The government made State Corporation Vnesheconombank a key instrument of its crisis management policy. The funds for refinancing credits to foreign companies were made available to Russian companies through Vnesheconombank; troubled banks were put on its balance sheet in order to rescue them and it became responsible for financing Olympic facilities. VEB Deputy Chairman Anatoly Ballo was in the thick of these events.
Anatoly Ballo who is responsible for the State Corporation's core activity - investments and support for top-priority economic sectors, became responsible for anti-crisis support for the real economy when the crisis started. His investment subdivision looked through all 142 applications submitted by banks and companies for refinancing their foreign debts worth 82 billion US dollars and it prepared credits for the ten lucky ones. When you ask someone of VEB's employees about financing specific projects their usual answer is: "Ask Ballo".
The Supervisory Board is headed by the Prime Minister.
Anatoly Ballo refused categorically to meet in a restaurant. "I am not particular about food and the more so I'm too pressed for time to go to restaurants", he says. He suggested that we should have a crisis-time lunch in a simple and quick way. I had to take crisp bread rings and ring-shaped rolls to his office in Sakharov Avenue, 9, and Ballo offered chocolate candies and orange souffle.
The office of VEB's Deputy Chairman who is in charge of the State Corporation's core activity looked to me quite modest and I can say even small. "Why so ascetic?" - I couldn't help saying.- You sort of deal in billions and your office is so tiny". "It's enough for work", he answered drily.
"A Last Resort"
Ballo asks all those who apply to Vnesheconombank for credits one and the same question: "Have you applied to any other banks?" "I don't want Sberbank and VTB to say that we deprive them of projects", he explains. In Ballo's firm opinion, VEB should be a last resort in search of money.
"He has often to say "no" but he always does it in a very refined way", recollects Valery Bezverkhny - a member of the UABC's Board of Directors. Ballo is the State Corporation's key Deputy Chairman, explains a manager of a major company that receives credits from VEB. "If his subdivision says "yes", it's almost a 100% guarantee to receive a credit".
"Ballo and his employees always examine a subject in depth. I think they have the most thorough expert's examination among financial institutions in Russia and this of course makes you respect them", says Elena Matveeva - Group GAZ Management Board Deputy Chairman (VEB is considering the Group's application for financing one of its engine projects).
Airports "are our pride" says Ballo meaning airports in Kaliningrad, Yekaterinburg, Sheremetjevo-3 and the Bank's strategic participation in Pulkovo. "Pulkuvo is our particular pride", he stresses. "Then, foreign banks and international financial institutions said quite openly that if VEB didn't finance Pulkovo, they wouldn't finance it either". "VEB is a sort of marker. VEB's participation in a project guarantees the project's reliability", he says.
VEB often operates as a mechanism for hedging currency risks, explains Ballo: "Quite often projects fail to withstand currency risks. Paradoxically, but in a number of cases it's easier to incur long-term liabilities in foreign currency than in rubles. Nevertheless, the ruble model of projects proved to be more reliable than the currency one. Now VEB is addressing this problem with regard to first concession road projects. VEB extends currency credits to finance only those projects that generate foreign currency incomes.
VEB's problem, Ballo sighs, is that in economic sectors of key importance for the Bank there are now very few engineering companies: "Sometimes we happened to be in situations when we had to do this engineering work from scratch on our own". In this respect, he gives an example of establishing jointly with German Company MAN Ferrostaal AG an investment-engineering company that came into being in the course of financing the pulp-and-paper mill construction project in the Lower Angara Area.
Ballo is keen to talk at length about each project financed by the Bank, each seems to be the most important, the most loved to him: whether it be the construction of a research and production complex to manufacture semiconductor products, the development and batch production startup of SSJ 100 or the building of the rail branch line the Kuzbass - Far Eastern Transport Hub.
"And do you know how healthy turkey meat is?" asked Ballo suddenly. VEB finances LLC Evrodon in the Rostov region. The company is building an industrial turkey-breeding complex. It is to produce 30 000 tons of turkey meat per year and in the future - 60 000 tons. With the same enthusiasm as before and emotional vigor which is the least expected of a solid investment banker and passion Ballo got down to describing strong points of the project aimed at building a cement factory in the Leningrad region, an automobile cluster in the Kaluga region and a nitrogen fertilizers manufacturing complex in Tatarstan. According to him, this is the best proof that despite the crisis and the fact that the Bank had to scale down some projects because it became responsible for implementing crisis management measures of the government its main line of activity as a development institution didn't "dry up". In the last year the number of projects financed by VEB has increased by 1.5 times, about 70 billion rubles were committed to implement 21 new projects and a program and about 13 billion rubles were committed to finance projects launched earlier. In total, for a two-year period of VEB's operation as a development institution about 100 projects totaling 1 trillion rubles were approved.
