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.