Bank Founded Under Lenin Hunts for Funding Amid Sanctions (Bloomberg)
Vnesheconombank is beating a retreat from debt markets after last year holding the biggest Eurobond sale by a Russian financial borrower since 2008.
Russia’s state development bank, which traces its roots to a lender formed in 1922 under Soviet founder Vladimir Lenin to raise capital and facilitate trade for the fledgling Bolshevik regime, is now turning to government funding, Asian investors and asset sales three months after European and U.S. penalties over Ukraine curtailed its access to foreign markets, Chairman Vladimir Dmitriev said.
“Times have changed, and access to previous sources of financing is practically closed for us,” Dmitriev, who’s headed the bank for a decade, said in an interview in Moscow. “Still we aren’t feeling like a downed pilot. Sanctions just pushed us to revise our credit and investment activity.”
The bank, which has lent $40 billion to back projects from Olympic construction to agriculture and the manufacture of airplanes, is pivoting toward state funding to cut its reliance on debt financing. VEB, as the bank is known, is cut off from some foreign capital markets after the U.S. and the European Union zeroed in on individuals and companies to punish Russia for the annexation of Crimea in March and President Vladimir Putin’s alleged support for the separatist insurgency in eastern Ukraine.
Government SupportWith the country walled off from foreign funding and sapped by capital outflows, state companies including Russian Agricultural Bank and oil producer OAO Rosneft are increasingly looking to the government to offset their shrinking funding base.
The U.S. Treasury Department imposed sanctions that prohibit transactions in, provision of financing for, or other dealings in new debt of greater than 90 days’ maturity for a range of companies. For banks, the debt financing restriction covers maturities greater than 30 days. The EU later joined the U.S. in tightening sanctions, restricting five state-owned Russian lenders in their ability to sell bonds or shares within the bloc.
Life under sanctions is testing the flexibility of VEB, which was revamped by Putin in 2007 to promote investment and finance long-term infrastructure projects. During the following two years, it also managed the government’s bailout program at the height of the financial crisis, helping rescue troubled companies and banks and buying domestic securities to support financial markets.
Mission UnchangedIts mission to boost investment and diversify the Russian economy remains unchanged in the face of limited access to global capital markets, according to Dmitriev. That means the role of state funding, which was “secondary” in importance for VEB, will grow.
VEB’s supervisory board, headed by Prime Minister Dmitry Medvedev, on Oct. 16 approved the bank’s strategy through 2020. It set targets including increasing VEB’s loan portfolio to at least 2.5 trillion rubles ($58.5 billion) from 1.7 trillion rubles, Dmitriev said. The bank will also channel 750 billion rubles to support exporters and issue as much as 265 billion rubles of loans to small businesses until 2020.
To support the plans, the government and the central bank are discussing measures to prop up the bank’s finances, according to Dmitriev. The supervisory board agreed on an annual capital boost of 30 billion rubles, which is possible in the form of a cash infusion or sovereign securities that can be used to get liquidity from the central bank, Dmitriev said, adding that he’s hopeful to get the first transfer by year-end.
‘Comfortable’ CushionThe government will also convert $5.9 billion from VEB deposits that hold cash from the National Wellbeing Fund into its subordinated deposits, bringing capital adequacy to a “comfortable” 14.9 percent, according to Dmitriev.
Other support measures include the central bank’s decision to raise its limit on VEB’s borrowing. The development lender will also get 310 billion rubles from the government next year to repay foreign debt and finance already approved projects.
It has to pay back as much as 70 billion rubles to international lenders next year, according to Dmitriev. VEB wants to avoid using state aid to pay down 107 billion rubles in domestic debt in 2015, he said.
Chinese Option?
Dmitriev says he’s hopeful that China will step in as an alternative source of funding if it eases access to its capital markets. Financing in offshore yuan is now limited to $300 million, which isn’t enough for VEB, he said. This month, the Russian lender agreed to borrow $2 billion from Export-Import Bank of China.
To ease the pressure on its balance sheet, VEB is also working to sell off assets such as the Novinsky Passage shopping center in Moscow. Its other holdings, which include a stake of about 3.6 percent in Russia’s natural-gas exporter, OAO Gazprom, and 3.1 percent in United Co. Rusal, can be only sold when their market price recovers, Dmitriev said.
The lender paid about 30 billion rubles in 2010 for its Rusal stake that’s now valued at about 11 billion rubles.
VEB uses shares of companies like Rusal to get funding in repurchase transactions with the central bank, he said. It’s in talks with the regulator on using American depositary receipts of Gazprom as collateral, according to Dmitriev.
Court ChallengeAs the bank is adjusting to the new limitations, it’s also challenging them in court. Last week, VEB and Russia’s two biggest banks, OAO Sberbank and VTB Group, filed claims against the EU in a bid to lift the punitive measures.
Dmitriev acknowledges feeling “upset” when he first learned in July that sanctions against his bank were possible.
“I understood perfectly well that we’ll have to work while facing limited opportunities,” he said.
The fallout from the standoff over Ukraine has hurt many longstanding business relationships, he said. Still, banks in Australia and New Zealand were the only ones to close VEB’s correspondent accounts, according to Dmitriev.
