Vnesheconombank Chairman Vladimir Dmitriev’s Interview to the Grozny Inform News Agency
Vnesheconombank Chairman Vladimir Dmitriev told journalists about projects being implemented in the North Caucasus Federal District (NCFD) specifically in the Chechen Republic
- Vladimir Alexandrovich, Vnesheconombank is actively participating in the Development of the North Caucasus, will you tell us in detail about the Bank’s activity in the region?
- In fact, VEB started to energetically support investment projects being generated in the the North Caucasus Federal District (NCFD). And in order to fulfill the task set by our country’s leadership aimed at raising large-scale investments for this region, the Bank established the North Caucasus Development Corporation. The Corporation’s main objective is to provide consulting assistance to investors for them to be able to make a balanced analysis of the economic situation in various regions, form projects and prepare appropriate documentation. All this is needed by banks to feel confident in funding investment projects. The Corporation started to operate at the end of the last year but it already has a whole number of projects in its portfolio.
We do not limit our activity in the North Caucasus Federal District to the North Caucasus Development Corporation. Vnesheconombank’s Representative Office has been operating for about a year in Pyatigorsk. The Office helped to prepare and submit to consideration by VEB documents on 7 projects with a projected amount of financing being more than 38 billion rubles. The Representative Office is working now on another 45 projects worth more than 226 billion rubles and these projects’ initiators are being provided with consulting and methodological assistance.
Moreover, our Representative Office is included in the working groups responsible for selecting top-priority investment projects on the territory of each region of the District.
Additional effective mechanisms for enhancing VEB’s cooperation with Russian regions are agreements on cooperation. Their subject-matter is to establish strategic partnership, promote long-term and effective cooperation in the investment activity. At present, Vnesheconombank have entered into such agreements with all constituent entities of the NCFD. To build on these agreements we sign protocols on cooperation in supporting public private partnership, small and medium-sized enterprises as well as agreements aimed at implementing specific investment projects in the region.
- What projects in your opinion are the most important in the North Caucasus Federal District?
- As of today, VEB has a number of serious projects in each of Caucasian republics. Out of them I’d like to single out tourist recreational business developing in line with the decisions taken by the country’s leadership. To this end, a special company, namely, the North Caucasus Resorts was established to develop major tourist centers and clusters. We started our work with discussing mountain-climatic and alpine ski resorts. One of our first projects is Arkhyz, which is generated by the Sinara Group. Vnesheconombank started to make arrangements to fund this project even before the crisis and it is now included in the list of projects to be implemented by the North Caucasus Resorts Company. The total amount of investments with regard to all resorts and the alpine ski cluster of the North Caucasus is to be 400 billion rubles plus investments in the coastland of Dagestan where we have unique opportunities to develop tourist and resort business.
In doing all this, we do not forget to develop industrial sector North Caucasus republics and we should develop and support traditional regional sectors such as agro-industrial business, light industry, manufacturing of construction materials in the Caucasus, that is, in the North Caucasus republics and in the Stavropol Territory
Another line of our Bank’s activity deals with projects aimed at supporting small and medium-sized enterprises that are very important in terms of addressing employment issues in the region. Here we are going to operate through our subsidiary SME Bank specializing in funding SMEs. In this respect, I’d like to say that last year the North Caucasus as a whole and the Chechen Republic in particular were leaders among Russian regions in terms of implementing programs of providing support for small and medium-sized enterprises.
As I have already mentioned we have a number of serious projects almost in each of Republics in the North Caucasus Federal District. Now the Chehenagroholding project is being actively implemented in the Chechen Republic. We are also involved in supporting the construction materials manufacturing sector in Kabardino-Balkaria, Dagestan and in Karachaevo-Cherkesia. As I’ve already said we started to implement the Arkhyz project. We are exploring the possibility of forming a large-scale agro-industrial cluster in the Stavropol Territory using the business experience we gained in the Rostov region where the largest Russian turkey meat production facility is being built with our participation. Now we are planning to replicate and expand these projects in other regions, specifically, in the North Caucasus.
- You’ve mentioned the project aimed at building an agro-industrial holding which is not only the first VEB’s large-scale project in the Chechen Republic but also the only large-scale federal investment project in Chechnya. How did the Bank approach the problem of high regional risks?
- While there is a certain regional risk you shouldn’t first overestimate it and second, if you don’t implement investment projects risks do not diminish for this reason. But as we must operate on a break-even basis we take up only break-even projects. And there are such projects in the Chechen Republic. We deem it necessary to support thoroughly prepared projects such as for example the Chechenagroholding project. It is a profitable project and it will create local competences and new jobs (we believe that more than a thousand and a half people will work in this agro-industrial integrated facility). This is the Bank’s most important pilot project whose initiator is the Government of the Chechen Republic. This is a very large production facility - about 20 thousand cattle heads, a poultry farm for 200 thousand birds, a meat processing factory, unique greenhouses operating on thermal springs and a whole number of other production facilities which are badly needed for developing food industry in the region.
