The interview was conducted by Elena Kiseleva. The intrigue around Globex Bank and Svyaz-Bank, being reorganized by Vnesheconombank (VEB), is still under way. Their future was expected to be ultimately determined by VEB’s Supervisory Board by early September. But at that time, the concept for the development of VEB’s subsidiary banks had to be finalized. VEB Chairman VLADIMIR DMITRIEV told Kommersant about the latest decisions taken by the Bank’s Supervisory Board and about the projects to be submitted for consideration by it in the near future.

-Would you clarify the situation with Globex and Svyaz-Bank? The latest meeting of the Supervisory Board produced several options of their future development.

-Nothing dramatic happened at the latest meeting of our Supervisory Board. We assessed the current situation with regard to each of banks which are historically incorporated in VEB’s Group (we have four such banks) as well as with regard to two banks under our reorganization, namely, Globex and Svyaz-Bank. Up until now, there have been several options for these two banks’ development but we intend to retain these banks within VEB in the coming five years. It’s too early to let them set out on a free long voyage. And their customers will feel more comfortable if they sail in the wake of a flagship. But we are well aware that sooner or later we’ll have to return the Central bank’s deposits of more than 212 billion rubles made available to us to reorganize Globex and Svyaz-Bank. We can’t afford to roll over deposits endlessly and spend 13 billion rubles per year to service them, that is, about 20% of all VEB’s interest expenses. So, in the future, we’ll have either to sell them to strategic investors or get them to conduct IPO. Of course, if we don’t make a different decision. Incomes generated by VEB and these two banks from current operations are not sufficient to return the said deposits.

-Is an issue of merging these banks no longer topical?

-We considered this option but decided that it had no prospects of success. We believe that Svyaz-Bank and Globex should develop on their own but under VEB’s stringent control. In order to exercise control over our subsidiary banks we intend to establish a specialized institution. I hope that this idea would be backed by our Supervisory Board. We are planning to submit the concept for our subsidiary banks’ development for consideration by our Supervisory Board within a month.

- You mean a company the establishment of which was approved at the latest meeting of VEB’s Supervisory Board?

-No, I don’t. These are quite different issues. I meant the establishment of a subdivision within VEB. As far as the new company is concerned, it will specialize in engineering. In structuring investment projects we have to address a whole number of complex technological problems ranging from expert’s examination of project documentation, technological and financial monitoring of facilities construction to management of existing multi-sectoral projects. And after all, we have to exercise control over the targeted use of funds. We have also to see to it that expense budgets are not overrated and that technologies are followed. In the past, design project institutes were responsible for this and now this expertise was lost in many sectors.

-Have you already identified an international partner in this company? On what terms are you going to involve such a partner?

-We would like to have a majority stake. Frankly speaking, we have some preferences, but I don’t want to name specific companies to avoid unnecessary commotion. There aren’t many companies with established international reputation; you can count them on fingers of one hand. We are going to analyze their business experience including their activity on the Russian market in order to see to what extent a company is multi-sectoral or if it is specializing in operating in such sectors as power engineering, timber-industrial complex, infrastructure…

-Are you planning to get this company to examine collaterals transferred to you by borrowers?

-This is not the case unless collateral has passed into VEB’s ownership. Maybe, in the future this company will be involved in managing our assets which are to be further developed.

- Do you have borrowers that could lose their assets in the near future?

-The amount of bad credits in VEB remains almost unchanged. Just four-five companies fall behind the schedule of servicing their debts. For the most part, these are small companies we inherited from VEB of the USSR. The projects we accepted for financing in the capacity of the Bank for Development are progressing well. Of course, the crisis brought about some changes and we are adjusting debt servicing patterns with regard to some projects. For example, current assets lending is not our core activity. But now it is sometimes difficult to find inexpensive money on the market in line with our new financing model. Cash gaps emerge among borrowers and they force us into reconsidering debt servicing schedules. We have to take these measures but they are relevant for the current situation in our country’s economy.

