VEB Deputy Chairman Anatoly Ballo: The State’s Support for Resorts is not our Invention
Will Russian resorts be able to compete with Antalya and the Alps? Is the creation of a mega resort in the North Caucasus an economic or political project? Who in fact launched the Karachaevo- Cherkess Arkhyz project? Vnesheconombank Deputy Chairman Anatoly Ballo told RIA Novosti’s correspondent about the development of tourism in the Caucasus and Russia as a whole.
- Anatoly Borisovich, was a decision to develop alpine ski resorts in the North Caucasus more economic to enable business to make money or after all it was a political and social decision to correct the current situation in this region? We know about low pesonal incomes there and high unemployment.
- I think it would be right to say that the decision was a complex one because top priority was given not only to social but above all to economic issues. It should be noted here that this project reflects the state’s policy in this sector because as part of this project almost the whole economic infrastructure had been already funded under the Federal Target Program aimed at developing the South of Russia. In particular, I would like to mention Dmitry Pumpyansky’s contribution to this project (Board Chairman of TMK and Sinara Group). As late as five years ago, long before the Government announced strategic measures for developing resort in the North Caucasus he came up with an idea to create the Arkhyz resort. And he didn’t pursue any political goals and his business – smelting and pipe industry is not related to tourism at all. But he became enthusiastic about the idea and made us enthusiastic about it too. Alexandr Khloponin – Presidential Representative to the Northern Caucasus Federal District was aso highly instrumental in implementing the project. During the year he initiated a number of interdepartmental conferences that helped us to resolve problems associated with the project. It’s worth noting that we were lucky with Arkhyz project (here I mean the first stage of construction), we set the right course and now it is a pilot project on the success of which depends the future of the entire comprehensive program aimed at creating a tourist cluster in the North Caucasus. VEB together with Sberbank and the Russian Economic Development Ministry participated in setting up JSC Resorts of the North Caucasus and now is closely cooperating with it. And in accordance with the decision taken by VEB’s Supervisory Board and as part of our “expansion in the region the North Caucasus Development Corporation was also founded which acts as a co-investor in the project to develop the Arkhyz alpine ski resort.
- Usually banks’ participation share in large-scale projects is 50% and more. What’s VEB’s participation share in the project? Are there people in Russia who are interested in investing huge money in the Russian tourist industry? And what might a payback period of such a project be for business?
- I’ll start from far. An idea of developing resorts in our country did not emerge spontaneously. VEB participates in the Long-Term Investors Club whose members are development banks of almost all industrialized countries as well as Brazil and China. As a member of the Club we constantly participate in consultations, specifically, we have close contacts with France’s development bank Caisse des Depots et Consignations (CDC). Two years ago when we held regular consultations we got to know that France’s development bank is a 100% owner of Companie des Alpes. The company manages alpine ski resorts in a number of French regions. It is very indicative and important that in such country as France it is a development bank rather than a private investor that owns such an operator. In other words, it’s not our invention. And this example shows the extent of attention that is paid to such an important economic sector as tourism in industrialized countries. In our country tourism lacks attention and that is why most Russian citizens, well-to-do people, spend their leisure time and Christmas holidays abroad. And the reasons are quite clear – we failed to create a relevant infrastructure. Nevertheless, we should keep in mind that even in France investors are not ready to invest considerable amounts of money (and here I mean huge amounts of money) in creating sports component of tourism and recreation. The reason for it is that although payback periods in the hotel and service sectors are rather long – on the horizon of 10 years, payback periods for investments in the sports component are a lot longer and might amount to 15-20 years. JSC Resorts of the North Caucasus was founded to ensure the creation of the said sports component.
As far as VEB is concerned, the Bank is to fund the project aimed at the construction of the first stage in the amount of 5.1 billion rubles. VEB’s credit will cover 10% of costs on building infrastructure (alpine ski and engineering infrastructure) and – 85% of costs on commercial real property (hotels and etc).
The construction of the Arkhyz resort first stage – Romantic village has already started (through using funds of the Arkhyz-Sinara company). As early as this winter three hotels, a chair cableway and two alpine skiing tracks are to be opened.
Payback periods are directly linked to holiday prices. Prices for holidays inside Russia are rather high but as investors want their money back prices have to be further raised and demand will fall. And in this case what are you supposed to do to address this contradiction?
