“Everything Located Behind the Urals Is Of Great Importance To Us,” said Vladimir Dmitriev in his interview with newspaper Kommersant
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.
July 2, 2007
Krasnoyarsk Region Governor Alexandr Khloponin’s interview with Vremya Novostei
- In terms of the number and scope of investment projects being implemented and discussed the Krasnoyarsk Region is the leader in the country with the exception of capital regions. What projects would you like to single out?
- Today major investment projects worth more than 20 billion dollars are being carried out in the region. These projects include the development of the Vankorsk oil and gas field on the border with Taimyr, the construction of an aviation hub on the basis of the Krasnoyarsk airport as well as projects in the power engineering, metallurgy and timber- processing complex.
The main investment project underway in the region is the Lower Angara Area Comprehensive Development project aimed at building a new powerful industrial district on the basis of its richest resource potential. The project includes the completion of the Boguchan hydropower station and the construction of a number of major power-intensive production facilities, above all, the Boguchan aluminum plant, the Boguchan pulp and paper integrated plant as well as oil & gas processing, petrochemical, gasochemical, metallurgical facilities and a cement factory.
- In what way do the state and business participate in these projects, what is the amount of their participation?
- At the first stage – up to 2010, the investment fund allocated 34.4 billion rubles for infrastructure development under the Lower Angara Development project. At the first stage, private investments would amount to 180 billion rubles and this is more than five times as much as budget appropriations for infrastructure development. In terms of the project’s contribution to the Krasnoyarsk region’s economic development it will increase the Domestic Regional Product (DRP) by up to 20% and the region’s budget by more than 10%. Generally speaking, in our region, we aim to get each ruble of government investments to generate 3-7 rubles of private investments in the projects. As a rule, this proportion depends on the level of infrastructure deficit on the territory where a project is carried out. The higher the deficit the larger the infrastructure shortages the Soviet power left behind and the more the state has to invest in building roads, power grids, bridges etc.
- Both as an investor and a creditor VEB takes an active part in these projects. Now it is being transformed into a Development Bank: will this influence the said cooperation, its mechanisms and scope?
- We are very happy that the Development Bank is being established on the basis of Vnesheconombank. I must say that some people appear to believe that it’s only now that VEB is being formally transformed into a Development Bank bur in our region we believe that it has been de facto as such for several years. VEB is the shareholder of the Krasnoyarsk Region Development Corporation, our main financial consultant, our investor in designing and construction of timber processing facilities in the Lower Angara Area.
Now that the Bank has a new status, a new range of instruments and new opportunities we would like to expand our cooperation in launching new major projects with the participation and support of the Development Bank.
As you know the Krasnoyarsk region is among the five Russian regions with the highest major investment project implementation ratio and this means that tens of billions of dollars will be invested in the industrial sector in the coming five-ten years. And all this money could be the subject of our cooperation with the Development Bank – somewhere they need infrastructure, somewhere they have problem attracting strategic investor, somewhere they need assistance in raising money for financing or in designing, somewhere they can’t carry out a project without guarantees, somewhere they need to put together a pool of financial investors. We are very optimistic about the establishment of Development Bank in Russia as a flexible tool for achieving investment objectives.
- What do you think about the emergence of such state development institution as a whole and in terms of regional development in particular?
- Creating and promoting investment instruments and institutions of public and private partnership (PPP) such the investment fund, the Development Bank, the Russian Venture Company, Special Economic Zones is a great stride forward for Russia as a country where the state and business are pursuing common cause. This is a positive development, and I am glad that our economic policy is moving in this direction. Now we can already rate the performance of the Russian Investment Fund. Tens of very important top-quality investment projects including regional stand a chance of being carried out. A year after the first meeting of the investment commission the first projects it approved are being implemented. For example, as far as the Lower Angara Comprehensive Development and the railway construction in the Chita region are concerned, investment agreements have already been signed and the funding and construction have started. Following the Government resolutions on allocating investment fund resources for the construction of the Western High-speed Diameter an international concession tender has been declared. And each ruble of government investments generates 3-6 rubles of private investments in line with established practice.
