Vnesheconombank Chairman Vladimir Dmitriev’s Interview to RIA Novosti News Agency
The Russian Direct Investments Fund’s Managing Company Gets Registered
MOSCOW, June 2 – RIA Novosti. The Russian Direct Investments Fund’s (the RDIF) Managing Company was registered with the Federal Tax Service, Vnesheconombank Chairman Vladimir Dmitriev told RIA Novosti about it. The RDIF is being set up as instructed by the Russian President. The Head of State stated the intention to set up the Fund at the World Economic Forum in Davos in January. The RDIF is being set up on the basis of VEB with a stated capital of 10 billion dollars. Using this investment mechanism, we plan to raise up to 50 billion dollars in direct investments for Russia’s economy key sectors.
“The RDIF’s Managing Company has been registered today with the Federal Tax Service. We are proceeding ahead of schedule”, said VEB’s Chairman.
According to him, the Fund is to invest in such sectors as biotechnologies, telecommunications, agriculture, infrastructure, innovation power engineering and others. Nevertheless, the Fund would not limit itself to investing only in high priority sectors, said VEB’s Chairman. This must dispel potential investors’ fears that the RDIF is designed to only implement strategic government projects to the detriment of profitability.
Investment transactions can be initiated both by the RDIF and foreign investors. In both cases co-investors are given access to the RDIF’s due diligence but they are supposed to assess investment opportunity on their own and make decisions regardless of the RDIF.
As far as the RDIF is concerned, most funds, more than 80%, are to be used to finance Russian projects and 20% is to be used to finance only those Russia-oriented foreign projects that yield reciprocal synergy and transfer of technologies.
An expected investment exit period is five-seven years.
“I am sure that the Fund will make its first investments till the year end”, said Dmitriev.
This year, 62 billion rubles are to be allocated from the budget to set up the Fund. “The funds are to be allocated under the Government’s appropriate decisions”, explained Dmitriev.
“We assume that a contribution to the Fund would be made close to September and by this time we have to agree upon all mechanisms with the Finance Ministry.
The RDIF will work with two types of co-investors: long-term-financial investors (sovereign investment funds, pension and insurance companies, direct investments funds with assets under management in excess of 1 billion dollars) and strategic investors (leading sectoral companies with market capitalization in excess of 1 billion dollars).
Investments are to be made given that there are co-investors or groups of co-investors in the ratio of one to one (co-investor/the RDIF).
“We haven’t discussed projects’ minimum profitability ratio yet”, said VEB’s Chairman.
For the time being, the RDIF’s free funds will be invested in foreign high –liquid securities.
“Now, the time has come to set up a team, form charter capital and present the Fund to investors”, said VEB’s Chairman.
The RDIF’s charter capital amounts to 300 million rubles. The Fund will have a three-tier management. Its supervisory board is to be responsible for formulating investment strategy and approving major transactions. The Fund’s investment committee is responsible for considering and making investment decisions as well as for discussing in great detail proposals made by executive management. The third tier is comprised of the Fund’s director general and management board.
Kirill Dmitriev from Icon Private Equity was appointed as the RDIF’s director general.
“At the present stage, it is important to set up a supervisory board to be responsible for approving investment transactions from a certain threshold that has not been established yet. This threshold is to be established by the Fund’s supervisory board” said VEB’s Chairman.
Mr. Dmitriev says that the Fund being set up is unique.
“The RDIF is to finance a project, given that there are co-investors. This Fund’s feature is unique. In the long run, we should engage investors that do not enjoy the state’s support”, VEB’s Chairman said.
“So far we have to use this sort of investment mechanism being aware that there are things that foreign investors don’t understand pretty well, for example, risk sharing, monitoring of projects. Foreign investors need quasi-public institutions“, he admitted.
“As a rule sovereign funds are set up to make investments abroad or as the case is in Persian Gulf states some funds are used to establish funds designed to finance infrastructure inside the country. But in these countries they do not engage co-investors to implement projects”, explained Dmitriev.
Vnesheconombank Chairman Vladimir Dmitriev’s Interview to the TV Channel Russia 24
TV Channel Russia 24,
HOST: A lot is being done in order to promote public private partnership and raise investments for the Russian economy, for example, legal framework is being upgraded, and monetary funds are allocated. But the state and businessmen are not competent enough as to how they should cooperate, believes Vnesheconombank Chairman Vladimir Dmitriev. In his interview with my colleague Evelina Zakamskaya VEB’s Chairman told her how to optimize cooperation between the state and businessmen, what measures for boosting Russia’s investment appeal were being implemented.
CORR.: Good morning, Vladimir Alexandrovich. Thank you for finding time for us. A key condition for a new, advanced modernized economy is public private partnership, that is, partner-based parity cooperation between the state and business. Vnesheconombank is an institution that is supposed to act as an intermediary between the state and business in implementing various projects. What’s in your opinion the current status of public private partnership and what conditions are needed for its development?