- It’s a very difficult question. We dealt with this problem. In fact, holidays, say, in Turkey are a lot cheaper. Why? For the most part it’s a result of package holiday solution when a tour’s prices, for example, include a price of air tickets which are subsidized and maybe through using government funds. Some things have been already done in this respect in Russia. It is known that air flights from the Far East to the country’s central part are subsidized by the state and this contributes to increasing passenger flows on the said routes. So, while making first steps towards developing tourist infrastructure we are also looking to developing airport infrastructure, specifically, to the project aimed at modernizing the airport in Mineralnye Vody. In fact, for quite a long time we have been actively dealing with air terminal infrastructure and at present, we are involved in projects aimed at modernizing five large airports. The Bank views its participation in each of the projects in a broader context rather than in isolation. So, the Bank’s funding of the Sochi and the Yekaterinburg airports modernization and expansion is not only our contribution to the 2014 Winter Olympics and to preparations for the 2018 World Soccer Cup but also a step towards developing the country’s infrastructure as a whole as well as towards increasing transport availability and building advanced infrastructure of tourist business.
We have to make purpose-oriented efforts to create a whole chain of services to make a tourist and any person feel comfortable at all stages of his journey – on his coming to an airport, on a flight, on arrival at destination and on holiday at a resort. And of course one of the most important things is that air ticket prices should compete with those on flights to Turkey, Austria and etc.
- The project is really very complicated, we are for example in contact with tour operators who now take tourists to alpine ski resorts and they have their own idea of this business. What’s the Bank’s position on the issue? Could you tell us what problems one can come up against upon implementing and perhaps launching this project because it’s no secret that they don’t have highly qualified personnel and there are security problems in the region? What stumbling blocks can you encounter upon launching this project?
- There is no doubt that the project is very important for Karachaevo-Cherkessia both in terms of addressing employment problems and training personnel. Now, there is an issue on the agenda relating to opening an independent educational facility on the basis of local educational institutions to train professional personnel for a resort sector that is being created.
It is estimated that only at the first stage of the project’s implementation 700 new special jobs will be created besides the fact that construction workers and engineers will work there. As far as security is concerned, it’s quite evident that if it isn’t ensured the whole idea will be doomed to failure and the project…
- And the project will not happen?
- The whole idea will be challenged. In fact, without reference to a specific project, it’s quite evident for us that we have to make purpose-oriented efforts to persuade people to spend their holidays in their own country. In various countries they persuade people to spend holidays in their own countries as they persuade to follow the principle: “Buy American”, “Buy French” and etc. And it has nothing to do with jingoism. It’s a reasonable and economically substantiated business imperative.
Information on the Arkhyz project
- Under the program of creating a tourist cluster in the North Caucasus the Government is planning to set up six tourist-recreational economic zones in the region and in the South of Russia. 60 billion rubles are to be allocated from the federal budget to develop them. These facilities are located in Karachaevo-Cherkessia, the Krasnodar region, the Republic of Adygeya, Kabardino-Balkaria, North Ossetia and Dagestan.
The Arkhyz tourist and recreational complex in the Arkhyz gorge is to become Russia’s largest world-class alpine ski resort. Under the project the all-season alpine resort will have modern infrastructure capable of receiving 25 thousand people at any one time and it will occupy an area of 16 thousand hectares. The resort is expected to be comprised of four tourist villages connected by a transport system of 69 lifts and cableways with a capacity of 140 thousand people per hour. It will have a network of alpine skiing tracks of different complexity with a total length of 278 kilometers and a wide public catering and public amenities network, balneotherapeutic and SPA centers and fitness complexes.
The project’s value might amount to 80 billion rubles. The entire resort is to be built by 2017. The project’s implementation will make it possible to increase personal incomes and create up to 10 thousand jobs, raise substantial investments, increase tax revenues in the budget of Karachaev-Cherkessia (tax revenues in the budgets of all levels will approximately amount to 850 million rubles during the implementation of the project’s first stage alone).
Information on VEB’s projects in the North Caucasus
Vnesheconombank’s main objective in the North Caucasus is to be a major source of funding the most promising and needed projects and help to raise large-scale investments. To this end, Vnesheconombank established a subsidiary – the North Caucasus Development Corporation designed to undertake active investment activity in the region. The Bank opened its representative office in the city of Pyatigorsk operating in all constituent entities of the North Caucasian and it acted as a co-founder of the Resorts of North Caucasus company set up to build a tourist cluster. VEB’s top-priority line of activity in the North Caucasian Federal District is to fund projects aimed at creating a large-scale tourist cluster.