We started to deal with this project in 2009 and hoped to receive a state guarantee. But the documentation process was so slow that the project was on the verge of collapse although the construction work had already started and some equipment had been ordered in hope of receiving funds from the Bank. So, in order not to shelve the project for a long time and not to run additional risks and having found out that the project was financially sustainable we found it possible to fund it. We had to use a favorable summer period for performing construction work. If we had failed to do it in May we would have lost a whole year.
As of today, about 2 billion rubles have been invested in the project’s implementation. All the facilities are in an active construction stage and are to be put into operation next year.
We still hope that the decisions on providing support for investment projects in the Chechen Republic and on the whole territory of the North Caucasus Federal District made at the highest government level will be carried out. Specifically, the Russian Government’s Decree on granting first state guarantees worth 42.5 billion rubles to implement 20 projects in the North Caucasus including granting a guarantee for the second stage of the project to build an agro-industrial complex in Chechnya aimed at developing winegrowing. Having entered into the agro-industrial complex construction project in Chechnya and having supported other projects not only in Chechnya but in the North Caucasus Federal district as a whole, Vnesheconombank is giving an example to commercial banks to participate in implementing projects in the region.
- Is there a possibility to implement any other projects besides Chechenagroholding in the Chechen Republic?
- Undoubtedly, it’s not the only project in the Republic. For example, at present, VEB is studying in detail the Veduchi project – an alpine ski complex in the mountains in the South of the Chechen Republic. The Bank is also conducting an expert examination of a project on building the Kazbek major construction materials manufacturing cluster. The North Caucasus Development Corporation will participate in it. The project aims to construct a complex of production facilities to manufacture advanced construction materials: aerated concrete, fiber cement plates, lime, dry construction mixes. This project is needed to provide not only the Chechen Republic but also other constituent entities of the North Caucasus Federal District with quality construction materials, given increasing rates of construction in the region. Moreover, we are cooperating with the Government of the Chechen Republic and the Grozny City Hall in reconstructing the city’s community facilities, which requires significant investments. We are going to offer schemes for investing these projects based on public private partnership. There are a lot of such examples in all other republics of the north Caucasus. I believe that state banks and above all VEB as a bank for development should create a normal investment climate and favorable conditions for raising capital for this region by leading the way in assessing risks adequately and participating in regional projects.
Vnesheconombank Chairman Vladimir Dmitriev’s Interview to the TV Channel Russia 24
TV Channel Russia 24
HOST: An Investment Forum is underway in Sochi today. Our raod show studio is operating there and my colleague Alexander Kareevsky plays the master in it.
CORR: In fact we are in Sochi now. A plenary session has just finished and we are commenting on it and all other things at the Forum. Our guest today is Vnesheconombank Chairman Vladimir Dmitriev, good afternoon Vladimir Alexandrovich.
Vladimir DMITRIEV, Vnesheconombank Chairman: Good afternoon.
HOST: A plenary session has just finished. A lot has been said about the macroeconomic situation in Russia.In general it isn’t bad. But there are now a lot of problems in Europe, in America, in industrialized countries. There is a threat of recession. How would you as a banker size up the situation? Is everything as terrible as the media says?
Vladimir DMITRIEV, Vnesheconombank Chairman: In fact, the situation you are now talking about is not a creation of media, it is a reality we have to reckon with – a reality we are living in, it’s a reality we went through during the latest crisis that influenced the economic situation in Russia. Nevertheless, I believe that Russia’s safety margin is great both in terms of its gold and foreign currency reserves and in terms of its macroeconomic indicators: it’s budget deficit, and according to the prime minister this year’s budget is most likely to be deficit free, it’s an unprecedentedly low inflation rate, it’s the best among the largest countries, the largest economies debt-to-GDP ratio – less than 10% of foreign debt, in other countries debts are sometimes twice as much as gross national product. All this is pretty optimistic.
HOST: According to Mr. Putin this time we haven’t suffered a double blow, so we are already prepared. You are well aware of the situation in the banking sector. I’ve got the following question: Are our banks better prepared for the situation than they were in 2008; here I mean their financial standing?
Vladimir DMITRIEV: I think that our banks and Russian corporations have learnt serious lessons from the previous crisis. And it should be noted that the state showed serious political will and readiness to provide support for the banking sector and corporations and in this sense the instruments that were used during the crisis, Lord forbid, of course, could be mobilized if the situation worsens. The more so, this summer the state took measures to activate budget auctions – the Central Bank’s potential. And as opposed to 2008-2009 when Russian corporation and banks were hit hard by the crisis on the international markets due to their short-term debt burden, at present these debts have been restructured. And so we can say that our banking system is now better prepared for a serious financial turmoil.
HOST: We’ll hope that there will be no serious crisis. So far, the old crisis might not have ended. But life is going on, although they said at the plenary session that in such times investors prefer to keep a low profile wait for better times. You are not waiting. Your corporation is a development institution. And as far as I know you are now changing your strategy. What do you want, what doesn’t suit you, what prevents you from participating in modernizing the Russian economy? How is the Bank going to look like in the coming years?
