It is topical to assign ratings to projects and identify their priority
Gazeta, N 247
December 26, 2008
- In the conditions of the financial crisis Vnesheconombank’s active involvement in implementing measures for supporting Russia’s financial system can’t help influencing the Bank’s activity as a development institution. How would you assess VEB’s performance?
- I find it difficult to assess our Bank’s performance. Even before Vnesheconombank was transformed into the Bank for Development, it placed much emphasis on supporting investment projects aimed at developing the most important sectors of the Russian economy. I hope we succeeded in establishing ourselves as a development institution, that is, an efficient instrument for supporting projects of high priority for the Russian economy.
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Economist, banker, investor Ballo Anatoly Borisovich was born in April 18, 1961 in Moscow. In 1983 he graduated from the Moscow Finance Institute, his specialty was International Economic Relations. In 1983-1991 – economist, researcher, Research Institute of Scientific and Technical Information and Construction Materials Industry Management, USSR Construction Materials Ministry. In 1991 - 1992 – lead expert, Gosbank of the USSR. In 1992 – chief expert, the Central Bank of Russia. In 1992-2000 – lead expert, manager, executive of the board, executive director, financial director, Russian Project Financing Bank (from 2000 – Small Business Lending Bank). In 2000-2002 – consultant to Vnesheconombank of the USSR. In 2002-2005 – deputy department head, Foreign Trade Bank (JSC). In 2005-2007 – department director, directorate director, Vnesheconombank of the USSR. From 2007 – Management Board Member, State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’, Deputy Chairman, Vnesheconombank |
- Vnesheconombank’s loan portfolio under the Federal Law “On the Bank for Development” amounted to about 255 billion rubles, with more than 80% of credits being mid and long-term ones (for the most part they are long-term credits with a tenor of more than three years). But for the crisis, we would not only have achieved our loan portfolio planned target of 270 billion rubles but we would also have far surpassed this figure.
Since the establishment of the Bank for Development a year and a half ago more than 70 investment projects worth about 750 billon rubles with the Bank’s participation share in excess of 400 billion rubles have undergone expert’s examination and have been approved by Vnesheconombank for financing. Investment projects account for a better part of these projects. They are designed to enhance the development of innovations and infrastructure (more than 80%). They include OJSC Terminal’s project to construct the Sheremetjevo 3 air-terminal complex, OJSC RZHD’s project to develop the infrastructure of the Kuzbass-Far Eastern Transport Hub, OJSC the Kaluga Region Development Corporation’s project aimed at building infrastructure of industrial parks: forming a cluster to manufacture automobiles and auto components. Vnesheconombank also participates in carrying out investment programs of OJSC Inter RAO EES and OJSC United Aircraft Building Company.
With our Bank’s support, OJSC Angstrem-T is building the first Russian production facility to manufacture sub-micron semiconductor components and OJSC Helicopters of Russia has launched serial production of the Ka-226T helicopter.
- How are you searching for new projects?
Our Bank is not a customer-oriented but a project- oriented bank and we are not searching for customers on the market. Business experience shows that companies interested in implementing projects tend to turn for help to regional authorities and to core ministries. We are working with regions especially with those where regional development institutions are in place and these institutions are responsible for generating projects and submitting the most interesting and well-prepared ones to us for consideration. If a regional administration is interested in implementing a project and invests funds in its preparation, then everything is going fast and well. The best example is the Kaluga region.
- What are the most interesting newly approved projects, which are not well-known so far?
In my opinion, the project to construct the Roza Khutor complex is very demonstrative. Under this project a sports and tourist complex is to be built in the Krasnaya Polyana district. This complex is going to be one of the most important facilities at the 2014 Winter Olympics. This Alpine ski resort is to be built and operated on public private partnership principles under the program of building Olympic facilities and developing Sochi as a mountain and climate resort. The total value of the project is about 38.5 billion rubles. Vnesheconombank intends to make credit resources available within the established limit of 21 billion rubles for a period of 15 years and the remaining amount of investments is to be financed by a private investor.
