do our best to formulate our proposals with regard to transforming Vnesheconombank into a joint stock company in the most objective way. We are not going to challenge this idea. And I’d like to assure you that my conversations with government officials that are related to Vnesheconombank’s future and are not indifferent to it make me believe that no hasty decisions with regard to transforming Vnesheconombank into a joint stock company will be taken.
HOST: Thank you Vladimir Alexandrovich, for finding time for us. Good luck to you next year!
Vnesheconombank Deputy Chairman Anatoly Ballo’s Interview to the Russian Information Channel Vesti
HOST: During the crisis the amount of private investments in the transport infrastructure diminished and due to currencies exchange rates fluctuations financial calculations of investments and potential profits became more complicated. Vnesheconombank Deputy Chairman Anatoly Ballot told us about this in his exclusive interview to our channel.
CORR: How can Vnesheconombank participate in developing transport infrastructure? Do you have a special program to this end?
Anatoly BALLO, Vnesheconombank Deputy Chairman: Vnesheconombank is charged with developing transport infrastructure which is one of the Bank’s main lines of activity and this is specified in our Memorandum. When financing infrastructure projects we use various instruments ranging from syndicated loans, for example, one of the projects whose completion coincided with the Forum was an opening of a new terminal Sheremetjevo-3. This is a syndicated loan that we raised together with Vneshtorgbank from a syndicate of Japanese banks. And the loan was raised, without involving any budgetary allocations, for a period of more than 13 years. Moreover, in a number of cases we act as a loan arranger, as a driving force and give the so-called signal effect. This was the role we played in financing the Pulkovo Airport modernization. It was our participation that made it possible for foreign banks to extend required credits. The main thing for us is a project’s importance for the country’s development. And I would like to stress that recently we’ve been giving increased priority to the Far East. At the moment, we’ve got plans to participate in building a new terminal in Vladivostok. We are starting financing the construction of the coal terminal in Vanino. Our interests run beyond the Urals, because it’s not a secret that the bulk of trade turnover between Europe and Asia bypasses our country. This is the case because we lack transport corridors, logistics centers – all-in-all, we lack transport infrastructure.
CORR: Yes, this is the way things are. When they bring up an issue of developing transport infrastructure they always mention the fact that investors are in short supply. You happen to be in direct contact with investors. What are they like, are there any quality investors you can cooperate and entrust funds to?
Anatoly BALLO: You know, strange as it may seem, we can see that real professionals work in the transport sector. Transport specialists can work efficiently both under socialist economy and market-oriented one. Of course, certain operational mechanisms have been changed but fortunately, we managed to retain professional personnel in this sector. Most of our projects are quintessence of our activities involving public private partnership when the state extends financing to private investors, as it was in the case of the Pulkovo Airport. I would also like to say that it was the well-timed establishment of our bank that made it possible in the very height of the crisis, in December, to start financing another important project - the project aimed at modernizing the Kolzovo Airport in Yekaterinburg. The project was completed promptly on the eve of the Shanghai Cooperation Organization summit.
As a whole, because of the crisis, the amount of private investments is of course diminishing. And the Bank has often to act as an investor as was the case with the Sheremetjevo-3 project. Nevertheless, we are sure that investments in transport infrastructure are always long-term ones and they are bound to contribute to our country’s economic development.
CORR: And now my last question. It’s quite clear that Vnesheconombank’s reserves and capabilities are not boundless. How is the transport investment program going to change next year and what sort of program is it going to be?
Anatoly BALLO: By the way, we’ve got a wide range of instruments. In particular, the state trust management company’s investment declaration is being expanded nowadays. Specifically, we’ll be able to invest funds in bonds issued by foreign financial institutions. Thus, we might be able raise funds from the European Bank for Reconstruction and Development. The bank is ready to invest funds in the Russian economy but unfortunately it does not have long-term ruble-denominated liabilities. This government’s decision allows us on the one hand to expand and diversify the base of strategic investors and on the other, the so-called infrastructure bonds are in great fashion at the moment. Unfortunately, a legal network is only being established. But we are confident that a mechanism of infrastructure bonds would make it possible to classically finance important infrastructure development projects.