Vladimir DMITRIEV: At present, nothing prevents us from participating actively in modernizing the Russian economy, in implementing projects of national significance. These are the goals of our new strategy because the pre-crisis strategy was seriously reviewed as the crisis changed our strategic approaches. But at the moment, we are moving back at a new qualitatively new level to a strategy we failed to implement because of the crisis. So you know we were burdened with the tasks of taking crisis management measures. Now we are focusing on serious, breakthrough projects in terms of investments in infrastructure, in large scale enterprises operating in sectors we give high priority to. And of course we are placing increased emphasis on innovations and modernization. Innovation projects will account for several percent of our loan portfolio. I’ve already said that our traditional lines of activity are to provide support for small and medium-sized enterprises and industrial exports. The more so, an Export Credit and Investment Insurance Agency has been established as our subsidiary institution. All these mechanisms allow us to realize the Bank’s potential set forth in the Law on the Bank for Development and in the Memorandum on our Financial Policies.
HOST: You’ve said recently that VEB will not be funded from the budget. What’s the reason for it? Why is the Bank determined not to be funded by the state?
Vladimir DMTRIEV: In fact, we needed budget sources in order to launch the Bank for Development. And with our own funds worth 30 billion rubles in 2007 when the Bank was being established it was impossible to imagine that we could operate on a large-scale as a development institution. So, in that period we needed budgetary funds. We also needed them during the crisis to take crisis management measures and by the way to fund a whole number of projects. We should keep in mind that lending to the Olympic facilities at lower than market rates was possible through using the capital formed from budgetary funds. We now understand well that given the current budget limitations, when a lot of government socially oriented measures are being taken, we would be ashamed to ask for budgetary funds. The more so, we are operating actively on the market and our credit rating equal to a sovereign one allows us to raise inexpensive and long-term credit resources both in Russian and abroad and this is a main source to fund our credit transactions.
HOST: It is known that because of the crisis VEB became an active participant in the stock market. You’ve already mentioned that you have large stakes of shares and that you’ve sold some of them. Are you going to change your strategy on the stock market? Are you going to sell the remaining assets or purchase more stakes if market conditions worsen? And how would you assess your activity on the stock market?
Vladimir DMITRIEV: Our activity on the stock market will remain unchanged. Our Bank is a traditional stock market participant and in terms of some instruments is a market maker. Our policy and day-to-day activity on the stock market is set forth in our regulations on liquidity management. We have certain limits established by our Supervisory Board. So, there will be no serious changes in our policy and in our approach to various stock market instruments. We are pursuing a pretty conservative policy staying away from speculative trading and risky instruments. We normally or even exclusively deal with debt instruments of serious players – with blue chips and this allows us to manage liquidity and conduct transactions on an break-even basis.
HOST: Let’s come back to the Krasnodar region, to the real economy in general. Your major projects are in the real economy which is often not attractive for a usual investor or it needs a partner like you. To my best knowledge you signed quite a few new agreements at the Forum. Would you tell us about them?
Vladimir DMITRIEV: First of all a few words about the Krasnodar region. Our activity here is above all related to the preparations for the 2014 Olympics. The total value of Olympic projects funded by Vnesheconombank is 150 billion rubles and Vnesheconombank’s participation share is more than 90 billion and even close to 100 billion rubles. This is infrastructure, the Sochi airport, thermal power stations and such Olympic facilities as hotels, the Olympic village, an alpine skiing cluster, ski jumping facilities and etc. And most of our today’s agreements deal with the North Caucasus Federal District. We signed an agreement with RZHD on providing investment consulting services on modernizing a whole range of railway stations. In fact, it’s a part of a huge project we are now implementing with OJSC Russian Railways. We also signed an agreement on investment consulting services on the projects being implemented on the principles of public private partnership with Ingushetia, North Ossetia-Alania, with Kabardino-Balkaria.
HOST: Are there large-scale projects in Chechnya?
Vladimir DMITRIEV: By the way, I was in Chechnya yesterday. We inspected the projects funded by Vnesheconombank. We were very happy about investors’ efficient and rapid performance. We visited Chechen agro holding’s facilities where large-scale poultry, livestock and greenhouse production facilities are being built. We are signing an agreement with the Chechen Republic on funding a large cluster to manufacture construction materials. Today, we are also signing a credit agreement on funding the first startup complex of the Arkhyz alpine resort in Karachaevo-Cherkessia and a whole number of other agreements including the one we have signed today. This is a large credit agreement worth more than 70 billion rubles on creating automobile production plant Ford-Sollers. We had a memorandum but now we have gone beyond specific agreements on funding this project. These are three large production facilities in Vsevolozhsk, Elabuga, Naberezhnye Chelny where 350 thousands automobiles will be manufactures per year with a target level of localization of at least 60% including manufacturing of power units This is a serious, breakthrough project in the automobile industry. Traditionally, a forum in Sochi is a place where we start and in a year’s time inform each other on projects progress .
HOST: Thank you for answering our questions Vladimir Alexandrovich Good luck to you in your work.
Vladimir DMITRIEV: Thank you.
Vnesheconombank has updated its strategy. The State Corporation promises to operate without funding from the budget but it is ready to triple its loan portfolio. VEB’s Chairman is telling Vedomosti about the Bank’s new life.
