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!