Vnesheconombank First Deputy Chairman Anatoly Tikhonov’s Interview to the Magazine Expert
November 2, 2009
Author: MARINA TALSKAYA
Photo: Petr Antonov / Agency.photographer.ru
Vnesheconombank is establishing its own engineering company to be responsible for comprehensively assessing construction progress of facilities financed by the Bank
In order to construct a facility, the more so, significant for the economy, whether it be a hydropower station, a pulp and paper mill or an Olympic complex, it’s not enough to simply commit a lot of money and hire highly skilled builders. The more multilayer a project, especially if it provides for building not only industrial facilities but also related infrastructure, the more complex organizational and production links between customers and those responsible for implementing a project. And the more difficult it is for a bank responsible for financing to assess how efficiently funds made available by it are spent: whether construction periods are optimal, whether the most advanced technologies are used and the more so whether products to be manufactured by a facility under construction will find their market outlets.
A bank is not competent enough to make this sort of assessments. Engineering companies are designed to make the said assessments all over the world. As a rule, banks get them to comprehensively assess projects being financed by them. Vnesheconombank decided to do it differently by establishing its own engineering company. Vnesheconombank First Deputy Chairman Anatoly Tikhonov is telling us about the way they see this new company and about objectives it is supposed to achieve.
-Anatoly Vladimirovich, how did the idea of setting up Vnesheconombank’s own engineering company emerge?
-Our Bank for Development has a very large loan portfolio. Almost all projects financed by the Bank are very significant for our economy: microelectronics, deep timber processing and infrastructure. As a case in point I can cite the construction of a timber processing complex in the Krasnoyarsk territory and a new integrated ammonia manufacturing complex under construction in Tatarstan.
Moreover, on the Government’s instructions our Bank acts as a main creditor of Olympic facilities: traditionally, development banks participate in financing such projects. Since Vnesheconombank is responsible for financing Olympic facilities, the Government instructed it to act not only as a main creditor of Olympic facilities but also be responsible for monitoring the physical scope of work. This function used to be performed by Promstroibank of the USSR. This was not an idle decision. In fact, there is an Olympic calendar and there are certain dates. And we must be confident that for our money a project will be built qualitatively and in due time.
Having received such instruction from the Government, we analyzed how this sort of activity could be undertaken. As a matter of fact, I’d like to mention that it is widespread world practice that banks participate in managing project risks, monitoring and supervision while organizing project financing. In fact, we are dealing here with project due diligence, with projects’ technical, budgetary and construction audit that is, with procedures enabling us to get an objective picture of a facility to be financed including investment risks. In general, we exercise this sort of control too by engaging companies on the market through outsourcing.
But Russian companies’ business experience is not sufficient. And there are objective reasons for it: there was no demand for such services. For example, pulp-and-paper mills designed for deep timber processing have not been built in our country for about 30 years. The largest paper machine manufacturers in Izhevsk and Petrozavodsk stopped producing them long ago – there were no orders. There are many such examples in other sectors too. And upon building any large-scale facilities, for example, such as the Boguchan Hydropower Station and Transneft’s pipeline, Russia’s famous companies usually hire foreign engineers for conducting comprehensive expert’s examinations.
And we tried to decide if we should hire somebody to this end. And then we arrived at a conclusion that we as the Bank for Development should establish our own company. By doing so, we can fulfill another task: if we are establishing such a company, a level of responsibility is rising. We can hold our subsidiary company responsible in a stricter way not only on a civil contract basis as we do with regard to outside companies, on which we can impose penalties for violations in construction within their fee earnings.
-You might as well dismiss your employees. But nevertheless it’s not quite evident that setting up a subsidiary company is an unconditional plus.
-There are only two options – we can either hire specialists or set up our own company. And we should establish our own company with a foreign partner’s participation; I’d like to say it once more that we don’t have this sort of expertise in our country. And in our opinion there are no institutions capable of establishing such a company with the exception of the Bank for Development. But we are not sure that we would need this company during our life-time. We do not rule out that once we have established such a company and incorporated training programs in it and gained required experience we might sell it in five years. In any case, we have discussed this option.
-Is this engineering company conceived as a universal one or are you going to establish it to implement certain specific projects? Or is it going to be an evaluation company?
-No, it’s not a matter of setting up an evaluation company; we are going to set up an engineering company. The main functions of such a company under the Bank are to exercise control over the quality of R&D and construction work financed by the Bank as well as to manage project risks (including control over the use of the committed funds, over their targeted use), exercise control over the compliance with project solutions and dates.
Your question concerning sectoral specialization is quite relevant. Almost all basic sectors are represented in our loan portfolio. And of course, one of criteria for selecting our foreign partner is its potentially wider competence. Another criterion is its experience in participating in Olympic projects. I wouldn’t like to name our potential partners now. The tender is still under way.
-More often a different approach is used. Having identified a project to implement, major companies tend to search for a highly specialized engineering leader.
