Development Bank Chairman Vladimir Dmitriev talks about the way he is going to spend money.

Newspaper Kommersant № 114 (3690) of 03.07.2007

“We are planning to choose promising regional banks for working together, become these banks’ shareholders, capitalize them and develop their core business.”

The reform of Vnesheconombank (VEB) of the USSR operating in the past 16 years within a dubious legal framework has at last started. VEB has succeeded in lobbying for establishing a Development Bank on its basis with an authorized capital of 70 billion rubles and gigantic powers, which are codified in the Law “On the Bank for Development and Foreign Economic Affairs (Vnesheconombank)”. This Law came into force in mid May and two weeks ago VLADIMIR DMITRIEV, former Chairman of Vnesheconombank of the USSR, was appointed as Management Board Chairman of the new state bank. He gave the first interview in his new post to Kommersant’s special correspondent ELENA KISELEVA.

- Besides the Law “On Development Bank”, the new Bank’s powers will be specified in the Memorandum of its financial policy. When will it be ready?

- According to the plan approved by the Government, the Memorandum is to be ready till mid July. So far Government departments have had varying approaches but it’s pretty safe to say that an agreed version will be submitted to the Government next week.

 - What are the main provisions of the Memorandum?

 - First, the Memorandum will set forth main criteria of the Bank’s financial stability. We believe that they should be specified despite the fact that VEB is not accountable to the Central Bank of Russia: the Bank has been assigned a task to become a maximally open and transparent institution. In this respect, we propose to specify in the Memorandum such criterion as capital adequacy in the amount of 8%. It makes sense specifying assets yield, that is, anything we need to assess the Bank’s performance. While these criteria are perhaps less representative because generating profits is not the Bank’s main objective, and for this reason our indicators will differ from average statistical indicators for the baking system as a whole.

Second, the Memorandum will specify VEB’s main core businesses such as transport infrastructure, power engineering (including nuclear power engineering), aircraft construction, shipbuilding, high technology, promotion of small and medium business, nanotechnologies.  

 - And what about capitalizing regional banks using VEB’s funds? Have you also identified this line of business as a top-priority?

- We think that it makes sense doing it. Specifically, we have already purchased a stake in the Togliatti National Trade Bank that will be responsible for monitoring our projects in the Volga region.

 - Is capitalization of banks recommended by the state or is it VEB’s way of establishing its own network of branches?

 - Of course, this, above all, is associated with a kind of business we’ll have to do in the regions. Here I mean major infrastructure projects where we have to exercise control over the proper use of funds. On the other hand, we’ll be also dealing with supporting small and medium business, which fulfils a task of bank capitalization. We are planning to choose promising regional banks for working together, become these banks’ shareholders, capitalize them and develop their core business. Our Supervisory Board will be responsible for decision-making and this is standard banking practice. To be more precise, development institutions’ practice: these institutions enter banks’ and companies’ capital to create a growth potential and then withdraw having ensured required profitability. By the way, the European Bank for Reconstruction and Development is involved in this sort of business (EBRD) and IFC (the International Finance Corporation is incorporated in the World Bank).

 - How much money is VEB ready to spend to support the Russian banking system?  

 - We’ve got our own opinion about this issue. But I would not like to make any figures public because it’s too early.  These figures are to be agreed upon with the Government. At least, we don’t propose to include any specific figures in the Memorandum. The document is designed for three years and it can specify our portfolio structure (long-term, mid-term credits, sectoral division). If the state thinks it fit to include these parameters in the Memorandum, we’ll do it. Furthermore, we can modify parameters of the Memorandum. 

 - Are you interested in majority stakes alone?

 - I don’t think we should limit ourselves to majority stakes. We should rely on independent and well-established banks in need of capitalization. So we can also acquire blocking minority holdings and even lesser stakes but they should ensure our participation in management process. 

 - In what regions are you going to buy banks?

