Vladimir DMITRIEV: “Infrastructure Development is not an End in itself”

21 january 2008 года

Fedor Zamyatin
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.


Synergetic Effect from Participation

28 december 2007 года

Analytical Banking Journal
12 (151)
December 28, 2007


In the year 2007, (after several failed attempts) the Bank for Development was established on the basis of Vnesheconombank. The Bank was tasked with financing the development of the country’s strategically significant industries and its infrastructure. Lately the Bank has at last received large budgetary funds and can start operating. We asked Deputy Management Board Chairman Sergei Vasiliev to tell us about the Bank’s high-priority plans and its methods.

-Despite lengthy discussions about the need to establish a Bank for Development in our country and even some, although not very successful experience in this field it was in 2007 when the Bank was established on the basis of Vnesheconombank. In many industrialized and developing countries such banks have been in place for a long time. Why are we lagging behind?

Sergei Vasiliev:The Bank for Development’s establishment actually proved to be one of the most important events of the outgoing year in our country. It was in 2007 when our economy reached the pre-crisis level of the 1990 economic development. And this changed dramatically the requirements for economic development conditions. Infrastructure economic growth restrictions are coming to the fore. The infrastructure that was built in the Soviet times was quite sufficient for the country during stagnation followed by gradual recover growth. Investments in infrastructure have been made in limited amounts in the lat 15 years and this limited the economic growth. The Bank for Development was established to meet the challenges of the time.

 -What are the sources of financing infrastructure?

Sergei Vasiliev: Infrastructure development can be financed with various funds. Above all, through using budgetary resources. But unfortunately budgetary monetary funds on the one hand are not sufficient to finance all facilities and on the other the current investment mechanisms demonstrated that they are rather cumbersome and ineffective. The decision that has been recently proposed for major investment projects is to create an investment fund. This decision makes a lot of sense but it allows to work simultaneously with a limited number of major investment projects while the he country needs hundreds of such projects. The main reason for establishing the Bank for Development now is the growing need for such an institution as an instrument of a large-sale infrastructure financing.

-What institutions should be our role models and whose mistakes should we learn from?

Sergei Vasiliev: Upon establishing a Bank for Development on the basis of Vnesheconombank the main countries whose best practices were of particular interest to us and where these development banks were very successful were such countries as Germany where such a development institution was established as early as the period of post-war rebuilding; Korea where a similar development institution was highly instrumental in the country’s industrialization; Brazil where such an institution was very efficient and is still very efficient.

As far as CIS countries are concerned, in my opinion, Kazakhstan’s experience is of particular interest. We are learning from its experience. The Bank for Development was established there not long ago but it’s already operating in a pretty successful way. Moreover, upon drafting our own documentation we relied, to a great extent, on Kazakh regulatory documents because this country is very close to us in terms of economic structure and institutional culture.

-What are in your opinion advantages of Russia’s Bank for Development?

Sergei Vasiliev: One of the Bank for Development’s principally important advantages is that it provides a very high multiplier effect from investing budgetary funds. Recently 180 billon rubles have been transferred to our Bank’s charter capital from the budget. With the Bank’s own funds its capital amounts to 200 billion rubles. It’s quite a large sum. But the Bank’s future potential is not limited to the said sum. The Bank’s 200 billion rubles can raise funds in international markets in the amount of about 800 billion rubles. Thus the Bank’s total assets will reach a trillion rubles in the short term (in the coming 3-4 years). Thus one ruble of budgetary investment in the Bank’s charter capital will be able to raise 4 rubles from the market. But there’s still something more to it. As a rule, projects are not financed in the amount of our 100% participation but on the basis of shared participation of the Bank for Development and other investors. Our position is that in the prospect the Bank would finance only 30% of investments in major projects. Another 30% is to be provided by the borrower from its own funds and assets. The remaining amount can come from other sources. We expect that those could be budgetary resources, international financial institutions’ funds and outside investors’ money. The main thing here is a synergetic effect from the participation of several investors in major investment projects: none of these investors can handle such a big project on its own but the Bank for Development’s initiative would minimize risks and make investment more profitable both for regional budgets and private investors. With this approach, gross investment amount per one budgetary ruble ratio proves to be 8:1. In other words one ruble from the budget invested in Vnesheconombank’s charter capital would raise eight rubles of gross investments. It is very good. If we now calculate the total sum of money we can raise to invest in our economy in the midterm through the Bank for Development it would amount to 1.5 trillion rubles. It’s a big sum of money equivalent to about $ 60 billion although it’s clear that it is not sufficient to meet all the needs for infrastructure development.

