Vnesheconombank Chairman Vladimir Dmitriev’s interview with newspaper Handelsblatt

10 october 2008 года
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10/11/12 October 2008
Handelsblatt
N 197
Translation from German

 

If our Bank did not exist now it would have to be established

 

- Recently Russian stock markets have gone through one crash after another. What’s the reason?

The current situation was caused by psychological factors rather than by any other fundamental ones. There is no doubt that a number of factors play a role here, for example, nervousness associated with putting together an economic aid package in the US and unfavorable news from Europe. But the market conditions and risks are known and they should be taken into account upon appraisal of assets. Psychological factors, above all, are behind sharp movements of exchange rates in Russia.

- Were you surprised that the crisis affected Russian markets so much?

I was surprised, above all, by sharp fluctuations in exchange rates. Economic indicators in Russia are better than in other countries. Let’s take for example financial resources accumulated in our two sovereign funds and our budget surplus. There is no doubt that we are a part of the world economy. But I should state that strategic investors remain in Russia and speculators have left the country.

- Originally, VEB was supposed to be responsible for long-term infrastructural projects. And now it has to rescue problem banks and companies.

In fact, it’s a serious challenge to us. The Bank was not designed to perform this function but it had to. Nevertheless, our current role will not differ significantly from the original one. Now we’ll be responsible not only for developing infrastructure, for example, motorways and airports but also for the financial sector, which is essentially a blood supply system for our economy.

- Earlier when problems emerged in the financial sector such large state banks as Sberbank and VTB were the first to come to rescue. This is no longer the case because they are publicly listed banks?

You are absolutely right. During the 2004 financial crisis VTB purchased a private bank – Gutabank. Now it has to deal more with its obligations associated with the bank’s listing on the stock market. So when it became known that the demand for financing was so high so as to affect its balance sheet, the bank refused to conduct a transaction to rescue Svyaz-Bank. That was why we stepped in and, to tell you the truth, not only on a grant basis. Now, our capital is to be increased by 75 billion rubles.

- Why did the state have to support Svyaz-Bank?

The Government and the Central Bank attached great importance to this bank: more than 13 million pensioners received their money through this bank. About 400000 employees from the Post of Russia received their salaries through Svyaz-Bank. A lot of large companies are the bank’s customers. The bank had to be saved.

- Is VEB going to benefit from purchasing Svyaz-Bank?

We can see a potential: a great deal of the bank’s branches would help us to finance small and medium-sized businesses. On the other hand, solid customers, for example, telecommunications companies would be our prospective partners in building infrastructure – a task, which was assigned to us by the state. So, this transaction is beneficial for us. Today we don’t know if Svyaz-Bank will be a part of VEB, an independent bank, or if we’ll sell it later to an investor.

- After the Bank of Russia committed 50 billion dollars in financial aid to VEB to refinance foreign credits obtained by Russian bank sand companies, do companies turn to you for financial aid?

With these 50 billions dollars we are going to manage, banks and major corporations are displaying keen interest in us. Some of them are on Russia’s Forbes list and some are state-run companies. In such a situation the state had to take measures and this aid package would be sufficient to enable Russian companies to fulfill their short-term financial obligations.

- But these are going to be not only problem banks?

 We may find ourselves in a situation where we’ll be purchasing not only banks but also businesses or at least we’ll manage risks with regard to their doubtful credits. But, of course, banks will remain our core customers.

- What sectors have been hit hardest?

Of course the construction sector was hard hit. We’ll focus our attention on road construction, logistic facilities, transport and etc, where the demand for financial resources is huge as before. Another problem sector is retail. Soon the Government is to take a decision on identifying our role in supporting the sectors that were hardest hit by the financial crisis not excluding curing of troubled businesses.

- Does VEB have enough financial resources to achieve these objectives?

Today, we already have a department in charge of managing problem credits. Their total amount of problem credits is about 14 billion dollars. We are in a position to settle about one billion dollars in debts per year: we commit funds and restructure debts in order to rehabilitate businesses.

- Did the risk management system let Russian companies and banks down?

This is not the only reason, the real problem and not only in Russia is poor regulation. I can safely say that nowadays various financial authorities and institutions are engaged in developing a package of measures to correct the existing laws and standards to upgrade the risk management system.

- Consolidation of banks is sure to speed up. Who is going to manage the process? The state or investors such as billionaire Mikhail Prokhorov who purchased Renaissance Capital and for a very pretty sum of money?

Above all, the state with its institutions. At present we don’t have enough billionaires with sufficient financial resources to buy banks.

- What banks are to be supported by the state?

First of all, these are banks, which have social commitments and play a system-forming role. The Government and the Central Bank are of course worried about the current situation but I can assure you that they know what they should be doing.

- The construction sector is in crisis and other sectors are in crisis too. Are you still planning to implement long-term projects?

Frankly speaking, we, of course, must check certain projects in terms of risk management and conformity with specific industrial standards and our borrowers’ financial standing. But the projects that have already been launched are sure to be implemented. Moreover, a few weeks ago our Supervisory Board earmarked 2.5 billion dollars in long-term credits to finance such projects as the construction of a petrochemical plant in Tatarstan. And all this is a part of our routine activity.

- Observers are critical of the fact that VEB does not have a clear-cut organizational structure. The Russian Development Bank and Roseximbank exist under one roof. Is this situation going to remain intact?