 - We would like to buy something in the Krasnoyarsk region, given the fact that we are active participants in the Lower Angara Area development project. And, of course, in the Far East. Together with the China State Development Bank we are getting involved in a number of projects to be soon carried out in Sakhalin. For example, the construction of a cement factory expected to be built with the use of Chinese technology and equipment. I would also like to mention gasochemical and petrochemical industries in Sakhalin. There are several related production facilities there and we can use the Bank’s resources to build plants and factories there. We are discussing this issue with the Sakhalin region administration.

There is another region, namely, the Urals where we have a number of large customers, for example, Uralvagonzavod and its related companies. We are also planning to participate in the development program “The Industrial Urals – The Polar Urals”. Nowadays we are discussing ways of giving real substance to our agreement on cooperation with Ekaterenburg SKB-Bank. SKB-Bank is a large regional bank, which cooperates closely with the Pipe Metallurgical Company (TMK). But the bank’s business is not limited to servicing TMK, it also participates in a number of national projects such as affordable and comfortable housing, tourist and recreational zones, deep processing of mineral resources, high technologies and etc. The bank is interested in cooperating with us and now we are making efforts to cooperate in certain lines of business.

 - Is VEB going to enter SKB-Bank’s capital?

 - We haven’t discussed this issue yet. But to enter the capital of companies, which are of common interest to this bank and us is pretty realistic.

 - Will all these projects be carried out within Private Public Partnership?

 - That’s right. That is why the Development Bank participates in the projects. It will raise investment to fund infrastructure projects in distant regions to ensure the participation of private capital. Our interests include Lower Yakutian coal deposits, in view of the fact that they are covered by the co-investment program with the use of investment fund resources and carried out by the South Yakutia Development Corporation. We hope that we’ll be able to participate in a joint project with the United Industrial Corporation for Elegestskoe Coal Deposit where they plan to build about 400 kilometers of railway. In short, everything located behind the Urals is of great importance to us.  

 - Are you going to enter capital of such corporations?

 - I think so. At least, we gained some good experience in the Krasnoyarsk region where we established a region development corporation (each participant has a stake of 25%) jointly with the regional administration, Rusalom and GidroOGK. We are going to act as an investor in the construction of pulp and paper and housing construction integrated plants. It’s already evident that the Krasnoyarsk corporation is making progress. A number of regional administrations offer us to set up similar corporations, and there are investors interested in carrying out such projects together with administrations and the Development Bank. 

 - Are you going to follow this practice in other regions?

 - In general, we are. In my opinion we can carry out similar projects in West Siberia, Transbaikalia, the Far East. I do not rule out that their configuration might be different, for example, there could emerge a major investor and in this case we would establish a triangle, which will include an administration, our Bank and a private investor. We can work without entering capital, acting as a creditor and financial consultant on the terms of project financing. 

 - Do you have plans to withdraw from projects carried out by VEB of the USSR, for example, such as NOVATEK or the Sheremetjevo-3 construction project?

 - We don’t have any stake in NOVATEK and so far we are not planning to withdraw from the Sheremetjevo international airport construction project. To fund the Sheremetjevo-3 construction project we have raised $230 million for a period of 13 years from a syndicate of Japanese banks. As far as the Russian banking system is concerned this project is unique both in terms of its time frame and amount.

 - Last autumn VEB purchased a 20% stake in the Eurasian Company, one of the private operators in the housing and communal services sector. Do you have any plans to purchase new stakes in this sector?

 - The Eurasian Company’s business is not limited to housing and communal services, it also deals with infrastructure. It includes water channels and drainage systems. By the way the Eurasian Company won the tender in the Rostov region for the use of investment fund resources. So this project is in line with the Development Bank’s core business. And as to housing and communal services, we have another project in the Kurgan region within the framework of the agreement with the local administration on reequipping heat systems and modernizing electricity and heat supply systems. A special company has been already established and we signed an agreement on cooperation with it and reached an understanding to enter capital of the project’s operator Toboloenergo.