Despite an uneasy situation in the world of finances, VEB Chairman Vladimir Dmitriev is calm and confident of himself. He promises that VEB’s support for the country’s economy will amount to 2-2.8% of GDP by 2015.
- The financial world is going through uneasy times. It may or may not be a crisis but there is no doubt that volatility is high. How is VEB doing? Are you mobilizing?
- In fact, the financial market’s volatility has increased significantly since May and in July a heavy storm struck. We saw it as a signal. Our line departments are pursuing a highly balanced policy with regard to debt instruments of Russian issuers. Here I mean transactions with ruble-denominated bonds, promissory notes and eurobonds. We give preference to short-term securities usually up to one year.
- And what about the shares you bought during the crisis?
- We are pretty conservative about transactions with shares because we tend to be long-term investors and sometimes strategic partners by way of entering into capital of various companies. At the same time, we have already sold many shares we purchased on the market during the crisis generating good profits for ourselves and good yields for the National Wealth Fund. And we are still holding the most reliable shares.
- Why did you sell Gazprom’s stake”?
- What stake do you mean?
- According to Gazprom’s latest report in line with Russian Accounting Standards, VEB owned 0.86%. And there’s no information about a 2.7% stake that VEB purchased from E.On.
- The large stake bought from E.On. is still on our balance sheet.
- Could you specify VEB’s stake in Gazprom?
- I can’t say definitely, because we constantly buy and sell Gazprom’s shares as one of the most liquid instruments.
- Nevertheless, it looks like that the current uneasy situation on the world financial market can’t help influencing you. Even the Russian budget isn’t in a good condition and you depend on the budget directly? Isn’t it true?
- Now in its current and planned activity VEB does not rely on budget support as opposed to other countries’ development institutions which have either budgetary guarantees for their obligations or are directly funded from the budget. VEB’s capital base is not to be increased through budgetary allocations.
- So, you are starting a life of your own and are not counting on budgetary funds any longer? Up until now VEB has received funds from the state coffers.
- You are quite right; VEB’s capital was largely formed through using budgetary funds at a time when it was vitally important to set up a solid base for the Bank for Development to get off to a start. During the crisis our capital was also increased to take certain crisis management measures, for example, we bought out the additional share issue of the United Aircraft Construction Corporation. The measures were taken and now as you rightly said before that we are starting a life of our own. The Bank’s strategy up to the year 2015 to be discussed at our next Supervisory Board meeting does not provide for using budgetary funds to increase our Bank’s capital.
- Are you going to make money on the market?
- Yes, we are. The market we’ll be our main source of money. As distinct from commercial banks that can raise deposits among other things from individuals we don’t have such an option. As far as many banks are concerned deposits are tangible resources for conducting transactions but this is not the case with us. So, when some view us as a quasi-budgetary instrument and try to push for interest rates lower than market ones they fail to understand the nature of our resource base.
- Nevertheless, if the state extends a credit to you it always extends a credit on favorable terms. For example, credits were extended to VEB through using monetary resources of the National Wealth Fund at an attractive interest rate. And maybe it was for this reason that almost all businessmen and bankers turned to you for help.
- I think there is some psychological aspect here: as you are a Bank for Development, as you are a state-run institution you must provide support. Don’t forget that during the crisis balance sheets of many banks were burdened with bad debts. They had to be helped and not only because Russian companies’ life depended on them but also because people kept their deposits in the banks. If the crisis had struck banks, it would have immediately worsened the economic situation in the country. And what should we have done, for example, with Traktornye Zavody? It’s not just a company; thousands of workers are employed there.
- We can always substantiate such transactions. Now the crisis is over and nevertheless you are considering options of buying Raspadskaya coal company.
- Not any more. They turn to all banks for help not only to us. We have to accept a proposal or reject it. We receive many proposals which conform neither to the Law on the Bank for Development nor to our Memorandum on Financial Policies. Unfortunately, they do not always study our underlying documents that specify everything.
- But there are exceptions.
- You are right. We implement some projects under special decisions by our Supervisory Board including those which are not related to our core activity or are not in line with lending limits. For example, the T-Platforms project: we are to enter into capital that is lower than the lending limit provided for by the Memorandum.
- Moving back to VEB’s strategy: there will be no funding from the budget, however you are going to increase your loan portfolio.
- By late 2015, we are going to increase the Bank for Development’s loan portfolio to more than 900 billion rubles, to be more exact, it is to amount to 30 billion dollars and Vnesheconombank’s total loan portfolio to 53-55 billion dollars.
- A very ambitious goal. You are going to triple your loan portfolio, aren’t you?
- Yes, we are. We proceed from the premise that increased funding dynamics will allow us to finance new infrastructure and large-scale sectoral projects. We are expecting new large-scale construction projects. We are shifting focus on funding innovation projects: their share is to amount to no less than 20% by 2015. By the way, during the crisis we got down to implementing several large-scale projects. Three of them were recognized by European economic magazines as the best projects in the following sectors: Tobolsk-Polymer, the Khabarovsk Refinery, Pulkovo’s Airport Reconstruction.