Another interesting project is to build a gasochemical production facility in Tatarstan. In mid October Tatarstan’s President Mintimer Shaimiev and Vnesheconombank’s Chairman Vladimir Dmitriev encased a capsule in the foundation stone of a unique for Russia mineral fertilizer integrated production complex worth 1.5 billion US dollars in the city of Mendeleevsk. The production facility is planned to be built for 36 months and launched into production in the first quarter of the year 2012. The project’s payback period is 6-7 years. The gasochemical complex will be the first modern production facility in the past 25 years to manufacture ammonia in Russia and the CIS. A distinguishing feature of the factory is that there will be no carbon dioxide emissions and that carbon dioxide will be entirely utilized to manufacture carbamite and methanol. Japan’s company Mitsubishi Heavy Industries has been selected as a contractor and another Japan’s company Sojitz Corporation has been selected as the project’s coordinator. Tatarstan’s government represented by the Investment – Venture Fund and Vnesheconombank act as the project’s investors. Under the project, debt financing is to amount to 870 million US dollars, which will be entirely refinanced in the conditions of the crisis by a syndicate of Japanese banks.
- Would you tell us about Vnesheconombank’s new anti-crisis functions? To what extent did the Bank prove to be prepared to carry out anti-crisis measures?
Even a few months ago, we were not aware that any different functions other than financing of major investment projects would be assigned to us. But the government provided us with an active, to be more precise, key role in stabilizing economic and financial situation in the country, and we started to act without any delay. Our considerable experience and our employees’ professional expertise helped us to launch the process almost immediately.
I would like to remind you that the Law “On Additional Measures for Supporting the Financial System of the Russian Federation” was passed on October 13, 2008 and on the same day the procedure for implementing the measures provided by the law was published and the first monetary funds were made available as early as October 30!
And we managed to do it despite the fact that the procedure for processing applications for refinancing borrowers’ debt obligations to foreign financial institutions provides for five decision-making levels and also for numerous mandatory criteria and requirements for documents. The Bank proved to be prepared to act quickly and decisively to overcome the crisis situation in the Russian economy. To my mind, the important thing was that we were not developing the techniques of considering and examining applications from the scratch, we already had a well-proven procedure for conducting expert’s examination of investment projects. We understood general techniques and adapted the bank’s staff for addressing new challenges. Otherwise we wouldn’t have been able to develop and implement the whole system of anti-crisis measures so rapidly.
- The current crisis makes the largest Russian companies to review their investment plans. Is Vnesheconombank going to change anything in its activity in terms of priorities and selection of projects?
Yes, it is. The situation forces us into making certain corrections. Responding to the realities, we might suspend consideration of certain projects as agreed upon with core ministries and departments. In doing so, we’ll carry on performing our main functions to assist in enhancing the development of the Russian economy. All the projects that are already being financed and have passed the point of no return are bound to be implemented. But a number of projects will be suspended. Nevertheless, the number of proposals coming from companies is on the rise. And as a result, it is becoming increasingly topical to assign ratings to and identify the priority of projects. Vnesheconombank initiated to expand the list of sectoral investment projects. Agroindustrial complex has been already included in this list. Proposals to introduce changes and additions to the Memorandum on Vnesheconombank’s Financial Policies are under preparation. Their adoption would make it possible for us to engage in financing projects in the pharmaceutical and construction materials industries. We are well aware that the Bank cannot and must not operate in all economic sectors and we offer to include strategic industries in the list of our priorities. In particular, we are planning to focus on the cement industry. The Government is making strenuous efforts to involve Vnesheconombank in working out the state’s support measures including those aimed at making it possible to finance the largest investment projects in the cement industry. These are projects aimed at constructing cement factories in the Kaluga, Leningrad, Penza and Tambov regions. We have a lack of production facilities and growing prices in the construction materials industry. Many infrastructural projects can’t be implemented if there isn’t a cement or brick factory nearby. So we are facing a paradoxical situation when we are allowed to finance infrastructure but are not allowed to finance the construction of a factory needed to build this infrastructure.
In a word, we’ve got a lot of proposals for new lines of activity and we are ready to act. But financing remains to be an open-ended question. The crisis reduced Vnesheconombank’s capital significantly and there is no reason to explain why. Naturally, we had to review our loan portfolio as a part of funds were used to implement anti-crisis measures and despite the fact that at the end of October we obtained a syndicated loan of 335 billion euros from a pool of the largest world banks at a rather attractive rate, we have to forecast difficulties in raising funds on world markets in the future. To my best knowledge, this was the last syndicated loan extended to Russia’s borrower on the foreign market.