Vladimir DMITRIEV, Chairman of State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’: I believe that a lot has been done recently in terms of establishing legislative infrastructure to get public private partnership to work in our country. It goes without saying that legislative initiatives alone at both federal and regional level are not enough for implementing PPP projects. We have been making strenuous efforts for several years at Vnesheconombank to encourage public private partnership. We have established a Public Private Partnership Center and this Center does not limit its activity to searching for projects that could be implemented on PPP principles, it also maintains close ties with regional, municipal authorities, cooperates with private business, runs various educational programs and introduces products to train participants in PPP projects in order to close the apparent incompetence gap in implementing projects.
CORR.: Who is more incompetent the state or the business community?
Vladimir DMITRIEV: I think to an equal extent, they don’t have a clear idea as to what they should be doing to insure a project’s budgetary efficiency on the one hand and to make it attractive for private business on the other. All these painful efforts made us understand that we should form national competences in public private partnership.
CORR.: This means that you should learn, learn and learn.
Vladimir DMITRIEV: We should learn and put into effect expertise we acquire.
CORR.: Where and how do you expect to do it?
Vladimir DMITRIEV: Originally, we hoped that we could accomplish this serious objective on our own. We organized TV conferences, ran workshops on the basis of Vnesheconombank, the Russian Civil Service Academy, the Finance University, we held road show conferences in the regions and staged interregional conferences. This is a very labor-consuming and labor intensive process. And in the long run we arrived at a conclusion that the Financial University under the Russian Government should become our natural partner in terms of forming scientific base and professional competences. We signed a supplement to the already existing agreement on cooperation between the Financial University and State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’. It provides for opening a public private partnership department at the Finance University to train representatives of both government institutions and private business.
CORR.: Thus, you raise professional level of those you are going to cooperate with in the future?
Vladimir DMITRIEV: Undoubtedly, this process is of great importance for our practical activity. It should be noted that being aware of the need to support regional and municipal infrastructure projects, the Bank’s Supervisory Board made a number of important decisions. Vnesheconombank is to allocate annually 2 billion rubles to be used to support regional and municipal infrastructure projects by way of funding engineering companies operating at a pre-project stage of forming projects that could be publicly put up for tenders to raise private investments. Besides these 2 billion rubles, 900 million rubles are to be allocated to Moscow for doing pre-project work and forming projects that could be of interest for private business in Moscow’s infrastructure.
CORR.: Vladimir Alexandrovich, what else is important for developing PPP? Maybe legislative initiatives because legislative gaps still exist? And we don’t know many examples of successful public private partnership. What examples can you cite?
Vladimir DMITRIEV: To my mind, we have good legislation and basis allowing us to push projects in public private partnership. Here I mean the law on concessions, the investment fund and our development institutions that are supposed to operate in the PPP field. We have pretty advanced legislation directly related to public private partnership in Saint Petersburg, Khanta-Mansiisk. In more than 30 regions appropriate regional laws were approved. They allow business and the state to cooperate on PPP principles. Unfortunately, out of a hundred projects which could be implemented most projects are wishful thinking ones. These are inferior projects, they can’t be publicly put up for tenders, and they are not attractive for private business. And that is why the role of the PPP department and development institutions is to prepare both private business and authorities for being able to form projects at various levels in a competent and professional way, as well as to upgrade legislation.
CORR.: By the way, I think you should name sectors that could be of interest for public private partnership and tell us about the PPP projects that are being implemented now including those being carried out in partnership with Vnesheconombank, here I mean infrastructure projects.
Vladimir DMITRIEV: The first two large-scale PPP projects are infrastructure projects, namely, the toll highway Moscow - Saint Petersburg project, the Odintsovo Bypass project, healthcare and educational projects that are to be implemented soon in Khanty-Mansiisk, infrastructure projects in Saint Petersburg – the Orlov Tunnel project, the North-Western Diameter project. This is also a large-scale project being implemented in Rostov-on Don – Rostov Water project, in which the investment fund, regional authorities and private investors participate. That project involves water treatment plant, water supply and water drainage systems. And in the final analysis it will make it possible to build a whole micro district on the best principles of private public partnership and international practices.
CORR.: Significant funds are required to implement all those projects. Besides allocating all these funds, Vnesheconombank also makes borrowings. In this respect, you set several precedents; I mean a record syndicated loan worth about 2.5 billion dollars and a ruble-denominated credit raised abroad by the English HSBC Bank in the amount of 160 million euros. What did you make the borrowings for? Did you run out of your own money? How are you going to repay loans, what are these loans intended for?
Vladimir DMITRIEV: Regrettably, this is established international practice. Development institutions tend to use either their charter capital or borrowed funds to finance investment projects. Vnesheconombank’s liabilities do not include customers’ inexpensive funds as opposed to other banks with the state participation. So, we have to pay for any resource and we have to pay at market rates, that is why, the borrowings you mentioned exemplify the Bank’s work with its customers. The syndicated loan worth 2 billion 450 million dollars is a three–year loan and as far as its financial terms are concerned, it is unprecedented for the Russian market both in terms of its amount and its loan rate – this is Libor plus 130 basis points. Russian borrowers have never had such favorable terms. The funds will be used to finance our projects including PPP projects and of course large-scale projects in various sectors of the economy.