“Not a single American or European bank has done that,” he said. “We’re trying to maintain relations with international partners even as business has become impossible.”
Vnesheconombank Chairman Vladimir Dmitriev’s Interview to TV Channel Russia 24
CORR: Good afternoon Vladimir Alexandrovich. Thank you very much for finding the time to talk with us. Let us sum up what has been just said at the conference especially under conditions of sanctions. What instruments – financial, administrative – do our exporters need the most?
Vladimir DMITRIEV, Vnesheconombank Chairman: Exporters in all spheres need to have industrial exports support institutions. At the Conference today we have said that a system of industrial exports comprehensive support is in place in our country. It is comprised of the Russian Economic Development Ministry, the Russian Ministry of Industry and Trade and development institutions themselves that are responsible for providing support. They include Vnesheconombank – Bank for Development and Foreign Economic Affairs, the Export Insurance Agency of Russia (EXIAR) and Russia’s largest leasing company VEB-Leasing, which is Vnesheconombank’s subsidiary. We also mentioned the fact that by creating this system we provide exporters not only with financial and insurance support but also with necessary information resources, which are of primary importance for exporters to know what mechanisms are available for Russian exporters to promote their products to foreign markets.
CORR: As far development of these institutions is concerned, last week you approved Strategy 15-20 and it was not a basic version but an upgraded one. What sort of version is it? What are its main points?
Vladimir DMITRIEV: In fact, last week we had a meeting of Vnesheconombank’s Supervisory Board, which approved a program of Vnesheconombank’s development, we call it a Strategy. Several versions were offered. Despite everything: despite a serious situation with the budget, despite the sanctions, our country should develop and development institutions should develop and be instrumental in developing the Russian economy. So, an upgraded version was approved. It provides for Vnesheconombank’s loan portfolio to increase to 2.5 trillion rubles by 2020. And an important thing is that Russian industrial exports with the assistance of Vnesheconombank and its subsidiaries will be provided with a support of 750 billion rubles, with 500 billion rubles accounting for credit support and 250 – for guarantee support. Of course, we hope that our subsidiaries will be supported and additionally capitalized, here I mean above all Roseximbank and this will enable a Center for Credit and Insurance Support, being created on the basis of EXIAR and Roseximbank, to operate in full strength. It should be kept in mind that Vnesheconombank was established among other things to support small and medium-sized enterprises and our strategy provides for supporting this segment of the Russian economy in the amount of 250 billion rubles. In approving our Strategy, the Government is aware that without the state’s support measures both in terms of liquidity and in terms of the Bank’s capitalization, it would be very difficult, if at all, to achieve the said results. So, these issues were also discussed. We discussed them at the meeting with the Russian Prime Minister where we considered measures for the state’s support of Vnesheconombank including its additional capitalization and the Bank’s fulfilment of obligations it assumed under credit agreements as well as repayment of debts to foreign creditors and capital markets.
CORR: What about the amount? If I am not mistaken, we talked about a basic scenario that provide for about 100 billion and if we talk about an upgraded scenario it must be even more.
Vladimir DMITRIEV: The fact is that under this strategy and given the need to increase its loan portfolio, the Bank is to be additionally capitalized in the amount of at least 30 billion rubles per year. As far as other support measures are concerned, the state believe that it and the Central Bank would expand the range of instruments to provide Vnesheconombank with liquidity. We can feel this support even now and we are grateful to the Central Bank for increasing Vnesheconombank’s limit from half capital to capital upon mutual guarantees of banks and this is more than 500 billion rubles. We are also holding talks with the Finance Ministry about expanding the range of instruments available for Vnesheconombank from the Finance Ministry and we can see positive reaction on the part of the Finance Ministry. I have already said today that in order to implement our strategy of supporting industrial exports we need financial resources to subsidize interest rates and extend credits to foreign importers. Now the Economic Development Ministry and the Ministry of Industry and Trade are considering our requests for an amount of 14 billion rubles - this a total amount of support to subsidize interest rates that we need to ensure the export of Russian industrial products to foreign countries.
CORR.: You have signed another very important agreement with the Export-Import Bank of China for an amount of 2 billion dollars. Do you know what projects you are going to finance with these funds?
Vladimir DMITRIEV: We have discussed concrete projects with our Chinese partners. The projects are associated with supplying Chinese equipment to Russia. I mean above all timber-industrial complex. I would not like to name specific projects now but they deal with timber-industrial complex, mechanical engineering production facilities, that is, sectors where Chinese equipment is competitive with the best foreign analogues.
CORR: And now my last question. On October 28, sanctions against Russia might be reconsidered. What’s your forecast? I guess it’s a thankless job to make forecasts especially about such geo-economic issues. Nevertheless, do you believe that sanctions might be softened a few days from now?
Vladimir DMITRIEV: In this respect, I have a conservative view. I don’t think that our foreign partners are likely to change their approaches to Russia. I believe that their policy toward Russia is linked not only to the situation in Ukraine although they say it is. I think there are deeper reasons. It remains to be seen. But I’d like to stress it once more that this time my position is rathere conservative.
CORR.: Thank you very much for your interview, Vladimir Alexandrovich.
Vladimir DMITRIEV: Thank you.