Ballo's main merit is his system thinking, says Bezverkhny. "He has such a deep insight into a technological environment of various kinds of companies - from agriculture to space, that it is hard to believe".
But for the crisis, VEB might not have started to finance Olympic facilities. In any case, to such a great extent. At the moment, the State Corporation is considering 12 projects totaling 166 billion rubles. We made a decision to finance six of them. "We had to help private investors who were affected by the crisis, says Ballo. We are also co-financing projects on the terms of public-private partnership. We make no allowances for anybody. We are for a level playing ground for all". VEB extends credits guaranteed by Olympstroi, which will take possession of assets if a private investor stops fulfilling his obligations. "This is our safety net", explains Ballo.
In response to my request to give me specific figures illustrating the extent of the Bank's crisis management efforts and tell me about the impact the Bank's efforts to support the financial system had on its balance sheet, Ballo fumbled through his papers on the desk and found a paper with relevant data. It says that Vnesheconombank's total assets increased by more than three times during the crisis (from October 1, 2008 to July 1 of this year). A decision was made to commit 1.3 billion dollars for refinancing Russian companies' and banks' debts to foreign financial institutions (in total, companies drew down 10.5 billion dollars - Vedomosti), the Bank extended subordinated loans worth 276.3 billion rubles, 174.5 billion rubles were spent to support the stock market, the loan portfolio (investment projects and export contracts) - a bit less than 250 billion rubles, Ballo quotes with some relief.
"I Remember that Night Pretty Well"
I couldn't help asking Ballo about a credit extended to Oleg Deripaska for refinancing a loan to foreign banks in the amount of 4.5 billion dollars. I wonder how it was.
"I remember that night pretty well, recollects Ballo. There were so many people in the Bank as though it was not 12 o'clock at night but 12 o'clock in the afternoon. We were in a great hurry to close a transaction. Every minute mattered. We were aware that there was a threat of losing an asset that was in pledge". Ballo is glad that the government and VEB acted at a lightning speed: law Ўн 173 on measures for supporting the financial system was published on October 13 and as early as on October 30 first money was committed. "We had only two weeks to study the transaction and make a substantiated judgment. The process involved five levels of decision making - three - inside VEB and another two - with the participation of the inter-departmental commission and VEB's Supervisory Board. Such a high speed was unprecedented. We did a great job in VEB's style", he said. In Ballo's opinion such a great speed was possible due to the State Corporation's business experience: the refinancing mechanism was combined with the procedures for considering standard investment projects. "Each customer was regarded as a project. What mattered was not an individual customer but benefits the Russian economy could derive from implementing a particular project", said Ballo. I asked: "Why after all did you help PIK, is it really of strategic importance? It turns out that other developers aren't of strategic importance?" "PIK is one of the few integrated regional construction companies; it is of great social importance. It would be unwisely to lose such a company the more so in the period of the crisis. For example, we didn't support Don-Stroi that for the most part involved in building exclusive housing but supported PIK", he answered.
"VEB is still being accused of having supported only those they saw fit in an unsystematic way", here I'm just voicing dissatisfaction of many companies with VEB. "We considered all companies but many companies failed to go through formal procedures", parried Ballo. Now, he says the program of refinancing is closed, it has exhausted itself, enterprises were supported at the appropriate time and then the government put in place a mechanism for extending subordinated loans and refinancing within the framework of the Central Bank. Companies that obtained credits at VEB can have their credits rolled over for a period of one year, says Ballo, the Supervisory Board made such a decision so that borrowers should not have cross defaults with regard to other obligations. Thus, the government did a goodwill gesture for borrowers, he believes. "But it was not an indulgence .All the companies are to fulfill terms and conditions of the current agreements. For example, we require Nornikel's shares (UC Rusal pledged them with VEB) to come under Russia's jurisdiction", Ballo specifies the Bank's approach. Credits are to be rolled over only on market terms, in each company VEB's representatives will be responsible for monitoring the situation.
VEB-Invest is to be responsible for dealing with bad credits, as they emerge, that is, their collaterals. The company was established to manage bad assets received in the course of rescuing Globex. We are going to develop the competence in dealing with problem assets at VEB-Invest, promises Ballo. "Therefore, we are already well-equipped", he jokes.