It’s quite evident that in the current situation there is a need for increasing the Bank’s capital significantly if the Bank is to continue its activity on supporting economically important and socially meaningful projects in full. At the moment, there remains a need for financing not only the projects approved by Vnesheconombank’s collegial governance bodies, which are going through a stage of executing credit documentation and are worth 300 billion rubles but also projects undergoing a complex expert examination. And here we mean 60 projects, with the Bank’s expected participation share in them being 600 billion rubles.
I would like to stress it once more that we are talking about the possibility of implementing large-scale infrastructural and innovation projects. Given this possibility, we would be able to keep private business interested in financing projects and also create preconditions for stimulating economic growth. By analyzing our foreign colleagues’ business experience, we can see that they are keen to speed up their efforts to finance infrastructure and other crucial development projects. I think that Vnesheconombank’s first-year experience as the Bank for Development testifies to the fact that we are ready and competent enough to address the most challenging problems we are facing.
Optimistic Proposal
Maxim Rubchenko, economics section editor of Expert Magazine
From the next year, Russian exporters of non-raw materials products will be able to have their political and commercial risks insured at Vnesheconombank.
Petr Fradkov
Photo: Oleg Serdechnikov
Despite the crisis, the Government approved Russia’s Foreign Economic Strategy up to the year 2020. The document, in particular, calls for implementing a major program designed to provide the state support for non-raw materials exports. VEB was assigned a key role in providing this sort of support. Management Board Member – Vnesheconombank Deputy Chairman Petr Fradkov told Expert Magazine about what kind of assistance and on what terms Russian exporters would be able to receive.
- Actually, Vnesheconombank has now become a key instrument in implementing the Government’s anti-crisis measures. Does VEB, in the current situation, carry on undertaking its traditional activity on financing long-term projects in the economy?
- Of course, new responsibilities for supporting the economy placed on the Bank by the Government take us a lot of time and effort. But despite our efforts to respond to the crisis, we continue operating as a bank for development undertaking our core activities on investing in infrastructure and industrial projects. In spite of the crisis, we give to priority to thee lines of our activities.
Specifically, there are a number of projects in power engineering equipment industry and transport sector, which involve European partners and have to be financed in euros to pay for equipment deliveries from Europe. In order to finance these projects, we raised a syndicated loan of 335 million euros in early November. This is rather unusual, because in the past we raised syndicated loans in dollars. But in this case we chose euros, as we had to finance the above-mentioned projects in this currency. As far as the amount of this syndicated loan is concerned we did not seek to raise a record loan because we needed money to finance specific projects.
In the past years, when the market was positive, it was pretty common practice to raise syndicated loans. Since the crisis started, Sberbank (Savings Bank of the Russian Federation) was one of the last Russian banks to raise a syndicated loan. We closed the said syndicated loan facility in the first days of November when loan market terms became stricter and this testifies to the fact that our country is still enjoying high confidence abroad.
A number of major banks from Europe, Japan and the US participated in the syndicated loan facility transaction. So, it proved to be very interesting even in terms of geography. This transaction is extremely important, as it is a signal to the market that it is still alive and that public transactions can be closed in today’s complicated market conditions. A loan interest rate is a different story. The loan facility has a three-year tenor and the floating loan interest rate is EURIBOR +075% per annum. Actually, this is a pre-crisis loan rate. For example, in 2006, we raised a syndicated loan at a rate of LIBOR + 035 percent and in 2005 we raised our first syndicated loan at a rate of LIBOR + 0.9 percent. Such rates are nonexistent now and the borrowing terms were unique for today’s situation.
- Why, at the height of the crisis, has an issue of supporting exports become so crucially important?