All parts of VEB will go on operating as they did before. Of course, the Russian Development Bank will be given a new name because it is still unclear in what way it differs from VEB. Its objective is still to finance small and medium-sized businesses. Roseximbank will assist the Government in raising funds against sovereign guarantees. VEB, of course, will continue to act as an instrument of export financing. Nevertheless, VEB or an institution to be established on its basis would act as an agent for insuring transactions like, for example, Hermes in Germany.

- When you communicate with Western investors today, what do you usually tell them?

I would like to quote Prime Minister Vladimir Putin’s words. He was very brief saying that investors should ask critical questions but our role is to calm them down. This does not mean we should indulge in wishful thinking. But we are sure that the Russian economy is strong enough to withstand the current critical situation. For example, our budget is rather robust. And even if oil prices fall to 50 dollars we will be able to fulfill our budgetary spending obligations for three years.

- Was it Russia’s objective not to reform the financial sector on a large scale during trouble-free years?

Crisis is always a chance to introduce changes. It’s a time for reforms. I can’t recall a time when the State Duma passed laws as fast as it did now and here I mean pension, tax and banking laws.

- When will these promptly taken measures yield results?

It will take some time before laws passed and measures taken give tangible results. I think that the situation will get normal not earlier than in early 2010.

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Rescuing Svyaz-Bank

9 october 2008 года
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Vremya Novostei
N 187, October 2008

 

VEB told about Svyaz-Bank’s future

Vnesheconombank is buying Svyaz-Bank for a symbolic sum of 5 thousand rubles, the Federal Antimonopoly Service has already approved the acquisition and the Central Bank placed a deposit of 2.5 billion dollars with Vnesheconombank for Svyaz-Bank to discharge its current liabilities. Yesterday the heads f the two banks spoke about Svyaz-Bank’s bright future.

Svyaz-Bank’s financial standing was seriously damaged by two factors – the bank’s overindulgence in repo transactions and “unbalanced balance sheet”, that is, short liabilities and long assets said VEB Chairman Vladimir Dmitriev at a specially called briefing yesterday. And he hinted that Svyaz-Bank’s management may have created this sort of situation deliberately. “Long assets were formed at a time when Svyaz-Bank’s management was set to leave the bank before Sberbank’s former top managers came to the bank. Factually, the bank’s liquidity was moved into long credits, - explained VEB’s Chairman. We together with a team from Sberbank are taking all necessary measures to analyze Svyaz-Bank’s treasury and credit transactions including those on the interbank market and on the exchange Repo market”. As of October 1, the amount of Svyaz-Bank’s loan liabilities according to its President – Board Director Alexandr Zhitnik was 90 billion rubles, these liabilities are mostly corporate credits. As he put it, the share of problem credits in the bank’s portfolio is 20 – 25%.

“A number of Svyaz-Bank’s problems are not associated with financial supervision. It’s evident hat we will need professional assistance, which is not related to banking activity”, - said Mr. Dmitriev adding that they will turn to law enforcement authorities for help. The banker said that the situation with Svyaz-Bank was similar to the one when a good fiddle had been placed in the wrong hands.

Together with Svyaz-Bank, VEB received its outstanding obligations to creditors, deposit holders an on the interbank market. In order to fulfill these obligations the bank needed 59 billion rubles, which it didn’t have. “The scale of Svyaz-Bank trouble was estimated at 60 billion rubles and these were the bank’s current liabilities which it couldn’t discharge without Bank of Russia’s and VEB’s assistance”, - explained Mr. Dmitriev. 45 billion rubles of the said amount were committed to Svyaz-Bank in the form of interbank credits and the remaining funds were provided for the bank to discharge its liabilities on the exchange Repo market.

In order to address Svyaz-Bank’s current problems the Bank of Russia will place a deposit of 2.5 billion dollars with VEB for a period of one year with a possibility of prolongation at LIBOR+1%. Thus Svyaz-Bank’s operation will be restored, continuous cash flow to all the bank’s customers including pensioner will be secured, payments under the Post of Russia wage projects will also be made uninterruptedly, said VEB’s Chairman. “Acting a core shareholder we can safely say that from this time onwards all Svyaz-Bank’s obligations will be fulfilled in full as we can use financial resources provided to us”, - said Vladimir Dmitriev. And the benefit is expected to be mutual. According to him, joint operation of the two banks under VEB’s auspices is of great interest, but nobody ruled out the possibility of establishing a Post Bank on the basis of Svyaz-Bank. “We spoke about prospects for cooperating with the Post of Russia with its head Andrei Kazmin”. Given this cooperation, VEB will get rid of non-core asset and the Post of Russia together with the bank will obtain a license for conducting banking transactions of what Mr. Kazmin dreamt about so much.

So far, private depositors and corporate customers have been assured that they will have no problems. But to tell you the truth, there is concern that on the backdrop of the complicated situation as a whole, the bank’s many customers both natural and legal persons would request the bank to transfer their deposits to more stable and more understandable banks”, - said Mr. Dmitriev. And there are already examples of that. According to Mr. Zhitnik deposit outflow from Svyaz-Bank is not significant, but businessman Alisher Usmanov has partially withdrawn his deposit.

Julia MIRONOVA

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