A Point of no Return
The crisis compels us to reevaluate our values completely, says Ballo. "Once we sacredly believed in various indicators and coefficients. For example, foreign banks accepted 25% plus one of Nornikel as pledge from UC Rusal and felt comfortable but several months later everything devalued. Ballo says that they are rethinking values in the banking community; we have to take a more serious approach to bank modeling. Demand is growing for professionals who can predict the consequences of a crisis and see which sectors are going to receive an impetus for development, he says. "The crisis showed that even the most problem-free projects could get in a real crisis situation, a lot depends on engineering managers' proficiency", sums up Ballo. The crisis taught us to be more cautious, he says: "If we approve a project for implementation we base our decision on its worst-case scenario". Now VEB is trying not to approve greenfields and projects on a business-idea level", he says.
There were cases when the crisis changed the project structure. For example, VEB suspended the funding of the second stage of the Moscow Business Incubator for small-size enterprises. "We'll see how the first stage will operate and then we'll start to think about the second one", said Ballo.
"We often have to approve projects that have already passed the point of no return. If financial resources were invested we must go on financing the project in order to avoid throwing real money down the drain", he says.
A Certain Symbolism
"What a family name - Ballo?" It is an Assyrian family name, explains Ballo. It's a shame to say that I don't know my ethnic language. My great grandfather came to Moscow in the Ў®20s so I am a third generation Muscovite. I grew up in Tishinka. Ballo graduated from the Moscow Finance Institute majoring in international economic relations. Many of his former fellow students became famous. Their names are known to everybody: Vladimir Dmitriev, Mikhail Prokhorov, Alexandr Khloponin, Andrei Akimov, Ballo counts off on his fingers.
Anatoly Ballo was the first in his family to receive higher education. His father was a cabinet maker. It was Ballo's father who recommended him to apply for the Moscow Finance Institute. "I did well at school so I had no problem getting enrolled", Ballo says to me. Now Ballo's father is proud of his son's successful career. "It's an honor for a representative of such a small ethnic group to hold such a senior position".
In 1991, Ballo started to work at Gosbank of the USSR. "Then, many looked upon me as an idiot. Civil service was not considered to be prestigious. Everyone wanted to find a job in Western representative offices of banks, companies and in all kinds of stock exchanges", he says. "I remember my first working day at the Bank; it was on August 19, 1991, when the State Committee for the State of Emergency (GKCHP) announced a state of emergency, there was a tank or an infantry combat vehicle in the Central Bank's enclosed court. They might have been searching for the Communist Party's gold. It was pretty amusing. I guess they haven't found any gold so far", he laughs. After the breakup of the Soviet Union, Ballo worked for another year at the Central Bank of Russia in the organizing committee on establishing a Russian Project Finance Bank (a subsidiary institution of the EBRD). "A sort of development bank", jokes Ballo. And then he said bitterly: "At the time, our attempt to establish a project finance bank failed. Only two years ago Vladimir Dmitriev's team created a bank for development on the basis of VEB".
Ballo is proud of working at VEB. "It's the oldest banking institution that has been operating since 1924". Now, he says, we are in a way getting back to the past as VEB is engaged in recovering the economy as it did in the past. "There is a certain symbolism in it".
Hobby under the Nick of "Fedya"
Ballo is a great fan of Spartak. In the past, he used not to miss a single match, now he is pressed for time. His favorite football player is Fedor Cherenkov who is soon going to be 50. "He is a very creative, truly popular player,- says Ballo. - All of a sudden my eight-year-old son started to support Luch-Vladivostok (laughing). Primorsky region Governor Sergei Darkin promised to give me a uniform of this team but he hasn't done it so far".
№ 106, June 19, 2009
In Anatoly’s Tikhonov”s opinion Svyaz-Bank and Globex were in a severely poor condition. “We need not only support problem banks but also give a fresh impetus to boost the economy.” With the advent of the crisis, Vnesheconombank’s financial resources were needed to support the Russian banking system, specifically, to stabilize the troubled Svyaz-Bank’s financial position. First Deputy Chairman of State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’, Chairman of Svyaz-Bank’s Board of Directors Anatoly TIKHONOV told us about Vnesheconombank’s rescue efforts and the future of Svyaz-Bank in his interview with Vremya Novostei.
- Why did Vnesheconombank get involved in rescuing Svyaz-Bank?