- Support for exports is a normal government policy throughout the world. And I am sure it should become more vital at the height of the crisis. The more so, there was no doubt long ago that we needed to promote non-raw materials exports because, in any case, economic development is based, to a large extent, on exports. Even at a time that our corporation was being established, an issue of providing the state support for industrial exports was high on the agenda. The fact is that in the past we had monopoly on foreign trade and in the conditions of large-scale liberalization a prevailing view was that there was no need for supporting and stimulating foreign trade and that business would sort everything out. But practice showed that this was not the case and business experience of even the most democratic countries demonstrates that under liberal domestic economic conditions, protectionism in foreign trade as well as administrative and financial support for exports tend to increase. Although inside the countries, competition and a level playground for all are in place.
Providing support for exports is extremely important from economic and geopolitical points of view and here the state should assist business and help it to address numerous problems. And, above all, it should be financial assistance but not only… So, while our corporation was being established t was obvious that the state could use various instruments to support exports.
Besides traditional transactions in providing pre-export financing, Vnesheconombank finances industrial exports in the form of extending “credits to the buyer” or “credits to the buyer’s bank, financing projects in partnership with contractors or equipment suppliers. This adds to the already existing export supporting instrument designed to extend the state’s guarantees. Guarantees are extended by Roseximbank incorporated in Vnesheconombank’s group.
In additional to this, a decision was made to establish a more flexible commercial mechanism, that is, a structure that would have enough resources to assume a part of the borrower’s sovereign risks. That was how we started working. And I should say that it was a difficult start.
By the present time, Vnesheconombank has signed a Framework Agreement worth 300 million dollars with the Kazakhstan Development Bank. We extend credits to this Bank under specific projects aimed at supplying various Russian industrial products, they, above all, include machinery and equipment, that is, high-value added products. The Bank entered into similar agreement with CIS countries such as Belarus and Central Asian countries.
- What kind of exports do you support?
- Under the Law “On the Bank for Development” Vnesheconombank is to be responsible for supporting industrial exports. We do not deal with raw materials; we have nothing to do with oil, grain and other commodity exchange goods. Our zone of responsibility includes only high-value added products.
The second line of our export-supporting activities deals with guaranties, which are not extended by the state but by our Bank. For example, advance-back (refund) guarantees: as a rule, the exporter is provided with an advance for an amount of 15 percent of a contract’s value and if the customer is dissatisfied with something and the advance is not refunded, we cover the costs. Or, for example, under the existing procedure the exporter is to issue a tender guarantee to participate in a tender. And if the exporter wins a tender, he is to provide a contract performance guarantee. We are responsible for providing these guarantees.
I’d like to say that in terms of banking practice there is nothing special in such documentary transactions, all banks conduct these transactions. The main idea here is not an instrument as such but terms. In case of standard documentary transactions, guarantees are extended for a period of one or at most two years we extend guarantees for a period of five or even ten years. Basically this is a serious alternative to standard long-term lending.
- Vnesheconombank is planning to launch another export supporting mechanism at the beginning of the next year. What sort of mechanism is it?
- It’s a completely new instrument for our country – export credits insurance against commercial and political risks. Up until now it hasn’t operated in our country because of the absence of required regulatory network. When the Law “On the Bank for Development “ was being prepared a decision was made that it was on its basis that a structure would be established responsible for insuring export credits.
We started to develop an internal regulatory network for insuring export credits but we soon understood that within our current corporate structure it would be extremely difficult to undertake this activity. Because banking and insurance activities are different types of business guided, to a large extent, by different laws and rules and requiring absolutely different methodologies and approaches. So, we decided that a specialized agency would deal with insuring export credits on the basis of our subsidiary banking institution. And this is, by the way, is in line with foreign business practice.
An objective of establishing an export credit and investment insurance agency was specified in “Russia’s Foreign Economic Strategy up to the Year 2020” approved by the Government at one of its recent meetings. We are planning to start conducting actively transactions in insuring export credits at the beginning of the next year.
To tell you the truth, if this mechanism is to function faultlessly and efficiently it will have to be improved and new laws and regulations will have to be passed. At present, we have already started to make necessary efforts but this work will take a lot of time.