Analytical Export Support Headquarters
PHOTO ALEXEI MAISHEV
Author: ALEXANDR IVANTER
One of proponents of an emerging Export Credit and Investment Insurance Agency, Vnesheconombank Deputy Chairman Petr Fradkov views a new institution as a brain trust responsible for supporting Russian exporters and investors abroad.
-Petr Mikhailovich, what stage is the project to set up an export agency going through?
-The project to set up an export credit and investment insurance agency is now at a pretty advanced stage, it consists of two parts. The first stage is to prepare legislative framework for a particular type of insurance, that is, insurance of export credits and investments against business and political risks. This type of insurance has been nonexistent in our legislation so far. We had to introduce a great deal of amendments in applicable regulations and above all in banking legislation. All these amendments were included in a federal law that was published and came into force a month ago.
The second part of the project is comprised of corporate decisions that VEB takes as a one-hundred percent shareholder of the agency being set up.
-Why was a decision made to set up the said agency as VEB’s subsidiary?
-Originally, and this results from the Law “On the Bank for Development” VEB was to be responsible for insuring export credits. Although the practice showed that it was not possible for one and the same institution to be a creditor and an insurer at the same time. It was a very difficult process in terms of internal documents, reserves and balance sheet. So, a decision was made to delegate an export credit insurance function to VEB’s subsidiary in the form of an open joint stock company.
-Is the agency supposed to be a commercial entity?
-It is a commercial entity on a pro forma basis. But all profits to be generated by an agency are to be used to form a reserve fund for insurance transactions. Initially, such reserve fund is to be set up by VEB and then it is to be replenished through using the agency’s capitalized profits. In the case that these reserve funds are not sufficient the law stipulates that federal funds can be requested.
-How is the agency’s institutional structure going to be formed? Will some of VEB’s departments become a separate entity?
-No, they won’t. The more so, this company’s shareholder’s rights are to be exercised by VEB’s Supervisory Board rather by VEB, this means that this entity’s management has been raised to a higher level. And this was done intentionally to underline the agency’s state rather than commercial function. The agency’s core personnel consist of insurers who are working outside VEB.
-Are there such specialists in Russia?
-Yes, there are, but not many. These types of insurance were developing in embryo in two three largest private insurance companies. They tend to develop insurance of short-term (up to six months) trade credits inside Russia. There are almost no specialists dealing with insuring exports and political risks. The agency plans to insure both business and political risks. A list of all risks is to be clearly stated in a governmental resolution to be specially worked out and approved to build up on the law. The resolution is also to state requirements for the agency’s financial sustainability as well requirements for insurance rules and control to be exercised by the government directly.
-So, the Russian Insurance Supervision Agency’ functions will not be applicable to the agency?
-No, they won’t. This is a very serious exception from the law on insurance business. But this exception is justified and is in line with such insurance agencies’ international practice. In fact, the agency is not going to operate in a competitive insurance sector because it fills a niche where commercial insurance companies are not represented now.
-Why wasn’t possible it possible to perform an export support function through VEB’s subsidiary – Roseximbank?
-Roseximbank’s agent’s function is to extend sovereign guarantees on behalf of the Russian Finance Ministry to Russian exporters. This is somewhat a different instrument. Such an instrument is used when Russian exporters are obliged by a contract or law to extend a guarantee to its foreign purchaser, that its, Russian products to be sold will be delivered timely, construction will be completed timely and etc. As far as complicated and long-term contracts are concerned, this sort of guarantee is not easily available to our exporters of high technology products and services. Roseximbank’s special guarantee mechanism was established to support exports.
So, sovereign guarantees and insurance of exporters are two complementary instruments. In some countries the situation is similar to ours. For example, in Japan the Japan Bank for International Cooperation (JBIC) extends guarantees to exporters and Nippon Export and Investment Insurance deals with insuring exports.
-Will the Agency be able to insure a foreign purchaser of our products rather than a Russian exporter?
-The law on the agency provides for the opportunity to insure both the seller and purchaser as well as banks funding supplies on the part of the exporter and importer. Later on, we might deal with insuring investment, for example, when a Russian company builds an enterprise abroad. These risks are more complicated, in fact, the agency will monitor a project at all stages of its life cycle.
-Given an initial capitalization of 30 billion rubles, what will be an approximate amount of total insurance coverage?
-We made a preliminary estimate with specialists from the Russian Economic Development Ministry acting on a presumption that at the first stage the agency will be able to insure 15 percent of Russian mechanical engineering exports. As a result we expect a total amount of insurance coverage for the first three years of the agency’s operation to be no less than 10 billion dollars.