- Svyaz-Bank was the first swallow that got into the whirlwind of the crisis. A decision to rescue it was taken in accordance with orders given by the President, the Prime Minister and VEB’s Supervisory Board. We could not let this bank collapse because it handled more than 15 million accounts of pensioners. In the course of several months we managed to correct the imbalance between assets and liabilities, clean up the loan portfolio and make a comprehensive business analysis of the bank. Our line departments examined the situation and proposed a rescue package. In April, VEB made an additional issue of the bank’s shares worth 70 billion rubles. As a result, the bank’s charter capital was increased 15-fold to 75.1 billion rubles. And today the bank is operating normally.
-Were Svyaz-Bank’s problems that necessitated the state’s emergency intervention brought about by the crisis alone?
- No, they were not. The main source of problems is a huge bad debt. By our estimate, it is no less than 40 billion rubles. And a main reason for it was not the market situation but a low quality of the bank’s loan portfolio. In our case, the crisis was a sort of acid test that revealed the existing problems. Loans were extended without proper collateral, under incomprehensible schemes and not only to Russian but also to foreign companies. For this reason, VEB’s Supervisory Board made a decision to set up an interagency task force that incorporated representatives of law enforcement authorities to thoroughly study the situation with problem assets. We believe that we’ll be able to find a solution through legal actions and recovering debts by court.
- How many customers ran on the bank?
In September 2008, when VEB agreed upon a program of financial support for Svyaz-Bank with the Bank of Russia, periods of many deposits were expiring and corporate customers were withdrawing them. In October, the process continued but not as quickly as before. In total, the amount of funds in corporate customers’ accounts shrank from 104 to 58 billion rubles (during September – October). Companies related to the bank’s former shareholders as well as a number of organizations which were not related to the communications sector (construction, industry) accounted for the largest outflow of customers.
Communications companies with which the bank established open and reliable relations, namely, Federal State Unitary Enterprise (FSUE) the Post of Russia, and Svyazinvest are still being serviced by the bank, although the amount of their funds dwindled: the average balance calculated for the first quarter of 2009 with regard to FSUE the Post of Russia fell from 17 to 14.4 billion rubles from the same period in 2008, with regard to Svyazinvest - from17.8 to 16 billion rubles. Since November 2008, the bank has been pursuing an active policy aimed at preserving its customer base and at raising funds from new corporate customers, above all, by way of placing balances into settlement accounts and deposits and implementing its own bill of exchange program. State guarantees and reliability provided to the bank by VEB makes this process more effective. Customer confidence is returning. Moreover, this year the bank is trying to focus on diversifying its loan portfolio due to companies in other industrial sectors.
- Has the structure of corporate customers changed in the last months?
- It remains almost unchanged. Such communications companies as Megafon, Rostelecom, including Westelcom, MMT, Gidrosvyaz still account for the largest deposits. A major transaction in placing Zentrteleom’s funds is nearing completion. Besides the Post of Russia and Svyazinvest such companies as Angstrem. Trust Management Company Dostoyanie and Sinterra have substantial balances in their settlement accounts.
As to the structure of liabilities, short-term deposits (from one to six months) are dominant and customers roll them over if required. Since January the bank has started to work with new customers such as Mining and Steel Group Evraz and Development Company Invest-Group.
- And what happened to natural persons’ deposits?
- At the start of 2008, natural persons’ ruble deposits accounted for 95% of all deposits in the bank’s portfolio - 7.1 billion rubles and 70% of them were owned by VIP-customers. By the start of September the portfolio shrank to 5.2 billion rubles and the proportion of VIP-customers – to 26%. From September to December the amount of liabilities decreased by another 2.4 billion rubles because of deposits withdrawn by VIP customers, the proportion of which shrank to 5.8%. At this year’s start the situation changed for the better: people started to put their money in the bank. From January to May, the growth in deposits was 1.1 billion rubles and their amount increased to 3.8 billion rubles. The pattern of deposits also changed: the proportion of deposits in rubles dropped to 48.2% and in dollars in euros increased twofold and amounted to 21.2 and 28.2% respectively in the total portfolio. It should be noted that almost all deposits in the bank are retail ones and the proportion of VIP- customers declined to 1.6%.
- Did you have to reshuffle personnel?
- We replaced the management staff right away and nominated professional bankers to all key posts. Then we started to optimize the bank’s administration costs, trying to maximally retain personnel in the regions. It numbers about 3 thousand people and there are many real professionals among them.
- Did you have similar problems with Globex?
- No, the situation in Globex was somewhat different. For the most part, its credits are concentrated in one and the same sector, so it didn’t take us a lot of time to clean up its balances. Now the bank’s assets have been handed over to a specially established Vnesheconombank’s subsidiary – VEB-Invest Company.