 - Is VEB ready to work out project financing schemes in housing and communal services sector and in the real estate market where VEB is not too active?

 - We can’t deal with real estate by definition. It’s not our core business; otherwise we’ll be stealing the bread out of commercial banks’ mouths. There is no doubt that we’ll participate in national projects in the context of implementing the program “Affordable and Comfortable Housing”. We are not going to fund housing construction in the interests of developer’s business but we can finance complex development of a city district, for example in Chuvashia. In my opinion, we should give high priority to housing construction, construction materials industry, for example we can build a housing construction integrated factory, build other production facilities that could contribute to the development of communal construction and help small and medium business.

 - We know that this year VEB helped Airbridge buy Hungarian airline Malev. Why? Isn’t the Bank planning to become a co-owner AirUnion to be established in Russia, with AirUnion being friendly to Airbridge?

- I’d like to answer you in the following way. The Abramovich Malev project (Boris Abramovich is the general director of KrasAir) was backed at the highest political level, as it was instrumental in supporting Russian business’ interests abroad. But this support is not an end in itself, we entered this project because we believed that it was possible to synergize KrasAir’s and Airbridge’s business with an eye to establishing AirUnion in the future.

 - Are you going to have a share in this project?

 - This is out of question. It’s just our support because the Bank’s top-priority line of business is to provide support for Russian industrial exports and Russian export of services. In this case we provide support for a Russian airline offering services abroad. We also cooperate with Zarubezhneft and its subsidiary Neftegazinkor to help them with their plans to purchase petrochemical assets in Serb Kraine in Bosnia for Russian specialists to reconstruct and modernize the production facility in the future. I was in Bosnia a week ago.  We examined the facilities and held talks about structuring business. I’d like to tell you that we are not going to purchase any equity capital.

 - When will by your estimates the Development Bank run out of capital?

 - Our capital hasn’t been formed yet. VEB of the USSR has so far transferred its assets into the state corporation’s ownership. By Russian accounting standards our capital amounts to about $650 million as of today and by International Accounting Standards (IAS) it is more than $1 billion. By law, our capital is to be formed in the amount of at least 70 billion till the year-end, to be more precise, within six months after the Bank’s registration, that is, on December 8.

 - Will it be formed at the cost of budget funds?

 - I assume that capital formation will go through a budget process and this would require amendments to the 2007 budget.

 - Somehow you said in public that stabilization fund resources would be used to form the Bank’s capital?

 - It wasn’t me who said that. Alexey Kudrin said that (the Russian Finance Minister). The case in point was that some 300 billion rubles would be spent on development institutions in the near future. According to Kudrin, 250 million would be spent on the Development Bank’s capitalization. The Russian President said that these funds would be allocated from the National Welfare Fund. But this Fund will be formed no later than February 1 and this means that some other sources should be found.  There was talk of incomes from the sale of Yukos assets but Kudrin said the stabilization fund could be used, with the funds being compensated for from other sources later on.

 - Does this sound realistic?   

 - It’s up to the Government to make a decision. Let’s take into account the fact that by law, stabilization fund resources can be used for the following two purposes: early repayment of foreign debt and compensating for budget deficit of the pension fund. Other options are ruled out.

 - Market makers who filed applications for receiving resources from the investment fund believe that it is VEB that should be responsible for managing this fund as an agent for the Government rather than officials?

 - There’s no doubt that VEB and its specialists are in a position to fulfill serious tasks associated with managing government resources. And it makes sense to involve major professional institutions in managing such funds. Here we should keep in mind that Vnesheconombank is only one of them.

 - How long are you going to act as an agent for the government in managing Russia’s foreign debt and operate as the state trust management company in charge of managing undecideds’ pension savings?