- Don’t you think that a picture you’ve drawn is too beautiful? Given that everything is so unstable all around, you just look like a dreamer.
- What do you mean? Financial markets are going up and down; there is a problem of sovereign debts. There is no other alternative for Russia but to upgrade its economy. We have to modernize our infrastructure, build new enterprises, rebuild agriculture and we should do all this on an innovative basis.
- Is VEB growing on the basis of patriotism?
- We are growing on the basis of objective reality. It’s no use speaking ironically. At present, Russia imports a lot of foodstuffs, machine tools, planes, equipment and petrochemical products. But we can produce all these things in our country and stop importing expensive products.
- My irony is not accidental. You are talking about great plans but it is not infrequent that VEB posts losses.
- For the most part, these losses are related to revaluating securities and exchange rate fluctuations. Undoubtedly, sometimes it happens due to our credit policy. For example, a credit we extended to a seemingly growing company, namely, Tractornye Zavody is a risky credit and it makes us set up additional reserves and this results in losses. We are going to reconsider approaches to our credit policy.
- Are you going to toughen the policy?
- On the contrary, we are going to make it more liberal. Now it’s too tough. In general, we regularly discuss credit policies of various countries’ development banks with our foreign colleagues. Tougher approaches to commercial banks’ activities worry us a lot, here I mean development institutions because development institutions are all non-profit organizations and the type of our activity is principally different: we extend long-term credits taking into account the state’s objectives. And our resource base is different from that of commercial banks. Observance of general banking regulations worsens significantly our balance-sheet indicators.
-So, all over the world development banks want to change rules of the game.
- We are not after changing rules of the game. We’d like to introduce reasonable exceptions. The fact is that development banks are established by the state and they do not pursue an aim of generating profits.
- What exceptions do you mean?
- For example, development banks should be at least allowed not to strictly follow requirements for setting up reserves.
- But you don’t pay profit tax.
- You are right. Lawmakers made a provision for that. Nevertheless we do a lot of things that commercial banks wouldn’t venture to do. For example, lending limit for one borrower can be exceeded upon extending a credit. This decision by our Supervisory Board is a sort of the state’s guarantee to investors.
- Nobody doubts it. Especially given the fact that your Supervisory Board is headed by Prime Minister Vladimir Putin.
- Encouraging risky projects the state assumes certain liabilities. God forbid but if VEB fails to fulfill its obligations the state is to redress a situation. I’d like to say that at present VEB creates pretty comfortable conditions for investors. Our ratings are always in line with sovereign ones. Last year, ours were the best borrowings by all parameters even in the sense that nobody had ever issued such long-term bonds.
- VEB is automatically likened to a sovereign.
- This happens not because Vnesheconombank is a state-run bank. This is recognition of the fact that the state will always provide support for the Bank for Development.
- During the crisis everything was done very quickly you were involved in providing a lot support. Are there any things you wish you hadn’t done?
- We are quite aware of what we did. We took on our balance sheet such companies as Amurmetall, Tracrtornye Zavody, we rehabilitated Globex, Svyaz-Bank and extended subordinated loans-nobody could do it instead of us. To be honest it’s a very difficult but interesting job. We can grieve over only one thing: everything happened too fast – Vnesheconombank’s capital was formed in late December of 20087. We had hardly got down to business when the crisis struck us all.
- Did VEB develop its muscles during the crisis?
- Yes, it did. We did a lot of exercising (laughing). But we were involved not only in taking crisis management measures. VEB started to implement serious development projects.
During the crisis you started to rehabilitate banks but of course it’s not your mission.
- Don’t forget that we didn’t get Globes and Svyaz-Bank free of charge. We haven’t so far received any dividends from them but we promptly pay interest on the Central Bank’s deposit and this is 8.5 billion rubles per annum.
- How are Globex and Svyaz Bank doing now?
- As compared to their condition when we took them on our balance sheet in the time of the crisis they are doing pretty well. Now Svyaz-Bank is a profit-making bank. Its return-on-capital ratio was 25% year-on-year in the first half-year, and this a positive indicator for the Russian banking system. As of July 1, the bank generated a profit of 2.5 billion rubles. The bank’s assets are 176 billion rubles. Globex’s capitalization is on the rise and it is expanding its business. Within three years since the crisis the bank has increased its loan portfolio by 850% from 9 billion to 87 billion rubles. Globex doubled its assets: as of July its assets amounted to 145 billion rubles. In the current year, the bank is to generate a profit of more than 1 billion rubles and this is a good result taking into account the fact that the bank largely services corporate customers.
- Are you going to sell these banks?
- Yes, we certainly are, but not now. Although there are some who want to purchase these banks on the cheap. But we tell them to take the Central Bank’s deposit we are serving and bad assets we received, that is, all these uncompleted and never-ending construction projects.
- Is this information circulating on the market or do they come to your Bank?
- They came to our Bank. And we are still receiving proposals.
- They want you to keep all the bad things for yourselves sell all the rest on the cheap.
- How much money do they offer?
- Ridiculous figures.
