“We Pump International Financial Institutions’ Resources into our Economy”
Vladimir Dmitriev Chairman of Russia’s Bank for Development and Foreign Economic Affairs talks about infrastructure, the banking crisis and Western fears of state funds.
As Chairman of Bank for Development and Foreign Economic Affairs (VEB) Vladimir Dmitriev is supposed to see to it that enough capital comes into the Russian economy for ensuring sustainable economic growth. He speaks for the first time with a representative of Western press about the Russian expansion on the world market, Western fears of state funds and gigantic tasks Russia will have to address. Jens Hartmann interviewed Mr. Dmitriev.
Die WELT: Vladimir Alexandrovich, you will be a member of the Russian delegation at the Davos World Economic Forum. What issues are the leaders of the Russian economy concerned about in the current year?
Dmitriev: One of the themes on the agenda is going to be an issue of whether state funds pose any danger or not. There are a lot of themes. Probably delegates will discuss the situation in Third World countries and implications of the mortgage crisis.
Question: An issue of state funds would be a concern of yours. What would you tell those critics who are worried that Russia and China are seeking to buy up Western assets?
Dmitriev: VEB is not in charge of managing Russian state funds. It’s the responsibility of the Finance Ministry and, to some extent, the Central Bank.
Question: Nevertheless, you purchased a five percent stake of Aerospace Company EADS last year.
Dmitriev: VEB has the right to purchase foreign shares and participate as an investor in foreign corporations. In case of EADS, our goal is not to purchase a Western asset as if we were to act as a state fund. At the end of 2007, the state raised our capital from 180 billion rubles (5 billion euros) to more than 200 billion rubles. We were seeking possibilities of making investments.
Question: Was it a net financial investment?
Dmitriev: We were going to exchange this stake for a stake in the United Aircraft Building Corporation (UABC)…
Question: .. a state-owned holding incorporating all Russian aircraft builders…
Dmitriev: I mean the UABC stake that will come on the market after additional share issue. UABS has to take a decision on this matter. In our opinion the exchange would help integrate the Russian and European aerospace industries to the benefit of both sides. As you know, EADS holds Russian Aircraft Building Company Irkut’s shares. Irkut is incorporated in UABC.
Question: The China State Development Bank has become a shareholder of the British Barclays Bank. When are you going to buy a stake in a Western bank?
Dmitiev: I wouldn’t like to rule out the possibility that some day our activity would assume larger dimensions and we would start to purchase foreign assets. But at present, it is much more important to us to initiate major investment projects in Russia. There are other state institutions designed to purchase stakes abroad such as the National Reserve Fund or the National Welfare Fund.
Question: Do you know why the EU is seeking to introduce legal protection measures against such investors like you?
Dmitriev: I think that the whole debate over legal restrictions for foreign investors in EU countries is blown out of proportion. Forced regulation could become a serious obstacle to Eastern European businessmen and would eventually deliver a blow to those who initiated these restrictions. Those who try to hamper competition harm consumers. I’d like to remind you that oil sheiks that invested heavily in the West in the seventies ran into fierce resistance to become later welcome business partners.
Question: Does this mean that the West shouldn’t be afraid of you?
Dmitriev: A line in a revolutionary Russian song reads: “ We are peaceful people but our train waits in reserve” ( laughing). Our Bank for Development is designed not only to develop our domestic economy but we are also developing it for our companies to step up their efforts to enter third countries’ markets. And this means that they seek to purchase production assets. For example, we financed the purchase of an oil refinery by a Russian company in Bosnia.
Question: Russia’s former economics minister Herman Gref said that a trillion dollars should be invested in infrastructure till 2020. What is VEB going to do to make this happen?
Dmitriev: If you will, we are pumping international and Russian financial markets’ resources into our economy. We are making efforts to move our economy to a qualitatively new level by overcoming our one-sided dependence on raw materials. Innovations are supposed to be a driving force of economic growth. We help key industries in need of the state’s support such as transport, power engineering, communications, aircraft construction and shipbuilding.
Question: You need Hercules’ strength to achieve these objectives.