But the Development Bank is perhaps more important for the real economy of most regions than the investment fund. The investment fund is a major institution designed to deal with projects of national significance. For us investment fund is associated with major national projects. But the Development Bank’s methods of selecting projects and its range of instruments are lot more sophisticated and this allows the Bank to deal with a more diversified range of projects involving small business, innovations, startups, and service sector and these are the things our economy needs so much. It’s very important that the Bank’s procedures for selecting projects, its standardized lines of business should be transparent and clear for business and regions, that is, for applicants; for the Bank not to overlook the country’s project potential. It is very important to the country’s economy that the Bank with such a large authorized capital should realize its full potential in its all stated lines of business.
- There’s much talk about the so-called private and public partnership, you’ve mentioned it too. But its mechanisms haven’t been clear so far. To what extent the projects underway in the Krasnoyarsk region can used as model for this kind of partnership?
- I don’t agree with you that PPP mechanisms are still not clear. Russia embarked on the path of providing public and private partnership with a modern range of instruments as early as three-four years ago. Nevertheless, as of today Russia is an advanced jurisdiction in terms of its range of sophisticated investment instruments and investment policies. We have three types of Special Economic Zones; port zones are in the pipeline, we have our investment fund and the Venture Company, we still have our target programs and they have become even more transparent and comfortable for business and regions. And now a new huge Development Bank has come into being. And it’s only a federal range of institutions and instruments. And we also have a varied range of investment instruments of regional level - from regional tax allowances to project monitoring.
Now we are faced with a different kind of problem - our business’ experience in doing investment business in cooperation with the state in the last 15 years has been traumatic and now business is not fully aware of all new opportunities to secure the state support.
You are right that for the most part PPP projects carried out in the Krasnoyarsk region are pilot federal projects. The Lower Angara Development project was the investment fund’s pilot project, and now territory development projects in other regions are modeled upon our pilot projects and we are very happy about it. The PPP project aimed t building the Krasnoyarsk aviation hub is also a pilot one. The Krasnoyarsk Region Development Corporation was established with the participation of Vnesheconombank on a pilot basis too. And now the practice of establishing special territory and region development companies is gathering momentum in the country as a whole. As to the Development Bank’s lines of business, the Bank should engage in spreading best PPP practices across the country and exchanging business experience.
- Don’t you think that once such large development institutions have been established our government investment policy should be changed? What sort of role should the investment fund play in this new system? What sort of mechanism for investing funds should it have? Do we need it at all?
- Investment policy in any country is changing constantly if it is working in practice. New projects are launched, new procedures and instruments emerge. This is a living organism. New instruments complement each other rather than duplicate.
For example, we can have a look at the Lower Angara Development Project. In order to launch this new industrial district with the investment worth more than 10 billion dollars an absolutely unique design of investment instruments of all levels has been worked out. The investment fund builds motorways, railways, power grids and a bridge. Under the Federal Target Investment Program they build a flooded zone of the Boguchan hydropower station. Under the unique joint project BEMO carried out by RAO Unified Energy Systems and RUSAL they build the Boguchan hydropower station and an aluminum plant. VEB raised funds to fund the designing and construction of the Boguchan pulp and paper integrated plant where, I think, we can also establish a JV with foreign specialists. One way or the other, we have to raise our region’s funds, attract investors and the Federal Target Investment Program to develop social and communal infrastructure in this area. I think that it would be possible to create Special Economic Zones in the Lower Angara Area. These will be Special Economic Zones of production type at the high-technology process stages and they can be used to build a modern chemical park on the basis of processing oil and gas resources from Sobinsk and Yrubcheno-Tokhomsky group of fields.
So I can see that there is a great amount of work for the Development Bank to do. So far, various instruments have only complemented each other. We have a huge investment- intensive country with a great number of restrictions on investments and here the Development Bank can be of real help to us. It remains to be seen if we have to change anything in the existing lineup of instruments, given the emergence of the Development Bank.
- What are we supposed to do now with other government investment programs?
- I’d like to hope that all of them would evolve towards greater efficiency. As we are a fast growing region, with investment growth indicator being twice-thrice as much as the average indicator in the country we speak out for replacing old investment instruments with new ones as soon as possible. We are in favor of development rather than levelling. But we should keep in mind that in our country few territories have such growth potential as ours that is why the social function of government investment is here to stay. This function is considered very important in all countries. But if our country’s economy grows as fast as our region’s our government investment policy will move towards creating instruments of development minimizing levelling transfers.