An important line of the agency’s activity not directly related to insurance is to set up a sort of credit bureau to accumulate basic data on Russian exporters’ credit histories. This, together with a constructive dialogue between foreign export credit agencies and our agency, would help to engage foreign export-import banks and export insurance agencies in cooperation with Russian counter agents.
-From what you said it follows that it is standard practice to exchange such data bases between countries?
-You are right, we are involved in an active exchange of information. Generally speaking, the agency is a serious brain trust and its customer service is not limited to insurance business alone. Both the customer and an insured project continue to be monitored constantly in order to forecast and if possible avoid an occurrence of insurance event. This differs a lot from a normal creditor-bank’s activity.
-Do you mean a remote control monitoring?
-No, I don’t. Under an agreement the agency’s representatives are to be in constant contact with their customer. They tend to interact actively with their country’s government authorities. These people have in-depth knowledge of their customer’s country of residence, specific industry and enterprise.
-Is the agency going to reinsure accepted risks abroad?
-Yes, it is. But the choice of reinsurers will be regulated. Specifically, these companies must have a rating not lower than the agency’s rating, that is, not lower than a sovereign one. One of our future Russian agency’s objectives is to receive a sovereign rating in the shortest term.
-When will the agency be able to start working?
-Three documents are required to launch a new institution. First, it’s a governmental resolution that specifies main requirements for the agency. Second, - rules of insurance, a main operational document, detailed procedures and regulations. And thirdly, - the agency’s strategy to set forth the agency’s operational financial parameters, its insurance capacities with regard to various countries and regions and etc. I hope that the agency will be able to start operating in early 2012.
Today, export credit agencies (ECAs) are operating in more than 80 countries. More than the 50 largest ECAs and insurance companies both private and state-run ones, involved in insuring and guaranteeing export transactions are united in the International Union of Credit & Investment Insurers also known as The Berne Union. The Union’s members account for 10 % of the world’s financial insurance and guarantee support.
A policy of export financial support is regulated by such authoritative international organizations as the OECD and the WTO. A special agreement on official export credits was worked out and is being successfully applied within the OECD. This document is a gentleman’s agreement and is not the OECD’s legislative measure. Its main objective is to regularize the export credit market and prevent dumping in the sector. The agreement regulates, in particular, minimum rates on insurance and funding of export credits. Adherence to OECD standards is recognized by WTO rules as not subsidizing exports.
The world’s functioning export insurance credit agencies can be subdivided into three groups in terms of a business model being applied.
An export insurance agency in the so called first traditional model operates directly by way of using the state’ budget and might be both a state-run entity, for example Eximbank (US), ECGD (Great Britain) and a private insurance company which is authorized to support national exports, for example, Euler Hermes (Germany), Coface (France),Atradius (The Netherlands) and others. ECAs operating on this model are responsible for supporting national component as part of export contracts.
Financial products offered in this case are highly standardized. This is above all export financing (a supplier and buyer credit, a documentary letter of credit) insurance of political risks, extending performance guarantees.
A high level of transactions’ standardization and the model’s insufficient flexibility make it almost impossible to diversify risks, customers, sectors and markets. Each transaction requires a high level of capital reservation and this in its turn might result in such activity’s reduced profitability.
ECAs’ operation on the basis of the second model (it is this model that Russia’s emerging agency is focusing on) is to provide support for national companies to implement their global development strategies as opposed to a concept of national component implemented as part of the first model.
The second model makes it possible to introduce innovations and new financial products, support national companies’ internationalization as well transactions classified as strategic ones from the point of view of the state. A range of financial products is notable for great flexibility and readily adapts to new programs such as untied financing in combination with direct lending.
And finally, the third highest type of ECAs operation when an export credit agency evolves into a global market player with a very wide range of services offered and in effect is a holding company consolidating various companies each of which specializes in a specific product, line of business (for example SACE in Italy). Under international practice ECAs do not give top priority to short-term business, it’s not their core activity. It is private insurers that are most active on this market. ECAs tend to expand their transactions on the marker for insuring short-term export credits in unfavorable economic situations as it was demonstrated by the recent financial crisis. Specifically, under a special resolution by the Euro Commission in May of 2008, ECAs were allowed to step up their activity on temporary basis on the market for insuring short-term export credits in a period of crisis for the most part to fully meet European exporters’ needs (largely small and medium-sized enterprises) for insuring their export credits.
On the basis of VEB’s materials