CORR.: Have you made a list of specific projects to be financed with these funds?
Vladimir DMITRIEV: The fact is that all these funds flow into a general cash account and budget and I can’t tell you what specific projects will be financed with these funds. But our total investment capital is rather big – more than a trillion rubles. And we’ll start financing some projects as early as this year. Another project you mentioned is a 160 million-euro loan. In total, the project is worth 600 million euros. The above-mentioned 160 million euros were raised in rubles. This is the first transaction of this kind when a foreign bank, here I mean HSBC Bank, supported by a Danish insurance agency, and Vnesheconombank signed an agreement. We signed this agreement during Russian Prime Minister Vladimir Putin’s visit to Denmark. This is the first unique project and the funds will be used to finance the construction of a large cement plant with a capacity of more than 3 million tons in the Kaluga region.
CORR.: Is it profitable for foreign partners to extend credits in rubles as the ruble strengthens?
Vladimir DMITRIEV: I think it is. If banks have ruble liquidity they are willing to extend credits in rubles. But this transaction is very important because favorable conditions are created in the new segment of the borrowing market for a wider use of the ruble in our relationship with foreign banks to fund projects inside the country. This is only a part of our work on establishing an international financial center in Moscow, a regional financial center and transforming the ruble into a regional accounting currency.
CORR.: As to the syndicated loan, three years are a short period of time after all. How are you going to repay it?
Vladimir DMITRIEV: As syndication requires many foreign partners, credit periods do not tend to be more than 3 years, 5 years at most. You can obtain long-term credit on capital markets where investors are ready to invest long-term. Last year we placed 5- and 7- and 15-year bonds and this shows that investors are ready to invest on a long-term basis.
CORR.: Let’s get back to the issue of boosting Russia’s investment appeal. How is the idea of setting up an Export Credits and Investment Insurance Agency coming?
Vladimir DMITRIEV: The Government introduced a bill to the State Duma on introducing amendments to the Law “On the Bank for Development” to set up an Export Credits and Investments Insurance Agency in the form of Vnesheconombank’s one hundred-percent subsidiary. In this case, we mean export credits and investments intended for promoting Russian industrial exports and supporting Russian companies’ investment aspirations abroad. A State Duma sectoral committee discussed the bill and we hope that in the coming days it will be approved on the first reading. To my mind, all the participants in the process at least as far as I know from my conversations and contacts in the State Duma and the Federation Council want the bill to be approved on all readings in the spring session and submitted to the President for signature.
CORR.: Vladimir Alexandrovich, when a Direct Investments Fund is supposed to be set up?
Vladimir DMITRIEV: We hope to set up Russia’s Direct Investments Fund by the time of the Petersburg Economic Forum. To this end, the Bank’s Supervisory Board took appropriate decisions in line with Russian President Dmitry Medvedev’s instructions. These decisions are associated with a Head of this Fund’s managing company. Kirill Dmitriev is to be appointed as the Fund’s Head. He is a well-known specialist in the investment community, a professional educated abroad, he graduated from two American universities and he meets all the requirements we agreed upon with foreign investors. We agreed upon our investment declaration and submitted it and other documents required to have the Fund’s managing company registered for consideration by the Bank’s Supervisory Board so that we could establish relevant bodies of corporate governance. We believe that this Fund and to be more exact the Fund’s managing company would operate in line with the best international practices. In this respect, our foreign partners go along with us. The Fund should be isolated from any administrative influence. It should base its activity on the principles of investments reliability and investment recoupment. Its lines of activity should be in conformity with the Russian economy’s modernization and innovation development. The most important thing is that the Fund should participate in investing projects that are of interest for foreign investors and that one ruble from the Fund should raise at least 2-3 rubles from foreign funds, with an ideal proportion being 1 to 5. Whether they be sovereign or direct investments funds, the idea is supported by our potential partners. At present, representatives and executives of sovereign and direct investments funds are visiting Moscow. They are from the Persian Gulf area, South-East Asia, China, Great Britain and the United States. We use a common professional language and this makes us optimistic that the Fund would start operating efficiently as early as this year.
CORR.: And now my last question. Every year, you and other Petersburg Forum’s participants talk about Russia’s business climate and its investment appeal. How would you describe the situation, if you compare 2008 with 2011?
Vladimir DMITRIEV: Of course in June of 2008, both investors and we were aware that being a part of the global market, the global economy, global financial markets, Russia was bound to be influenced by the financial crisis already apparent for the West at that time. Now, three years later, we are sure that we are coming out of the crisis. Although the economy hasn’t recovered fully I can say that the business climate is undoubtedly coming to life. We can see an increasing number of very interesting projects.
CORR.: If you have chosen the right path, you should keep following this path. Thank you for your interview and all the best to you.
Vladimir DMITRIEV: Thank you.