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.
There is no Unified System of Supporting and Promoting Exports in Russia at the Moment
Magazine “Energia Promyshlennogo Rosta”
Upon entering foreign markets Russian industrial companies find themselves in an unequal playground compared with their competitors from Western countries – Western companies are backed by a unified export promotion system but our companies do not have such a system. Management Board Member – Vnesheconombank Deputy Chairman Petr Fradkov is talking about how to change the current situation.
Petr Fradkov: In the modern world support for national exporters turned into an integral part of all industrialized countries’ economic policies. Above all, this happens due to this function’s importance in terms of boosting a country’s competitiveness on the world’s markets, managing its balance of payments, creating new jobs, expanding output volumes and tax collection. Moreover in the times of crisis increased exports make it possible to prevent aggregate demand from falling with no risk of fueling domestic inflation. As an example, I’d like to refer to activities undertaken by the China State Development Bank and the China Export-Import Bank in the Russian Far East. By offering inexpensive credit resources to Russian companies, among other things, for purchasing Chinese products, these banks are actively encouraging foreign trade expansion of Chinese industries. And they are a lot more competitive as far as terms and interest rates are concerned than European and American banks.
Another example is Germany, where money is not as inexpensive as in China. Nevertheless, when the crisis started Germans who are heavily dependent on industrial exports started to search for new opportunities to promote industrial exports. Specifically, in the recent months an idea of establishing a joint guarantee fund together with Vnesheconombank has been discussed extensively and this project was backed at the highest political level both in Russia and Germany. In case of its successful implementation, this project would allow German companies to significantly reduce risks associated with the crisis instability and keep their supplies of products to Russia at a previous high level.
Have we got anything similar?
P. F. There is no unified system of supporting and promoting exports in Russia at the moment. There are separate institutions responsible for encouraging exports with various operational capabilities. For example, Minpromtorg is responsible for partially subsidizing interest rates. We are performing our banking work. The Ministry of Economic Development is working out proposals for institutional development and regulation of exports support. The Finance Ministry and Roseximbank are responsible for running the mechanism of state guarantees etc. From my point of view the efficiency of all these activities is rather low as a whole. For example, out of 2 billion dollars reserved in the budget for state guarantees to support exports only 10 percent is actually used at most.
What’s the reason for it?
P. F.: In the first place this happens because the procedure is extremely complicated, with each transaction being considered individually. At the moment, there is no unified common mechanism for processing companies’ requests for obtaining state support for their export contracts. Foreign experience shows that the so-called export agencies are in place almost in all countries. As an example I’d like to refer to “the big three”: Hermes in Germany, COFACE in France, SACE in Italy. They are better known today than the others. What are their lines of activity? These agencies are responsible for insuring export contracts against commercial and political risks thus an exporter company does not run the borrower risk and the borrow country risk (for example Angola or Algiers). This risk is assumed by a state and as a result it’s a lot easier for an exporter company to find financing and it is a lot cheaper. At the same time, the procedure for providing insurance coverage of export transactions does not differ much from the procedure for purchasing any other insurance policies, that is, the process is fast and well adjusted. It’s not a matter of charity: in any case you have to pay for an insurance policy (commission fee) and if the situation develops unfavorably with regard to a specific contract (occurrence of insurance event), an agency has always enough funds to compensate for the exporter’s losses. A distinguishing feature of all these agencies is that they are all state-run or quasi-state institutions and all their obligations are guaranteed by the budget. These agencies wouldn’t be able to operate without these state guarantees because none of private companies are capable of assuming such large-scale risks. For example, a risk under a contract with a specific African country for a period of 15 years.
There isn’t such an insurance agency in Russia. What are we supposed to do?
P. F.: We need to establish a new institution that will specialize in insuring export credits. VEB has prepared relevant proposals including those for participating in a new insurance agency’s capital and sent them to all interested departments and the government. Now consensus building is under way. By our optimistic estimate, the agency should be set up as early as next year. In any case, this date is mentioned in the Prime Minister’s instruction.
Do you understand what this agency should and should not do?