-One of the terms on which VEB extended credits intended for refinancing foreign debts was the inclusion of the Bank’s representative in the borrower’s board of directors. Is this an effective measure?

-To my mind, it’s quite effective.

-Even in case with the Mining and Smelting Operator Norilsk Nickel? Is it true that VEB insists that its second representative should be included in Norilsk Nickel’s board of directors reasoning that Alexandr Voloshinin in his capacity of an independent director is not accountable to the Bank?

-What do you mean by saying that he is not accountable to the Bank? Alexandr Voloshin is not our employee but he is a state official and VEB is a state-run bank. By nominating him as a candidate for Nornickel’s board of directors we assumed that he defended the interests of the state rather than the Bank. By voting for including various candidates in Nornickel board of directors we take a position agreed upon with the government.

-Why then do you insist that the second VEB’s representative be included in Nornickel’s board of directors?

-We do not insist on the second representative. I believe that shareholders and creditor banks are in a position to run the board of directors properly.

-By way of appointing the Bank’s employees as the company’s managers, specifically to a post of financial director or head of legal department with a right of veto on key issues?

-Now that the Bank has a blocking minority stake of Nornickel as pledged collateral, I think that the Bank should have some sort of operational control over the company’s operation. But the Bank employs bankers rather than risk-managers and professional metal-makers. And we believe that the Bank’s representatives in the borrowers’ management bodies should not necessarily be our employees. Rather, they should include experts well-versed in a core business. Of course, we can post inspectors with Mausers, but business will only suffer from it.

-Did the government favor VEB’s initiatives?

-This issue is under discussion now.

-Is Rusal that pledged Nornickel’s blocking minority stake with VEB servicing the credit?

-Interest payments are made in due time. We are in talks over rolling over the credit.

-Is it true that one of the conditions for rolling over the credit to Rusal is that the group must agree upon all transactions in excess of 10 million dollars with VEB?

-No comment.

-An issue of rolling over the credit to Rusal was expected to be submitted for consideration by VEB’s Supervisory Board prior to September 1. Why didn’t this happen?

-As I’ve already said this issue is under consideration by the Russian Government Office. We have enough time for its final endorsement.

-Do all borrowers that were provided with the state’s financial support under the government crisis management measures have a chance to have their credits rolled over?

-Our Supervisory Board has already made a decision that the borrowers that are not in a position to repay their debts to VEB this year can have their credits rolled over for a period of one year at a rate that is in line with the borrower’s market risk assessment. We are in talks with most borrowers over rolling their credits over.

-Is Alfa-Group that obtained 2 billion dollars from VEB by pledging 44% of Vympelkom’s shares among these borrowers?

-Yes, it is. Eko Telecom that acted as the borrower has repaid the first part of the principal debt worth 500 million dollars and it makes interest payments in due time.

-Is it true that PIK Group has problem servicing its debt?

-We came up against problems of technical nature as PIK didn’t have current assets to service its debt. We are in talks with PIK now and we stand a chance to resolve the problem amicably.

-Has VEB completed the state program of extending subordinated loans?

-As of September 2, VEB’s Supervisory Board approved subordinated loans worth 391.8 billion rubles. Taking into account that the limit to this end was legally set at 410 billion rubles we can extend such loans for an amount of 18.2 billion rubles. And the total amount of applications under our consideration is 69.54 billion rubles and the total amount of preliminary requests is 50.75 billion rubles. Thus, the deficit of funds under this program is in excess of 102 billion rubles.

-Another anti-crisis measure was the purchase of shares by VEB on the stock market. In your interview to Kommersant in April you said that you had refused to support the market since the beginning of the year. But VEB’s financial statements show that the Bank conducted transactions with securities in spring and summer. What was the purpose of it?