- Approximately how much?
-At least, less than one capital. And sometimes they tend to say: let’s work out appropriate schemes. So, they don’t have money but they are hungry.
- When are you going to sell them?
- Before the crisis, banks were sold with a multiplier of three-four capitals, the latest transactions – a bit more expensive than one capital. So far, Globex and Svyaz-Bank have not required significant expenses. We’ll capitalize them, wait until favorable market conditions emerge and sell them. After selling them we’ll be able to repay the Central Bank’s deposit account and compensate expenses on paying interest on it.
- Do you want to sell the banks at a profit?
- At least, we would like to sell them on a break-even basis. And we should consider selling assets we took on our balance sheet when we rehabilitated the banks (especially Globex). The situation is different with Svyaz-Bank. Its bad credits amount to 100 billion rubles – a huge sum of money for such a bank. A part of them were written off and we took some bad loans with a significant discount. Now VEB Capital is responsible for selling bad assets and sometimes I should admit that it has to wring out debts.
- The word on the markets is that you are going to sell the two banks to foreigners. Allegedly, there are no buyers in Russia except for Sberbank and VTB.
- Now it makes no sense talking seriously about selling the banks. The situation is not right. But I discuss this issue informally with sovereign funds and solid investors. I ask them if they are ready in the future to enter into capital of these banks. And I should admit that their reaction is positive. And maybe because they can see that the banks are making good progress and are supported by VEB. Investors are sure that they won’t find any skeletons in the cupboard. But I’d like to stress we are not talking in practical terms about selling the banks.
- Would you tell us about setting up a Postal Bank? There was a lot of noise but now silence set in.
- When a new issue emerges it tends to cause a lot of noise and then the noise abates. It’s quite normal. I’d like to remind you of the issue’s prehistory. VEB’s Supervisory Board took a decision to set up a Postal Bank on the basis of Svyaz-Bank with the participation of the Post of Russia and a partner bank. We chose Bank Russian Standard and Nomos Bank as candidates for a partner bank. The candidates worked out in great detail various models of implementing the project and agreed them upon with the Post of Russia. In its turn VEB cleared problem assets from Svyaz-Bank’s balance sheet. A final decision on choosing an operational model of a Postal Bank and on engaging a partner bank in the project depends directly on the way the Post of Russia will enter in the capital of Svyaz-Bank. A decision on the amount of the Post of Russia’s share in Svyaz-Bank’s capital and sources to pay Svyaz-Bank’s shares is to be taken by the Government as it affects the country’s interests. Without Post of Russia’s participation in Svyaz-Bank’s capital it makes no sense setting up a Postal Bank. At present, the Post of Russia is selling on contractual basis services of 22 commercial banks including Svyaz-Bank through 9000 branch post offices. It’s impossible to provide banking services to the Post of Russia’s entire network of 42 000 post offices because of the Post of Russia’s commercial partners’ selective approach to searching for profitable sales outlets. It’s obvious that in remote and sparsely populated districts these outlets are sure to be unprofitable. But it was for the sake of these districts that the establishment of a Postal Bank was scheduled. The Postal Bank’s social function is to provide services in remote areas. Losses here should be compensated for by incomes from selling services in post offices more accessible for communications channels with a lot more customers. But competition with commercial banks in other outlets won’t make it possible to generate incomes sufficient for subsidizing money-losing post offices and paying back the project as a whole.
- Is Vnesheconombank still participating in the project or have you changed your plans?
- We are considering our participation. We have studied the world’s practice in establishing postal banks. It demonstrates efficiency of exclusive partnership between a postal service and a postal bank where the post participates in the postal bank’s capital and receives additional incomes in the form of dividends and increased capitalization of its share. The second efficient option provides for agency relations between the post and competing commercial banks whose services the post sells in sales outlets chosen by the said banks. But none of the countries implemented both options at the same time. Thus, if the Post of Russia continues to maintain agency relations with other commercial banks the project to establish a Postal Bank will fall through. A social objective of providing banking services to all branch post offices of the Post of Russia can be achieved but we won’t be able to pay the project back. A decision of exclusive relations between the Post of Russia and a Postal Bank is to be taken by federal government authorities as it affects anti-monopoly regulation.
- Under what conditions are you going to participate in the project?