- How much money has been spent on rescuing Svyaz-Bank?
- The total sum is 87 billion rubles. It includes Bank of Russia’s deposit and VEB’s own funds. For us Svyaz-Bank is an investment project. At the first stage our objective is to solve day-to-day problems, expand the bank’s branch network and offer quality services. And within three-five years we’ll be able to withdraw from the project by selling it to a strategic investor. By the way we are already receiving proposals. For example, recently a major foreign investment bank has turned to us expressing its readiness to enter Svyaz-Bank’s capital but with so far a small stake.
- In line with the Government’s crisis management program VEB started to perform newly-assumed functions of rescuing troubled banks. How does this correspond to typical functions as a development institution?
- There’s no doubt that both Svyaz-Bank and Globex were in a severely poor condition when they were transferred to VEB’s jurisdiction. But it was more a matter of supporting the banking sector rather than rescuing problem banks. We are trying to combine these two seemingly incompatible objectives - providing support and encouraging development. And while the problem is really formidable it is not unmanageable. In the long run we should not only help problem banks get back on their feet but boost the development of the whole economy.
I’d like to give just one example and maybe it’s not the most typical one. The Law on the Bank for Development and the Memorandum on its Financial Policies stipulate that the Bank is to finance major projects with long pay-back periods in certain economic sectors. But in real practice there emerge small projects, around above all, infrastructure projects. It would be wrong not to support them as they are important for the development of the country’s economy and regions. But we can solve this problem by using capabilities of VEB’s two subsidiary institutions - Svyaz-Bank and Globex. These banks have formed a good branch network in the regions. This would help us to channel money to those places where major Moscow’s banks have not come yet. Svyaz-Bank has already been drawn in implementing our regional projects. It is an operator responsible for VEB’s Olympic facilities construction projects. Now we are expanding its branch in Sochi so that it could fully service companies engaged in building Olympic facilities.
- This means that you have already identified Svyaz-Bank’s scope of work?
- Not exactly. We are still considering this issue. And it’s not only a matter of Svyaz-Bank. We are formulating a concept and identifying potential lines of activity for all members of Vnesheconombank Group which incorporates Svyaz-Bank, Globex, the Russian Development Bank and Roseximbank. We turned to a financial consultant – Ernst and Young Company. This Company has completed preparing several options of the concept for reorganizing VEB’s subsidiary banks. The Bank’s Management Board would consider these proposals and make an agreed decision and submit it to approval by the VEB’s Supervisory Board.
-Does this concept encompasses Belarusian Belvnesheconombank and Ukrainian Prominvestbank – Vnesheconombank participates in these banks’ capital?
- No, it does not. We didn’t set this objective.
- What options are under discussion, what do consultants recommend?
- Roseximbank is expected to give top priority to supporting exports. The more so, this function was assigned to VEB. At present, Globex is operating as a universal commercial bank. We can’t rule out that it would continue to operate like this. There is a very interesting option for Svyaz-Bank. We believe that it might become a very influential sectoral bank operating in the communications sector, may be with functions of a “post bank”. Svyaz-Bank has been cooperating closely and for a long time with the Post of Russia and Svyazinvest, it also services accounts of other telecommunications companies. By joining forces, we’ll be able to create a pivotal bank which would enable us to make a breakthrough in restructuring, developing and financing one of the fastest growing, high-technology economic sectors. This idea was favored by the Telecommunications Ministry, Svyazinvest and the Post of Russia. We set up a joint commission which is to formulate a final decision.
- If such a pivotal bank is established, will it be responsible for servicing companies in a specific sector?
- Not only. Today more than 70% of Russians do not have bank accounts. And to a certain extent such a situation arose because many people do not have access to retail banking. I have already said that Svyaz-Bank is well represented in the regions – it has 49 branches and more than 160 branch offices. But now it’s too early to talk in great length about the bank’s and Vnesheconombank Group’s future core activity as a whole. It remains to be seen later whether the banks’ assets will be consolidated or whether each of them will go its own way. I’d like to stress that so far none of the options have been given high priority. According to our plans, a final scenario would be submitted to the Supervisory Board in July.
VEB purchased Svyaz-Bank and Globex at the last year’s end as part of measures for stabilizing the banking sector. The Central Bank provided financial aid by depositing 2.5 billion dollars with VEB to purchase Svyaz-Bank and 2 billion dollars to purchase Globex Bank.