-We are not prohibited from fixing incomes and entering the stock market again. To this end, we used funds of the National Wealth Fund and our own funds too. As of September 1, the amount funds of the National Wealth Fund placed on the securities market was 161.6 billion rubles (as of August 1 – 168.5). The reduction in the amount of placed funds was caused not only by the purchase of securities but also by their repayment and presentation of securities by offer. It’s important for us to make funds entrusted to us by the state generate not only a fixed income of 7% per annum but also an additional income.

-Aren’t you afraid that an attempt to sell a major stake on the stock exchange would cause the collapse of issuer quotations?

-Being one of the largest minority shareholders of Sberbank, LUKOIL, VTB, we are not going to take any actions that could negatively affect these companies’ positions on the stock market. This is our main ideology. But at the same time we can’t help taking into account emerging market conditions and a chance of generating additional incomes.

-They have been hinting in the Finance Ministry that from September VEB might change its strategy of investing financial resources of the National Wealth Fund…

-The Finance Ministry is interested in upgrading the system and forming a median yield curve which would be used, as agreed upon with us, as a basis for determining an additional income from investing financial resources of the National Wealth Fund.

-VEB has been criticized for generating rather low profits in the first year-half, given that it purchased securities of some issuers at the peak of their fall…

-You’ve said low profits? Our portfolio’s current profitability (and the Finance Ministry agrees with this indicator) was about 60% as of the end of August. Someone calculated our profitability in the wrong way: they simply subtracted the amount of our investments as of the beginning of the year from the amount of investments as of May. But this data does not show the securities’ performance during this period and the amount of income we generated.

-As we can see in the Bank’s performance report for the year 2008, VEB preferred to invest its own funds in bonds rather than shares…

-After all, bonds generate sustainable yields as opposed to shares that are vulnerable to considerable market fluctuations. But it’s a different matter when we conduct transactions with financial resources of the National Wealth Fund: we were tasked with supporting the market of Russian issuers. In forming our own portfolio we take independent decisions on the principle that generating profits is not the state corporation’s primary objective.

- On August 2, the new rules of investing pension savings funds came into force. The new rules make it possible to invest pension funds in corporate bonds and deposits. Do you prefer bonds or deposits?

-The system is to start operating on November 1. We are guided by the principle that pension savings funds should be invested in high-grade reliable financial instruments, namely, bonds of reliable issuers with high reliability ratings and, best of all, secured by state guarantees. We are interested in purchasing bonds of Transneft, RZHD and of design project companies implementing infrastructure projects supported by the state. These long-term instruments are reliable and profitable; they generate yields higher than inflation.

-The government considers pension savings funds as a major resource for supporting the Russian economy?

-There is no doubt about it because long money is still in short supply in the economy and we have to implement serious long-term projects. Pension funds are a significant source of long money but, of course, are not the only one. We are active in cooperating with international financial institutions in financing major infrastructure projects. By the way, under the new expanded declaration we are authorized to invest in these institutions’ bonds. So, if the EBRD and IFC decide to issue ruble-denominated bonds in Russia, we are ready to explore the possibilities of investing financial resources of the Russian Pension Fund in them.

-Are you less interested in bank deposits?

Our portfolio should be diversified. And we plan to keep the current unused funds to maintain required liquidity on deposits with reliable banks. We have our own risk assessment system to monitor banks on a constant basis. Moreover, the government ordered that if a bank fails to meet regulations we are required to early close deposit without any loss of interest rate, so, we are going to draw up agreements with them so as to have the right to early withdraw funds in certain cases.

-Are you going to work with VTB? At the end of August, the Federal Service for Financial Markets (the FSFM) removed VTB from the list of banks recommended for working with the National Pension Fund.

-We have always worked with VTB. I respect the FSFM’s opinion but VTB is a state, system-forming bank and we have never come up against any problems working with it. This issue is going to become topical for us only from November 1.

-In May, the FSFM registered five issues of VEB’s currency-denominated bonds for a total amount of 10 billon dollars but so far, the Bank has placed only one issue worth 2 billion dollars. Are you planning to go ahead with the program of borrowings?