Dmitriev: Gaps in infrastructure, in which the state has not invested on a large scale in the past 20 years, hamper the economic development. Businessmen are ready to develop new mineral deposits, build factories and electric power generation stations in Siberia and the Far East. But we have to build railways, bridges, pipelines, power transmission lines and communal networks for them to reach mineral resources and production sites. Private business can’t do all this. The only way out is for the state and VEB to finance these infrastructure projects.
Question: What can and should private business do?
Dmitriev: In our estimate, each ruble invested by the state would raise up to 3-5 rubles in private investments till 2012. We see ourselves as a link between the state and private business and we’d like to become a national expert center for public private partnership.
Question: The USSR was involved in mega projects, which had no chance of being profitable. Is there any danger that billions would be thrown down the drain again?
Dmitriev: Of course, we have learnt lessons from our history. Both the Law “On Bank for Development” and the Memorandum on the Bank’s Activity stipulate that the projects financed by the Bank should be both environmentally and economically feasible.
Question: What are VEB’s advantages over commercial banks?
Dmitriev: We carry out the projects, which are financially unfeasible for commercial banks or go beyond their capability. These are, for example, the long-term projects with a duration of at least five years. They need to be financed on the most favorable terms and are designed to boost our economy. Commercial banks’ goal is to generate profits. Our goal is to address social and economic tasks.
Question: Does it make sense to refuse to generate profits?
Dmitriev: We are not philanthropists. While our founding documents stipulate that generating profits is not our central principle they specify that we should operate on a break-even basis. As far as competition is concerned, in Germany, for example, the state guarantees all KfW’s loans, in our country we are exempted from paying profit tax. This enables us to borrow money on more favorable terms than other banks and lend at lower-than-market interest rates.
Question: One of the main issues at the coming Davos Forum will be the mortgage crisis in the US. How do you think this crisis affected Russian banks?
Dmitriev: The crisis didn’t have any negative effect on VEB as we didn’t borrow on a large scale on international markets. There is no doubt that on the whole borrowing costs will be higher but we’ll be able to take new credits because we have sovereign rating and don’t have to pay profit tax.
Question: Are there any reasons for Russian banks that used to bankroll their development through using major Western credits to be afraid for their future?
Dmitriev: To my mind, the situation in the Russian banking system is by and large pretty stable.
Undoubtedly, Russian banks were active players in the international interbank market but, for the most part, they didn’t use highly risky financial instruments. If some difficulties emerge they would be able to address them by way of borrowings, consolidations, mergers and acquisitions in the banking sector.
Chairman and Bank
In his capacity of VEB Management Board Chairman Muscovite Vladimir Alexandrovich Dmitriev is one of the most powerful bankers in Russia. Dmitriev has been in leading positions in VEB for eleven years. He has been VEB Chairman since 2004. He did a course in international economic relations and defended Master’s thesis. After graduation he was on diplomatic service. 53 year-old Dmitriev is seen as the Kremlin’s banker.
If you want to enter the Bank’s Moscow headquarters, a massive Soviet-era fortress, for starters, they will place you into a glass capsule and screen from all sides. State-run VEB has always been reputed to be a secretive financial institution heavily guarded from the outside world. In the past, the Bank was largely responsible for managing Soviet-era foreign debt but in 2007, it took on a new responsibility for financing the modernization of the Russian economy and seeking out interesting assets abroad.
The Kremlin formed the basis for the Bank’s activity by contributing 202 billion rubles to its charter capital, which is to be raised to 250 billion rubles in 2008. Next year the charter capital is bound to increase. VEB is a state corporation, that is, a non-profit institution. Although the Russians modeled their Bank on German KfW, the Russian state is not responsible for VEB’s obligations and credits. The Bank’s total assets were 8.3 billion in euro terms as of January1, 2007.
Vladimir DMITRIEV: “Infrastructure Development is not an End in itself”
January 21, 2008
The Russian economy is in great need of long investments that would allow it to secure the development of strategic industries. In his interview Vnesheconombank Chairman Vladimir Dmitriev told us about the way State Corporation ‘Bank for Development and Foreign Economic Affairs’ was going to address this problem.
- Given huge earnings from the export of energy resources and increased investments, the real economy is pressed for cheap and long money. In other words, such funds which are absolutely necessary for implementing large-scale projects. Is the Bank for Development established on the basis of Vnesheconombank capable of solving this problem?