 - To my best knowledge, the Government doesn’t have any plans to release us from our status as the agent for the government in managing foreign debt and as the state trust management company responsible for managing funded portion of pension funds. In fact, I don’t think that it makes sense doing it. Conventional wisdom has it that the best is the enemy of good. At present, 270 billion rubles of would-be pensioners are under VEB’s management. As early as last year, we offered to increase the number of investment instruments and enable us to invest these funds in Russian and foreign issuers’ bonds and may be in their shares in order to diversify our investments. To all appearances, this offer was supported by the Government and key ministries. We still believe that we can use pension funds to fulfill investment tasks.

 - Do you mean they can be used to fund infrastructure projects?

 - That’s right, here I mean infrastructure projects that are carried out within public and private partnership and can be implemented through issuing securities guaranteed by the state. So, we won’t have to introduce any amendments to regulatory documents, we’ll be able to purchase these securities using pension funds. I’d like to stress that it’s not a matter of direct lending of any projects. We also proposed to lift restrictions on investing in mortgage securities because in accordance with our investment declaration we are limited to buying only those mortgage securities that are guaranteed by the state. But in view of the fact that mortgage securities are pledge-backed securities we believe that government guarantees are excessive. With restrictions lifted, we’ll be able on the one hand to diversify our investments and on the other to raise liquidity of the Russian banking system through securitising these assets. By the way, this is quite a topical issue today and the President speaking at the meeting of the State Council set a task of using pension funds for the construction of affordable and comfortable housing.

 - Do you agree that compared to your colleagues from other development banks, the EBRD and the World Bank you are in a unique situation in terms of the number of functions?

 - The situation is unique. In fact, none of development banks, to say nothing, about international development institutions have so many functions: the Bank is the state trust management company; it is responsible for managing foreign debt and domestic debt as well (we are authorized to recover bad debts from debtor companies). Historically, this is the way things worked out. And in so far as a well-functioning system has been put in place to my mind it’s hard to cut the ties that bind in order to just ensure the validity of the experiment. Our agent’s functions provide us with additional opportunities to achieve the Bank’s core objectives. For example, the fact that the Bank is involved in managing foreign debt and financial assets enables it to advance Russian companies’ interests abroad and encourage Russian industrial exports in the case that we are making efforts to redeem foreign debt through goods deliveries. On the other hand, Indian and Syrian debts can be used to help Russian companies to achieve their investment objectives in these countries.

 - Are there any Russian companies that are interested in using Syria’s debt, as was the case with AFK Sistema and India’s debt?

 - There are quite a few companies for example the said AFK Sistema is interested in the tourist infrastructure in Syria, Pumpyansky (Dmitry Pumpyansky, TMK General Director) is both interested in tourism and his core business in Syria. And I can also mention Zarubezhvodstroy, Stroytransgaz, and LUKOIL. A great number of companies would be willing to use Syrian assets for their investments, with subsequent payments to the budget being made at a later date. It should be taken into account that here we deal with the government debt, which is accounted for by Vnesheconombank and in this context we can start to build a system of Russian industrial exports promotion.

 - Is the Bank going to operate in the securities market?

 - Yes, it is. This activity will not be our core business but it is important in terms of maintaining the Bank’s own liquidity. VEB operates in the securities market on a daily basis both with Russian and foreign issuers. Of course, we stay away from conducting risky transactions in second- third-rate securities. But I believe we’ll be a noticeable player in the securities market and of course we will coordinate our policy with the Supervisory Board. Our capital would amount to 250 billion rubles but this does not mean that all these funds will be used to implement various projects. Our capital will be invested in liquid assets. We insisted that the Bank’s authorized capital should not be used to finance its day-to-day operation. These funds should, above all, serve as the basis for raising financial resources.

 - Will it enable you to raise cheap money?

 - There’s no doubt about it. You need cheap money where yields are a priori minimal, project payoff periods – longer, the amount of resources - a lot larger and where commercial banks are not interested in doing their business. This is our mission and the fact that we are exempt from profit tax would help us accomplish it.

 - Do you pay any other taxes?

 - Of course, we do. We are a national development bank; we even have our own individual taxpayer number (ITN). VEB is a Russian resident.