P. F.: An export agency’s main operating principle, as our experience in cooperating with similar institutions shows, is to offset country and commercial risks faced by exporter companies in foreign markets with all the state’s financial might. None and even large private insurance companies can do it. So, the export agency’s obligations should be guaranteed by the state and the government and this should be set forth in a clear-cut way in a law on establishing such an agency and in its charter. Only in this case it will be able to become a full-fledged partner for banks and similar institutions abroad. Foreign counterparties should be fully confident that this agency is backed by the state and that its operation is managed and supervised by the government and so if any problems arise this institution can rely on the state’s support. In practice this means that such an export insurance agency has a sovereign rating and therefore companies that have its insurance policies can take out loans at lower interest rates and it also means that insurance policies issued by it are recognized and accepted in foreign countries. Germany’s insurance agency Hermes has a rating of AAA, that is, the same rating as Germany and so German companies do not have problems looking for financing for fulfilling export orders. Russian companies are facing a much more complicated situation because they are not protected by insurance policies and they have to take out loans burdened with payments for country and commercial risks and this, without any doubt, reduces their competitiveness. If such an export agency were operating today the problem would be at least less acute, the fact is that today Russia has a rating of BBB. Few Russian industrial exporters, especially small and medium-sized ones, can boast a similar rating and under this ‘umbrella’ it would be a lot easier for them to operate. The second important problem that we have to address so that exports support should not be limited to words alone is a lack of long financial resources. Today, we don’t have funds in Russia to extend long-term credits to exporters. In order to finance export transactions VEB has to raise funds on capital markets at commercial interest rates and unfortunately, as a result in a number of cases interest rates on credits offered by Vnesheconombank to domestic exporters and foreign purchasers of Russian products prove to be unacceptable for them. How should we address this problem? Unfortunately, there is no simple answer to this question. In some countries they make provisions for budgetary funding of export-import banks, in other countries they opted for establishing insurance agencies. We can get a clearer idea of how we should cope with this problem after we establish our own export agency and have a chance to assess its performance in creating an equal playground.
You said that a new export insurance agency would be set up as early as next year. What do you think the next step should be?
P. F.: As far as a system we have to create is concerned there is no need to invent the wheel again. Similar systems are already in place in the world and we shouldn’t search for any special path. If we have a look at the export support systems operating in various countries, we can divide them into three categories: the first category includes countries where work on supporting exports is performed through insurance agencies (the EU). The second category includes countries where a key role is played by export-import banks (the US, Brazil). And the third category includes mixed systems (China, Japan). To my mind, it is a mixed system that should be created in Russia. This system does not only make it possible to equalize terms of access to credit resources but also provides for partial financing through the use of the state’s funds for implementing an industrial strategy.
Vnesheconombank Fist Deputy Chairman Anatoly Tikhonov’s Interview to the Information Channel Vesti
TV Channel Vesti-24
HOST: Issues of saving government funds have hit the headlines of the leading economic publications lately. We’ll discuss today how to spend government funds wisely including those intended for the Olympic Games in Sochi with our guest. Our guest today is Vnesheconombank First Deputy Chairman Anatoly Tikhonov. Good afternoon, Anatoly Vladimirovich!
Anatoly TIKHONOV, Vnesheconombank First Deputy Chairman: Good afternoon!
HOST: Just at the beginning of September Prime Minister Vladimir Putin proposed to set up a specialized institution responsible for supervising the construction of facilities financed by Vnesheconombank. Would you tell us what sort of institution it is?
Anatoly TIKHONOV: You are right. On September 2, Vnesheconombank’s Supervisory Board approved the Management Board’s proposal to create a specialized engineering company with the participation of a leading foreign company. What was the reason for it? The fact is that Vnesheconombank is a state-run development institution and projects implemented by Vnesheconombank are financed by public money and we should be well aware what is being created with this money in all these projects. For example, we have been charged by the government with implementing a number of Olympic facilities construction projects. What are the Olympic Games for us? They are not only an investment project for us. They are projects that are closely associated with the dates when Olympic facilities are to be commissioned. We are cooperating with Olympstroy and we are well aware that there are certain dates set by the Olympic Committee and Olympic facilities are to be commissioned on these dates. But in order to understand what our money is spent on, that is, what sort of project solutions were adopted, how the investor economizes on funds under the today’s market conditions, we need a relevant expertise. And having examined what’s going on in the market today, we made a decision to establish our own independent company, our subsidiary company. And we are inviting one of the leading foreign partners to this company. Moreover, we are developing engineering expertise, that is, by accomplishing our internal objective we are working out training programs, we are introducing high technologies to exercise control over Olympic construction projects. And this will allow us to see what’s going on our construction sites more professionally and most importantly bring new technologies to Russia.