- The Russian financial market is really coming up against an acute problem of getting cheap and long monetary resources. According to the Ministry of Economic Development and Trade, the share of banking credits extended to the real sector of the economy for a period over three years is about 15-18%. The volume of such credits in Vnesheconombank’s portfolio was 65% last year and in the previous three years we fitted successfully into parameters of about 50%.
We knew what we should and what we were going to do even when the decision to establish a bank for development on the basis of Vnesheconombank was under discussion. Taking into account the best practices of other countries and international financial institutions we drastically change the structure of our loan portfolio and increased it through long credits placing great emphasis on serious and major investment projects. We have been active in doing this in the past several years. For ample, in the year 2008, we are determined to carry out projects worth 2 trillion rubles. According to our estimate the Bank’s resource base and raised capital would make it possible to fulfill 30% of the task of raising investments in the country’s economy.
- It’s quite clear that even such huge sums should not be spread thinly across the whole economic field. You should follow a certain logic upon carrying out your investment projects. Is this sort of logic in place today?
Main lines of our investment business would be directly linked to the state’s economic policy. This approach would be developed in great detail in Vnesheconombank’s Development Strategy which is now being discussed extensively and would be submitted to VEB’s Supervisory Board till March 1. Main parameters and lines of this very important document were approved by the Supervisory Board at the end of September 2007.
We are operating in the industries and main sectors, which are supposed to address the tasks set by President Putin in his address to the Federal Assembly. These tasks are to increase economic growth rates among other things by way of overcoming infrastructure restrictions, establish new and upgrade old functioning high-technology production facilities, rationalize the use of natural resources.
It’s evident to us that infrastructure development is not an end in itself; infrastructure should and would develop the economy as a whole, it would help create new production facilities, jobs, develop new mineral deposits. Overcoming transport, energy, communal and other economic growth restrictions combined together would yield a colossal multiplier effect for the country’s development.
Avia and rocket-space complex, shipbuilding, power engineering including nuclear power engineering, mechanical engineering, electronics industry, timber industry are highly instrumental for our economy’s structural restructuring. They are, in a sense, breakthrough sectors in terms of introducing innovation technologies, which are, above all, in need of long and cheap monetary resources. Commercial banks won’t be able to make this money available to these industries on the most favorable terms and in required amounts due to low yields and long payback periods of the largest-scale projects in said industries.
At the end of the last year we received an agreed list of projects from the Ministry of Economic Development and Minpromenergo, which they offered to finance with Vnesheconombank’s funds. I am happy to say that we are already working, to a variable degree, on 80% of these projects in almost all industries where we are required to operate by the Memorandum
-What are the mechanisms of implementing the Bank’s main lines of business and its participation in investment projects?
-The Law “On the Bank for Development” and the Memorandum on the Bank’s Financial Policy provide for various forms of the Bank’s participation in investment projects. We are entitled to conduct expert’s examination, offer consulting services, participate in business entities’ capital, found and participate in various institutions and funds, which in their turn provide support for investment projects. As you can see, the Bank has a large range of financial instruments at its disposal.
-What about leasing schemes?
-At the end of the last year during the trip with the Russian Prime Minister to Vologda we discussed an issue of reequipping our timber industry, specifically, pulp-and-paper mills and related production facilities operating in a closed-loop cycle. It is leasing that is one of the most important instruments for such modernization. By the way, very few leasing companies are willing to operate in the industries that do not generate fast profits. That is why they have few customers in our high priority industries. For example, our cement industry that is in very high demand now is a case in point. We believe that VEB’s participation in leasing companies can redress this imbalance.
-Can we address the problem of long money deficit in the domestic economy using development institutions’ resources alone? Or do we have to take additional systems decisions?
-Development institutions are known to have received 600 billion rubles at the end of the last year. And only Vnesheconombank with its appropriate authorities determined by the Law and the Memorandum on the Bank’s Financial Policy and the Supervisory Board’s special resolution not to mention the existing banking infrastructure is capable of investing and managing this money efficiently. All other banks are not in a position to do it due to current applicable legislation. The bottom line is that huge resources are put on hold for the time being. That is why we have to look for systems decisions.
-They should be aimed at the effective use of development institutions’ huge resources with an eye to promoting the inflow of private investment to the economy.