-Nevertheless, the Bank for Development is a state bank? What is its official status?

Sergei Vasiliev: The Bank for Development was established as an institution with a special status. It is a state corporation that operates on the basis of the special Federal Law and its operation is not to be regulated by the Bank of Russia, we don’t have mandatory reserves and we don’t have profit tax. All financial regulation is made on the basis of the Memorandum on the Bank’s Financial Policy, which sets regulatory standards for its operation.

-What is the Bank for Development’s management structure?

Sergei Vasiliev: The Prime Minister heads the Bank’s Supervisory Board comprised of key ministers. This is the Bank’s supreme collective body, which formulates main rules of the Bank’s operation. Day-to-day operational management is the responsibility of Vnesheconombank Chairman and its Management Board. Russia’s President is to appoint Chairman of the Bank’s Management Board and Management Board members are approved by a decision of the Supervisory Board. The Memorandum on the Bank's Financial Policy sets forth that for the most part the Bank is to finance long-term projects the payback period of which is at least five years. Another significant indicator is that a project’s value should be no less than 2 billion rubles and this means that the Bank doesn’t have to participate in small projects.

-You’ve said that the Bank’s profit is not taxed. What financial results do you expect to achieve?

Sergei Vasiliev: The Memorandum formulated the principle of the Bank’s break-even operation. Taking this principle into account, the Bank for Development should see that a project is sure to pay back although the Law regulating our activity states directly that “the Bank for Development’s objective is not to generate profits”. At the same, time we do not give high priority to generating maximum profits. This means that our rate of interest would be a lot lower than a market rate of interest. It would be equal to the cost of borrowing funds plus the Bank’s margin determined by our overhead costs.

-What are the Bank’s main lines of activity?

Sergei Vasiliev: Infrastructure, innovations, rational use of natural resources, small and medium-sized business development and support for industrial exports. These are traditional lines of business for most national development banks. In addition to this, certain industrial priorities have been assigned to us. These are for the most part sectors of heavy industry such as aviation, space industry, shipbuilding, energy and transport mechanical engineering, atomic industry, nuclear power engineering, woodworking and pulp-and- paper industries. It should be said that Vnesheconombank has been traditionally working with these industries. In a way, these industries pose a problem to private investors.

At present, on the Supervisory Board’s instructions the Bank’s strategy is under development where the Bank’s industrial lines of business are being worked out in more detail, not just transport but its specific sectors, for example, building federal roads within public private partnership, reconstruction and building of sea ports and port facilities, development of internal waterways. Here we mean almost all major industries, which need large investments. The same is true of power engineering industry and housing and communal services.

-Hence, the Investment Fund is responsible for financing major projects. The Bank for Development is also responsible for financing major projects but of lesser scale, that is, those the federal center can’t finance from the federal budget – projects of regional level. At the same time the Bank would start to participate in financing projects on the competitive market on the terms of co-investing with private business including banking business as well. In this case such a partnership would boost competition and would bring about the redistribution of market forces.

Sergei Vasiliev: The Memorandum officially bars us from competing against private business. In the case that a project even in the infrastructure sector can be funded by market makers for example by commercial banks we won’t participate in principle in this sort of projects. In other words, we are not supposed to go into competition with banks. By contrast, as Vnesheconombank does not have branches many projects in the regions would be carried out through regional commercial banks, which would assume the responsibility for making funds available to borrowers as well as for exercising control over the way the funds are spent. Vnesheconombank would not perform these banking functions. Its task is to examine and fund projects. As regional problems are coming to the fore a special department for regional development was established in the Bank. In the near future representative offices are to be established in the regions. The task of Vnesheconombank’s representative offices is to study distinguishing features and details of the projects locally and assess risks associated with them and propose projects to the management.

Among the lines of particular importance for regional development I would single out small-and –medium-sized business infrastructure development, creation of techno parks and business incubators. In terms of financing technology we are going to select regional banks on a competitive basis and these banks are going to become operators of a number of projects. These banks would extend credit to small and medium-sized business using Vnesheconombank’s credit lines. But as to techno parks and business incubators the Bank will finance them directly.

The second line of business also associated with regional development is to build infrastructure of special economic zones, this line of business is the Bank’s top priority. But I think that we would make investments in regional infrastructure and development of the regions, which are not special economic zones. Facilities to invest in would, for the most part, depend on what kind of projects regional administration can offer to us. If there are interesting, well-prepared projects then I am sure there would be no limitations in those regions in which the Bank would invest money.


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