The government has already passed a resolution providing for the procedure for and setting terms and conditions of insuring export credits by the Bank. The resolution sets forth everything rather clearly: Russian exporters’ risks are insured as well as risks of banks that extend credits to foreign legal persons and incur risks of these legal persons, risks of an enterprise itself are also insured if it exports its products on an installment payment plan without involving a bank. The resolution stipulates that insurance period may range from two weeks to fifteen years and it also specifies a list of insured commercial and political risks. It also stipulates that insured amount under commercial and insurance agreements is not to exceed 95 percent of an export credit amount and under political risks – 100 percent of an export credit amount. Vnesheconombank is to compensate for up to 95 percent of the exporter’s or creditor bank’s losses in case of occurrence of an insured event. One hundred percent is not to be compensated for, so that an enterprise or a bank should be economically stimulated to adequately assess risk, that is, act economically responsibly.
Pursuant to international practice, a credit insurance agency’s obligations under insurance agreements are to be guaranteed with federal budget funds. This practice will be adopted in Russia.
- Now Russia, for the most part, exports raw materials and our hope is to boost non-raw materials exports. Is it a realistic hope in the current situation?
- It’s an objective rather than a hope. Anyway, we have non-raw materials exports, namely, mechanical-engineering exports. I don’t mean that these are breakthrough innovative products. These are products of smelting, machine-tool building, aircraft construction, chemical, timber processing and heavy and power engineering industries – our traditional industries, which are not innovative ones but have always formed and I hope would form the basis of our non-raw materials sectors of economy. Anyway, we are well positioned in these sectors.
It’s not that these products are basically noncompetitive. The fact is that, today, technical characteristics are not regarded as the most important things on all world markets. The most important things today are financial terms and conditions offered by the supplier. And only a combination of products and terms of delivery can put together a competitive proposal. In fact, our products are often not worse and cost less than their foreign analogs but poorly worked out terms and conditions question our ability to win tenders. We are sure that there is a market for such products and therefore our task is to coordinate and organize everything.
- And what requirements do you make for borrowers, Russian exporters?
- Any Russian company can receive this sort of insurance and not only a single delivery of goods but also a whole project abroad, for example, a construction project can be insured and there are no limitations with regard to insurance amounts. We just examine an export contract as such, assess country risk, and project feasibility. We have already developed the procedure and rules for assessing risks, they occupy three thick volumes.
These rules, terms and conditions were developed a long time ago within the framework of the Organization for Economic Cooperation and Development (the OECD). The OECD Working Party on Export Credits and Credit Guarantees incorporates export agencies and banks of the largest OECD member countries, representatives of national finance or economics ministries. Not being a member of the OECD, Russia is a member of the Group as an observer and we have recently attended the Group’s meetings together with representatives of the Russian Finance Ministry and the Ministry of Economic Development.
Documents regulating guaranteeing and insurance of export credits were drawn up for years, many volumes are written so we should not re-invent the wheel we should adapt them to our specifics with due regard to our applicable legislation. This is what we are doing and we’ll be doing.
As far as our efforts to insure export credits are concerned, we are preparing the first project associated with putting on the market Russia’s new civil aircraft Sukhoi Superjet 100. This is an international project. Besides Russian companies Italian and French companies take an active part in it. The jet has good prospects not only in Russia but also in Europe, America and across the world. In order to guarantee global sales of this aircraft, our Bank, France’s foreign trade insurance company COFACE and Italy’s export credit agency SACE signed a joint trilateral statement on cooperation in launching a scheme for financing and insuring international sales of new generation civil aircraft – SSJ-100. I’d like to say it again that it would be the first practical step taken by our export agency.
- How are you going to set tariff rates? Won’t these rates be prohibitive for some companies?
- No, they won’t. Export credit insurance is a commercial activity. We are not going to regulate anything through tariffs – some companies can export their products and some can’t. We are going to take decisions on the basis of financial expediency assessing the supplier’s financial standing and ability to fulfill contractual obligations, products destination, contractual terms, and the contract’s potential to boost Russian companies influence on the world market.
Our tariff rates are based on existing world rates. Rate setting methods are well known: you need to know a cost of contract, assess risks mathematically and then apply various correction coefficients and taking into account market conditions. Insurance premium is determined on the basis of known and proven methods ant its amount is to be agreed upon with a customer.
It’s common knowledge that the most competent analysts - not only specialists in specific areas but also political scientists and economists- work for export agencies. Ideally, an export agency is a very powerful analytical private institution authorized by the state to operate.
- Are you sure that your plans will remain topical despite the growing crisis?
- Yes, I’m absolutely sure.