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.
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.
Vnesheconombank Chairman Vladimir Dmitriev’s Interview to the Vesti TV Channel
The Vesti TV Channel VESTI/INTERVIEW, 29.10.2008, 14:43,18-35
HOST: The Federal Service for Financial Markets expects Vnesheconombank to assist it in normalizing the domestic stock market. Vnesheconombank Chairman Vladimir Dmitriev told our channel about the measures Vnesheconombank is going to take to this end.
Vladimir Alexandrovich, Good afternoon.
Vladimir DMITRIEV, Vnesheconombank’s Chairman: Good afternoon.
HOST: Vladimir Alexandrovich, you’ve said that today’s positive dynamics on the Russian stock market is a result of Vnesheconombank’s support. Would you elaborate on this further please?
Vladimir DMITRIEV: I don’t think we have been the only player at today’s trading session but our participation at the end of the business day demonstrates that such a strong player helps to strengthen the market and sustain its growth. Vnesheconombank has been conducting transactions on the Russian stock market for about 10 days using the funds it received from the National Wealth Fund. Every day we agree upon our actions with the Finance Ministry on the scale of our transactions, securities and borrowers in which we are investing funds. Thus, we diversify the National Welfare Fund, make it operate to benefit the Russian stock market and at the same time sustain the stability of the Russian stock market and the financial system as a whole.
On some days Vnesheconombank’s participation aimed at sustaining the said stability and growth of quotes made itself felt quite significantly.
HOST: Vladimir Alexandrovich, what’s the amount of your participation and whom do you support on the stock market?
Vladimir DMITRIEV: Out of 175 billion rubles allocated from the National Wealth fund and intended for conducting transactions on the Russian stock market we invested about 20 billion in shares and about 5 billion rubles in bonds of reliable Russian issuers.
HOST: This means that this is not a whim of speculators but a systematic support.
Vladimir DMITRIEV: Yes, our main principle is to operate on the stock market purposefully and consistently to sustain its stability.
HOST: I’d like to ask the following question: won’t additional functions assigned to Vnesheconombank and the actions you have to take in the situation of financial instability affect your main objective, here I mean, the development of key industries of the Russian economy? But judging by an agreement you have signed today with the United Shipbuilding Corporation there isn’t such a threat at the moment?
Vladimir DMITRIEV: In fact, our employees are working now under considerable pressure because of additional tasks, we didn’t use to perform before, have been assigned to us, of which the main task is to implement additional measures for sustaining the stability of the Russian financial system and that is why we have to operate on the stock market. But in doing so, we, of course, do not set aside our current core activity set forth by the Law and the Memorandum on the Bank’s Financial Policies. Today, we have signed an Agreement with the United Shipbuilding Corporation. This Agreement formalizes our relations and sets forth main lines of our joint efforts in upgrading our civilian and defense shipbuilding in carrying out programs of military-technical cooperation. This program of cooperation is multisectoral, but this Corporation is not, of course, our only partner from the key industries identified for our activity. They include aircraft construction, space industry, communications, high technologies, rational utilization of natural resources and infrastructure. It goes without saying that, given the volatile financial situation we are facing today and have to reckon with, some programs will be suspended temporarily. We have also to take into account the liquidity issues and difficulties our customers face in borrowing at acceptable rates.
HOST: What programs will be suspended at this stage?
Vladimir DMITRIEV: Above all, investment programs, which are at the initial preparation stage because the projects that have already been approved by the Bank’s Management Board and Supervisory Board in infrastructure, high technologies and rational utilization of natural resources are sure to be implemented. And they are funded by foreign creditors who take risks on projects themselves. These creditors include major Japanese and West European banks. This means that despite the crisis, the level of trust in Russia, Vnesheconombank, and reliable borrowers remains stable and this is a sure guarantee that many of the projects that were approved by our corporate governance bodies are bound to be implemented.
HOST: Another confirmation of this is the fact that you managed to raise a syndicated loan facility worth 335 million euros from a consortium of foreign banks. How did you manage to do it, and how are you going to use the money?