HOST: Do you already know who is going to be your foreign partner?
Anatoly TIKHONOV: On the instructions of our Supervisory Board we have worked out a procedure to be used for selecting such companies. We have sent invitations to participate in a new joint company to those partners who in our opinion are relevant to objectives we have to address. And we hope that within a month or a month and a half we’ll perform such an analysis and hold detailed negotiations with companies and as I’ve already said we are sure to find out what expertise, technologies and programs they prepared to share with us.
HOST: When do you intend to launch this subsidiary company?
Anatoly TIKHONOV: We plan that this company will start operating as an instrument in December. We are pressed for time. We have to act.
HOST: What projects are you financing under the Olympic construction program? What criteria do you use to select projects and facilities which you are ready to finance?
Anatoly TIKHONOV: In the first place, Vnesheconombank in its capacity of a development institution finances infrastructure projects and such projects are included in the Olympic program. These are the Sochi International Airport, Port Sochi Imeretinsky, and the Sochi Thermal Power Plant Expanding Reconstruction. There are also a number of projects that are Olympic facilities as such. Here I mean the Gornaya Karusel project, the Rosa Khutor project where Olympic facilities will be located including, of course, the Olympic Village. That is, all the projects that are directly linked to the Olympic Games. We believe that these projects are fully in line with our memorandum because the Olympic Games are not just a major sports festival; they are, above all, a major investment project aimed at creating a world class resort in the Russian Federation.
HOST: There are opponents and proponents of the Sochi Olympic Games. Opponents say that Olympic expenses are huge funds that would be put down the drain and that they would not produce any multiplier effect for the economy. How do you feel about this sort of opinions?
Anatoly TIKHONOV: First, everything we are doing to make preparations for the Olympic Games is being created for us, for our entire country, for our people. Having built Olympic facilities we might not be able to utilize 100 percent of them for holding international competitions after the Olympic Games in the future. But this is a sports infrastructure to be used by people. Is that right? Here I mean children’s sports and mass sports. And we should not forget that Sochi’s unique feature is that it is an all-year-round resort and this unique feature was taken into account by the Olympic Committee. So, it’s quite evident for me that it’s going to be a world-class resort with its entire infrastructure which will be accessible to us, our citizens.
HOST: For many years ahead.
Anatoly TIKHONOV: Yes, of course.
HOST: Anatoly Vladimirovich, how realistic is the Olympic budget? We know that now the state’s expenses are being reduced where it is possible, won’t it prevent you from performing all work in due time?
Anatoly TIKHONOV: It’s good after all that expenses are going down and actually prices for many materials are going down. And our government requires construction companies to reduce costs and this is also going to be a function of our new engineering company. It’s absolutely normal that under the conditions of competition expenses have to go down. This doesn’t mean that the number of facilities is falling. There are facilities that were approved by the Olympic Committee that are to be commissioned on certain dates and these facilities are being built. Maybe, some investors who wanted to implement projects related to the Olympic Games but not directly related to the Olympic infrastructure would cut their expenses or would not do excessive things. But it’s a matter of taste, a matter of business itself. As far as the Olympic Games and Olympic facilities are concerned, everything is being done in a thoughtful way.
HOST: Is the budget realistic as of today?
Anatoly TIKHONOV: The budget is realistic. Of course, we have to search for new state-of-the art engineering solutions and in principal we are doing it. In implementing our projects today, we have to change certain solutions but it’s a positive factor, given that such changes enable us to save funds. The main thing is not to affect quality negatively.
HOST: You are right. How much can you save in the situation of the crisis due to lower prices for construction materials, construction work, can you give us any specific figures with regard to potential or actual funds saving?
Anatoly TIKHONOV: I can’t say for everybody, but the analysis performed by our specialists on the basis of the analysis made available by the Russian Ministry of Economic Development finds that we might reduce costs by 15-20 percent with regard to a number of projects and this is already happening today. And I think that such industrial sectors involved in the Olympic construction as the construction and the metal making industries are also well aware that having such a big guaranteed order they need to adopt an economical attitude to their supplies to Olympic construction projects.
HOST: Anatoly Vladimirovich, thank you for your interesting interview, I wish you all the best in your work and thank you for finding time to come to our studio.
Anatoly TIKHONOV: Thank you.
HOST: I’d like to remind you that our guest today was Anatoly Tikhonov, Vnesheconombank First Deputy Chairman.