-What is needed to put your proposals in place?
-In any case we need legislative initiative, joint and concerted action by all government institutions involved in developing the economy.
-It is worth noting that development institutions and in particular the Investment Fund, the Russian Venture Company, State Corporation Rosnanotech, special economic zones can undoubtedly do a lot but not everything. The main thing they and our Bank should do is to enter into projects and widen their investment appeal. And we can’t address this problem today without changing applicable legislation. Experts believe that in order to launch effective and large-scale private public Partnership (PPP) we have to introduce amendments to more than 100 laws and by-laws. Being aware of the problems investors face we are going to initiate a procedure for changing a number of existing regulatory acts. We don’t want our complicated and conflicting legislation to stand in the way of private investments.
Our potential target is that each ruble invested by the state could raise 3-5 rubles in private investments.
-Do you think that this target is realistic?
-Someone can say that it is not. There are really a lot of skeptics. I would answer them by giving the following example: at present the Bank is considering financing investment projects in the Kaluga region and as to these projects, according to project developers’ estimate each ruble invested by the state would raise almost 25 rubles in private investments.
-This brings up the issue of project development. Are there now any project development institutions in Russia capable of developing large-scale projects our country needs to promote further economic development for example the said infrastructure projects?
-It is a very relevant question and it is directly linked to the need for us to make systems decisions. You are absolutely right: in many industries that are of paramount importance to us there remain only few project development institutions and they are far from meeting today’s requirements. If we look at the situation in the timber industrial complex we find that there are only two project development institutions, with one of them being bought by Finns and restructured to advance its owners’ interests. The situation similar to that in the timber industry is developing in petrochemical industry. That is why our proposal is to establish new or retain old project development institutions equally distanced from business in a number of key industries for them to act as expert centers in these industries. They should take the form of competent, expert institutions where both large corporations and small-sized companies could turn to without being afraid of revealing their cards to competitors.
-Under the scheme for financing the construction of a pulp-and paper mill in the Lower Angara region –no pulp-and-paper mills have been built in our country in about 30 years – we are now trying to establish an engineering company, which would be much needed by our timber industrial complex. As a project institution it will provide services on conducting high-quality expert examination of projects and it should be staffed with world-class experts. But its activities will remain under the state control. We should do the same in machine tool building. Maybe this is a forced measure at this stage but it is designed to speed up a breakthrough in top-priority industries.
-Unfortunately, Russia is known almost exclusively as an exporter of energy resources in the economic world. One of your Bank’s tasks is to provide support for high-technology exports. How are you going to fulfill this task?
-We are going to support industrial exports through establishing a system of export credit insurance as well as through granting targeted mid and long-term credits, for example, such as “buyer credits” which are accepted international practice. These credits are designed to finance the supplies of Russian exporters’ products to their foreign counterparties. But we have a broader view of export promotion functions.
Besides a system of extending and insuring export credits, we find it necessary to provide Russian producers of high-technology export-oriented goods with long-term cheap financial resources and create import-substituting production facilities to expand Russia’s export base.
By doing this, we can also address an important social objective of creating new jobs.
We are quite aware that Russia’s export potential is not unlimited and that is why we have to find a niche in the former Soviet markets. These are, of course, markets in CIS countries, China, India, the Asian-Pacific region, the Middle East and Latin America. Our power equipment and nuclear power generation technologies are still in great demand there. These countries are also in need of military-technical cooperation with Russia.
-Does the Bank plan to work with small and medium business. It is known to account for a lot lager share of GDP in industrialized countries. Our Government also plans to focus more on the “little ones” for them to become driving forces of economic growth too.
-Small and medium business support is one of our key lines of business.
But the fact is that we can’t provide credit resources to small and medium-sized businesses on our own and operate either through specially established business structures or commercial, mainly regional, banks. For them it’s their core business. Thus, we not only finance small and medium business but also help regional banks increase their capital base and diversify their liability structure contributing to the development of the financial sector.
This line of our activities is critically important because so far the bulk of financial resources earmarked for small and medium business have been accumulated in businesses involved in trade and services. We believe that our objective is to change the situation and place particular emphasis on financing businesses engaged in industrial production, innovation business, and high technologies.