-In this case, we are talking about the domestic currency-denominated loan. The banking market appears to be more interested in more profitable instruments. But we are continuously monitoring foreign markets. I do not rule out the possibility of meeting foreign investors. And now we have occasion to do it – the IMF forthcoming session. There will be a lot of bankers and investors there. You can do all preliminary work without placing bonds until the proper time comes and then you can do it quite easily. Many banks purchase our bonds in order to manage short-term dollar liquidity. Now we don’t need to raise funds on the market because all our passive operations are determined by the amount of active operations. And this is related to investment projects, and they are our high priority.

-Why didn’t you discuss the project aimed at building a super shipyard in Primorsk at the latest meeting of your Supervisory Board?

-We were ready to discuss it but we had a number of questions to the project’s initiator, the Vyborg shipbuilding plant (controlled by Bank of Russia institutions – Kommersant) and so, we made a pause. This is a very important, emblematic project. It aims to build a major shipbuilding complex capable of manufacturing two-three heavy-tonnage vessels per year with a deadweight of 100-300 thousand tons. Such mega shipyards haven’t been built in Russia since the Soviet times. Perhaps, we’ll discuss the project at the next meeting of our Supervisory Board.

-The total value of the project is known to be 38.5 billion rubles. How much money is VEB prepared to provide?

-About 22 billion rubles.

-What other projects are at a final stage of endorsement?

-In the near future, we are going to sign a credit agreement under which VEB is to provide 5.8 billion rubles for building a production facility to manufacture diesel engines YUM3-530 at the Yaroslavl plant – Avtodiesel (it is incorporated in Oleg Deripaska’s GAZ Group, 30 % of Avtodiesel’s shares are owned by Rostechnologies State Corporation – Kommersant). The total financing amount is 9.4 billion rubles. This is a breakthrough project that will make it possible to bring diesel engine production in Russia to a new level of quality. They plan to manufacture world-class diesel engines. Moreover, the project provides for upgrading these engines.

-At our next meeting we are planning to discuss the project to build coal complex Inaglinsky in 2009-2011 in South Yakutia. The project is aimed at building a mine with a capacity of 2.75 million tons of coal per year and a concentration plant with an annual capacity of 2.1 million tons of high-grade coke concentrate. The project’s total value is 9.2 billion rubles out of which we’ll provide 6.4 billion rubles. The project will create up to a thousand jobs and this is of particular importance for the region. Another main line of our activity involves the construction of Olympic facilities. As of September 1, a decision was made on VEB’s participation in financing six projects with a budgeted value of more than 106 billion rubles (VEB is to provide 45.5 billion rubles). All financial resources provided by VEB are long-term ones.  Four projects in the total amount of 95.5 billion rubles are to be financed against Olympstroy’s guarantees.

-What’s the amount of credits extended by VEB for the construction of Olympic facilities?

-About 8 billion rubles. Four projects with a budgeted value of about 69 billion rubles are already being financed, we provide about a half of these funds. Besides Olympic facilities, we participate in building city infrastructure.

-Recently the General Prosecutor’s Office has started to inspect state corporations’ activities on the President’s instructions. Aren’t inspectors interfering in your work?

-We are not disturbed by them at all. The more so, we intend to do our best to help them carry out their inspection properly. The Russian public should know that state corporations use funds in a targeted way and that we receive market-relevant salaries. By the way, our top management’s salaries are below mid-market level. The Bank’s Management Board argued against bonuses. To be more exact, it didn’t submit an issue of awarding bonuses for consideration by the Supervisory Board.

-How do you feel about the idea of abolishing state corporations?

-I believe that our legal status is in line with the state’s interests. If our status was different, we wouldn’t be able to implement crisis-management measures adopted by the government. By the way, we didn’t invent the wheel - there are state corporations in other countries too. Some days ago I read that they completed a prosecutor’s inspection of the industrial exports support state-run corporation in Canada. Under this country’s law, state corporations are to be inspected not oftener than once in ten years. They feel at ease with this sort of organizational legal entities.