Vladimir DMITRIEV: We have been making efforts to raise this syndicated loan facility for several months. To tell you the truth, the borrowing amount could have been greater but for the liquidity crunch on the international markets as a whole. But in terms of transactions to be funded, this amount is optimal for us. We partially close the open euro position that emerged at the beginning of the year but the main objective of the borrowing is to finance the transactions I mentioned above.
HOST: You haven’t identified your main lines of activity, have you?
Vladimir DMITRIEV: Yes, we have identified our main lines of activity. They include, above all, infrastructural projects, and with due regard to the difficulties that metallurgical and construction companies are going through, the implementation of a number of projects aimed at developing transport would be financed at accelerated rates.
HOST: By what criteria are you going to distribute 50 billon dollars allocated to Vnesheconombank for refinancing Russian companies’ debts?
Vladimir DMITRIEV: The criteria have been established by the Bank’s Supervisory Board. And they are built into the procedure, which was also approved by the Supervisory Board and posted on Vnesheconombank’s website. Main criteria are comprised of both quantative and qualitative parameters. According to quantative parameters credits per one borrower are not to exceed 2.5 billion rubles but the Supervisory Board is also entitled to take different decisions. This refers to refinancing credits raised prior to this September and also debts to foreign creditors. And another key criterion stipulates that we are to refinance those debt liabilities, non-fulfillment of which threatens to cause serious economic and social consequences, here I mean adverse consequences to Russia’s system-forming companies.
Our Supervisory Board took a decision on a number of borrowers whose debts are to be refinanced; the amount of their debts is a little bit less than 10 billion dollars. They are prime borrowers who are confronted with a threat of losing their assets due to the unfavorable situation on the international financial markets.
HOST: These borrowers are the oil companies that initially turned for help?
Vladimir DMITRIEV: Yes, we give high priority to the borrowers whose obligations should be fulfilled in the most immediate future.
HOST: Vladimir Alexandrovich, what about providing financial assistance to banks? Vnesheconomank has already acquired Svyaz-Bank and yesterday the Supervisory Board approved the purchase of Globex. Are you going to acquire other banks as well, is this the Bank’s current policy and strategy?
Vladimir DMITRIEV: I would classify this activity as the Bank’s non-core activity but this is our institution’s destiny and even if our Bank didn’t exist we would have to establish it in case of emergency circumstances. As far as Svyaz-Bank is concerned we have fully secured this financial institution’s solvency and financial sustainability. We received financial resources from the Central Bank and we used our own liquid assets to assist Svyaz-Bank to restore payments.
And we can see that outflow of customers’ funds has stopped and that the bank’s is operating normally in all its traditional spheres of activity. And if 15 million pensioners receive their pensions through the bank, it’s no time for joking.
As to Globex-Bank, we also intend to get down to restoring its image and financial sustainability. We don’t think we’ll have any serious problem restoring trust in this bank, given of course, the Central Bank’s assistance but it is safe to say that the situation there is manageable.
HOST: And now my final question: what is going to happen to pension savings? Are they properly protected now?
Vladimir DMITRIEV: I am ready to answer only for the state management company…
HOST: Naturally. 90 percent.
Vladimir DMITRIEV: For Vnesheconombank. For the third quarter, we are of the few management companies, if not the only one, that produced positive results in terms of pension savings funds’ profitability. We had been making consistent efforts to get our investment declaration expanded so that we could invest pension funds in highly liquid and reliable bonds of Russian issuers, that is, blue chips. We really expect that our proposal for expanding our investment declaration would be accepted and backed in the long run by our legislators and we‘ll be also allowed to deposit available money, funds in the amount of up to 20 percent with banks and this on the one hand, will make it possible to increase profitability and on the other, to offer additional liquid assets to our interbank market. And today, we have discussed with our colleagues at a Russian-Chinese business meeting the possibility of investing pension funds or funded portion of pension funds in infrastructural bonds. They could be issued by Russian reliable borrowers such as Transneft and other companies that are in need of significant investments for a long period of time. We are sure that funds of would-be pensioners that they would start receiving in the year 2022 would be invested reliably, without any losses, with sufficient profitability.
HOST: Let’s hope. We wish you ever success. Thank you.
Vladimir DMITRIEV: Thank you. Thank you.