- Since February, we have been asking government authorities to address an issue of the Post of Russia’s sources to pay contribution to a Postal Bank’s charter capital. A decision hasn’t been taken so far. Nevertheless, the Post of Russia continues to develop an alternative project of agency relations with two dozens of commercial banks and financial institutions. According to the Post of Russia, communications channels technological readiness makes it possible in the near future to provide banking services to 24 000 branch post offices without significant capital investments. For VEB, the Postal Bank Project’s implementation is tied to the Strategy of Svyaz-Bank’s Development for a period of 5-10 years. To rehabilitate Svyaz-Bank and restore its solvency we raised deposits of the Bank of Russia in the amount 125 billion rubles. Out of this amount 90 billion rubles were directly contributed to Svyaz-Bank’s capital to restore capital adequacy. The amount of Svyaz-Bank’s bad assets after a lapse of three years can be estimated at about 100 billion rubles. The claims worth 24 billion rubles were written off Svyaz-Bank’s balance sheet, rights of claim worth 75 billion rubles transferred to Vnesheconombank’s balance sheet were estimated by a an independent appraiser at 6.3 billion rubles, another 8 billion rubles represent credits transferred to Vnesheconombank’s balance sheet extended to the Don-Stroi Group of companies that do not have sources to service and repay debts. Debt service cost at ½ of refinancing rate rests on Vnesheconombank and it is 5 billion rubles per annum. Svyaz-Bank’s goal is to increase its capitalization for the purpose of sale at a horizon of about 10 years, given favorable market conditions. So, Svyaz-Bank’s strategy should be based on increasing its value substantially. As I have already said proceeds from selling Svyaz-Bank’s stake should be sufficient to repay the principal to the Bank of Russia and repay interest paid by Vnesheconombank for the whole period. This is about 150 billion rubles. With a realistic multiplier of 2.5 capitals, a value of Svyaz-Bank’s net assets due to Vnesheconombank’s share in its capital is to amount about 60 billion rubles.
- This means that you do not rule out the possibility that a Postal Bank won’t be established.
- I’ll say diplomatically: a decision on implementing the Postal Bank project is a condition precedent for formulating a long-term strategy of Svyaz-Bank. If the Government argues against the Post of Russia entering in Svyaz-Bank’s capital and makes a decision to provide retail banking services in a different way, Svyaz-Bank will develop as a universal financial institution. It looks like the problem is being slowly addressed. The government considers transforming the Post of Russia into a joint stock company as well as it considers a format of its entering in Svyaz-Bank’s capital. And I think that now it’s clear to everybody that the establishment of a Postal Bank should not be a philanthropic gesture on our part.
- Why is Vnesheconombank jointly with IFC participating in establishing a capitalization fund for small and medium-sized banks?
- The International Finance Corporation (IFC) is the World’s Bank structural subdivision which is well aware of regional banks’ problems. It is common knowledge that these banks’ insufficient own capital resources hinder investments in the regions. In order to alleviate the problem they got in touch with us and turned to the Finance Ministry requesting to set up a Capitalization Fund for Russian Banks (CFRB) to support Russian regional banks – but support not all banks but only leaders in lending to the real economy and driving forces of economic growth.
- How much is VEB going to invest in this Fund?
- In the course of talks between the Finance Ministry, IFC and VEB we agreed upon a joint mutually conditional participation in the Fund. Vnesheconombank’s and IFC’s contribution might amount to $50 million and the Finance Ministry’s – to $50 million. We’d also like to engage foreign institutional investors in the Fund. VEB’s participation in the Fund aims to create additional incentives for raising large foreign investments for the Russian real economy through efficient regional banks. Using capital resources raised by the Capitalization Fund for Russian Banks (CFRB) to fund the real economy through advanced banks is expected to have a greater influence compared with direct investing. By IFC’s estimates, multiplier effect will amount to 3:1. So, upon selecting banks it’s very important to take into account their day-to-day credit activities. This means in particular a significant proportion of credits extended to the real economy in a bank’s total assets, its strong regional presence and active participation in funding small and medium-sized enterprises.
- Are you going to insist that your representatives be included on a mandatory basis in a board of directors of each of the banks participating in the program?
- No, we are not. The Asset Management Company is to be responsible for day-to-day management of CFRB. The Asset Management Company is IFC’s 100% subsidiary. But I promise that we are not going to be passive onlookers. We’ll monitor and select jointly with IFC those banks in which the Fund will invest.
- The Russian Direct Investment Fund (RDIF) that you set up not long ago has already got off to a start. They say it does not try to navigate difficult paths but is going to invest in large-scale projects.
- I’d like to warn you against using usual clichés. It’s small wonder that we are focusing on projects that are in line with our core business, for example, in the timber industrial sector, pharmaceutics or agriculture.
- My understanding is that VEB’s former customers might be financed by RDIF.
- In fact, we are proposing a number of projects that we know well. We know them well because our Bank and other banks funded them. You have to know a project well, especially at an initial stage when we are launching the Fund. As the phrase goes the best oftentimes is the enemy of the good.
- Could you tell us about the first transactions?
- I would do with pleasure but at the moment RDIF executives are in talks with foreign investors about the first transactions. It takes about 6-9 months to analyze a project thoroughly. And before transactions are closed, RDIF is to favor no-disclosure agreements. Potential projects are related to the agricultural sector, energy efficiency and medicine. The Fund will invest not only in state-run companies but also in many promising private companies. The Fund should not seek as many transactions as possible now. Now it’s important for the Fund to develop procedures for working with projects and mechanisms for making investments. It’s not the speed that matters now; we need top quality high-yield transactions.
- When will the first transactions be closed?
- I hope 1-2 transactions will be closed till this year end. But it remains to be seen. I believe that transactions will be conducted in 2011-2012. I think Kirill Dmitriev, we happen to have the same family name, goes along with me.
- It’s funny that you have the same family name.