-That’s a different matter. You mean a construction organizer. And we are after establishing an engineering company that would enable us to conduct a technical and financial audit of projects. We don’t have any problems with a financial audit but it is not the case with a technical audit. Money is spent but for what purposes? What does this money produce?
-Could you tell us about technical aspects of setting up this company? It’s clear that you can’t name your potential partner until the tender is completed. When is the company supposed to be formed? What sort of role is Vnesheconombank going to play in establishing this company? Is it going to form the company’s charter capital?
-As far as our potential partner is concerned, I can add that most companies participating in the tender are global ones and they are operating in many countries. Vnesheconombank is expected to have a majority stake in this project. As to the Bank’s financial expenses, it would only make a contribution to the company’s charter capital. This is not going to be big money because the company would start generating profits right away by forming its backlog of orders. We expect this company to service not only Vnesheconombank’s projects but it is also sure to participate in other projects on market-oriented terms: it would compete against foreign companies on our market and offer its services as a construction organizer.
-How are you going to address personnel matters, given the absence of specialists in this field?
-In fact, the most important thing is to train personnel. Our people are intelligent. But engineering is about technologies. Maybe these technologies are pretty simple. But unfortunately, we have lost our Russian engineering school. And the recent technological accidents have been caused by engineering mistakes alone. You can manage a project only if you are well-versed in technical aspects of it. We saw the products that could be used for managing a project. Generally speaking, we can buy them. But it’s important to rebuild our own engineering school and to train our engineers to work using modern technologies and models.
-It will take a lot of time to achieve this objective and deadlines in particular for Olympic facilities are strict. Will you be able to make it on time?
-We’ll have to, we’ll try to do our best. In fact, during the first year we’ll have engineering teams operating in specific sectors. At the initial stage, the teams will be headed by foreigners. But there will be our specialists in them and they will train on the job. We are well aware that at the initial stage most employees will be foreigners. But we’ll launch a training program for Russian specialists immediately with practical training.
-To what extent is an emerging servicing company going to increase the cost of credit for the borrower?
-To no extent. At the moment, borrowers pay for similar services. Upon financing any bank imposes a condition under which a company responsible for conducting a comprehensive audit is to be hired.
-But you don’t tend to trust outside auditors, do you?
-We have very peculiar and high-tech projects. We receive a project with a conclusion from Glavgosexpertiza. What does this conclusion tell us about? It states that the institution looked through the project and confirms that a certain industrial building will be built and that its roof won’t collapse and water will be supplied and that a machine tool installed there won’t disappear. This sort of expert’s examination is of course necessary. But we would like to know what products this machine tool will manufacture and whether an appropriate technology has been chosen and whether proposed equipment is relevant. We should have a document confirming the soundness of our decision.
-And in this case you’ll be in a position not only to finance but also to build.
-Exactly. Therefore our logic is ‘trust, but verify’.
-But this logic will result in emerging a sort of State Planning Committee (Gosplan). And this would complicate the procedure.
-Many have been wanting for a long time to set up an institution similar to the former State Planning Committee (Gosplan). To be honest, I see nothing bad in planning. The Soviet planning system was not that bad especially in terms of distribution of production facilities. For example, let’s assume that two applicants for the construction of a cement plant from neighboring regions are turning to us. In which of the two regions should this plant be built? There is no doubt that cement is always in demand. But two cement plants in the immediate neighborhood would be too many. How should we find out which of the two applicants offers more advanced and efficient technologies and more optimal terms of construction? Whose technologies are better? These are the matters of planning, designing and engineering.
This is also a matter of exercising adequate control over spending funds. Nowadays, many construction companies are behind schedules represented in their business plans. Of course, the crisis changed the situation. But we should be fully aware of what caused the backlog of work: was it caused by objective reasons or by wrong managerial decisions. This is one more argument for the logic ‘trust but verify’. For example, in some cases our large companies had to hire construction organizers in the process of construction and sometimes they ended up changing already approved projects.
-Our objective is not to complicate the procedure. Generally speaking, but for our fear of overbureacratizing and complicating something, we should conduct a comprehensive audit of projects. But it will take a lot of time. Ant this means that we should assume functions non-inherent for us.
-Once a new engineering company you can trust comes into being, the Bank should reasonably feel more confident. Is the amount of financing going to increase?
-At the moment we have a very busy schedule. We have a lot of projects under consideration. We have a lot of tasks that we are already fulfilling. It would be irresponsible to say that we’ll have even more tasks. The establishment of a new engineering company would enable us to better understand what we are financing. But no more than that.