- It is. By the way I call Kirill my younger brother. But in fact we are not relatives. In general, family name Dmitriev is popular in VEB. When I left the Finance Ministry and started working in VEB in 1997 I looked through a directory of employees and Dmitriev was the third most popular family name.
- Persons with family name Dmitriev like to work in VEB
- They just like to work in general.
- How are things with the Export Credit Insurance Agency? They intended to establish it for a long time and finally the State Duma approved amendments to applicable legislation to institutionalize the Agency.
Russian companies need this Agency badly. We made a request and many exporter companies sent us applications for insuring their export credits. For the coming three years they need tens of billions of dollars. Given these needs, the Agency will have a lot of work to do. Now regulations and various decisions are being prepared to launch this new Agency.
- Haven’t you appointed Director of the Export Credit Insurance Agency?
-All the organizational matters and the Agency’s Head are to be approved at the next meeting of VEB’s Supervisory Board. I think that the first insurance transactions will be conducted in the 1st quarter of the next year.
- How many people will be employed by the Agency?
At least one hundred. I personally meet candidates. They are young but pretty well-known representatives of the insurance market. Some are insurers and some are mathematicians.
- Do you succeed in hiring away specialists from private companies?
- Yes, we do. And not only from Russian companies but also from foreign ones. We are happy that sometimes candidates agree to work for us for less money.
- Probably you win them over by the virtue of patriotism…
- By an interesting job. Sometimes it comes to paradoxes. Today I came to work in the afternoon – a young man came up to me at the entrance and said “I’ve been long dreaming about working in VEB. And he gave me his resume.
- Have you read it?
- I took it to our personnel department. But I think that it’s quite a deed – he had to wait for half a day and handed his resume to me personally.
- You should give him a job.
- My point is that you have to work hard in our Bank. Without any envy I can say that our salaries are lot lower than those in commercial banks.
- Do you feel bad for paying lower salaries?
- Frankly speaking, I feel sorry for people, they have to work for less than market-rate salaries.
- Maybe they agree to work in your Bank for career purposes, they work for small money for some time and then find a highly paid job and it’s a god think to write in their resume that they worked in Vnesheconombank.
- Unfortunately, I have to admit that some of our employees are hired away. We have to work with commercial banks and they can see that our employees are highly qualified.
- Were you assigned to deal with the newly established Strategic Initiatives Agency (SIA)?
- We haven’t determined any parameters so far as it was not long ago that the Government instructed Vnesheconombank to be a basic financial institution responsible for supporting SIA projects. So far, we have established a special department at the Bank to cooperate with SIA. We’ll provide support for the Agency in two forms: sponsor’s contributions to run SIA – so far they amount to 100 million rubles and providing SIA with the Bank’s investment infrastructure to assist the Agency in conducting expert examination and preparation of projects. In the future, this will help to receive funding for projects at commercial banks and VEB. Unfortunately, we have a week feedback with federal authorities which are supposed to give clear-cut instructions to development institutions. I think that SIA executives should be more active in working with federal authorities.
- If public servants worked properly you would not have exert pressure on them.
- Exerting pressure is against our rules. But we hope to cooperate closer with line agencies which will allow us to be on a par with world leading development institutions. Let me cite an example of the Brazil Development Bank. It succeeded in supporting almost from scratch the Brazilian aviation industry which is now competing on a par with leaders in the aviation industry. And the situation in our country is not that good. Not long ago I became Board Chairman of the United Aircraft Construction Corporation and I see that the Corporation is developing in a somewhat different way.
- Now you’ll be able to put the house in order. You are in charge now.
- In order to do it you don’t have to be Board Chairman you have to pursue a well-defined policy that provides for the Bank for Development to implement specific projects of national significance. Let’s remember that in the times of the USSR there was Promstroibank which employed bankers and engineers and constructors. They were responsible for funding large-scale construction projects and exercised control over the targeted use of financial funds. In my opinion VEB could become a proper instrument that would replace many targeted programs implemented through using budgetary funds with programs to be funded on a repayment basis.
- We had the Investment Fund which is almost nonexistent now.
- I won’t say anything about the Investment Fund. But take my word for it, it would be more difficult to spend a budget of a construction project funded by VEB, given our stringent technological control and our control over the proper use of funds. We are well aware how money, especially budgetary money is spent.
- You mean how money is misappropriated.
- I wasn’t there in person.
- Will you outline your mid-term strategy?
- Keeping in mind all the difficulties and downsides of the Bank’s activity for more than four years, we introduced serious changes in VEB’ strategy up to 2015 which we are going to submit to consideration and approval by VEB’s Supervisory Board at its next meeting. I can say that we reconsidered to a large extent the Bank’s role and place in the Russian economy and lay down qualitatively different approaches to its strategy. The new strategy’s main feature is to expand Vnesheconombank’s transactions in its capacity of the bank for development, increase its role in the country’s investment policy, participate actively in modernizing the economy and shift emphasis on innovation projects.
- What’s in your opinion the most important indicator for the Bank?
- We set ourselves the following objective: we should bring the amount of our support for the national economy by 2015 to 2-2.8% of GDP.
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.
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