Vnesheconombank Deputy Chairman Mikhail Poluboyarinov’s Interview to TV Channel Russia 24
TV Channel Russia 24,
HOST: Our guest in the seventh studio today is Vnesheconombank Deputy Chairman Mikhail Poluboyarinov. Good evening Mikhail Igorevich.
Mikhail POLUBOYARINOV: Good evening.
HOST: I’d like to discuss business development as a whole and Vnesheconombank’s role. I’d better start with official current events because on Monday Vladimir Putin who is Chairman of Vnesheconombank’s Supervisory Board said that development institutions responsible for business development should be more accessible to business itself, so I have the following questions: aren’t these institutions doing enough in this respect? And what is VEB doing to this end?
Mikhail POLUBOYARINOV, Vnesheconombank Deputy Chairman: Basically, Vnesheconombank is rather a conservative development institution under its Memorandum. But in the spirit of latest developments and the time we are trying to be closer to business as Vladimir Putin emphasized. And Vnesheconombank Group is stepping up its efforts to lend small and medium-sized enterprises through SME Bank. Not long ago an Export Credit Agency of Russia (EXIAR) was established and it is for the most part designed to extend credits to small and medium-sized enterprises. We are now a pivotal bank in supporting the Strategic Initiatives Agency’s projects. This Agency is also focused on SMEs. At its meeting on April 2, VEB’s Supervisory Board approved conceptual approaches to setting up an Energy Finance Agency, which Vnesheconombank wants to establish jointly with the Energy Ministry. This Agency is to provide guarantee support for projects in energy efficiency.
HOST: A road map?
Mikhail Poluboyarinov: Yes, we are placing great emphasis on energy efficiency so that these initiators could turn to any commercial bank for financing thus raising non-budgetary funds in the development of energy efficiency. This isVEB’s current wide range of activities.
HOST: To more specific, Vnesheconombank tends to fund projects with long payback periods as well as difficult to implement projects as some call them. Do you think it’s a right approach? Doesn’t VEB think about recovering the funds? Actually, this is also government money and you need to look for a sort of balance or is ours a time of such long-term and difficult to implement projects?
Mikhail POLUBOYARINOV: Basically, Vnesheconombank is designed to remove infrastructure restrictions on the country’s development.
HOST: Is it the Bank’s main function?
Mikhail POPLUBOYARINOV: In my opinion it’s one of VEB’s main functions and it is specified in our Memorandum. Hence, Vnesheconombank is after all a project finance bank. The Bank concentrates its efforts and funds on large-scale, major infrastructure projects and this is a key line of VEB’s activity and it’s really difficult.
HOST: Then I’d like to ask you about criteria for selecting projects because sometimes mainstream audience finds it difficult to understand VEB’s functions and decisions taken at Supervisory Board meetings.
Mikhail POLUBOYARINOV: Alexei, main criteria for selecting projects are posted on Vnesheconombank’s site and you can read them there.
HOST: It would be interesting to read them.
Mikhail POLUBOYARINOV: Projects are to be worth no less than 2 billion rubles with a payback period of no less than 5 years and are to be in line with well-defined criteria of our Memorandum and the Bank’s lines of investment activity. At the same time, another key criterion to my mind is payback. In other words, the Bank is not designed to generate some super profits; it is designed to invest its funds, be able to recover them and ensure that projects are paid back. I think that these are key criteria. So when we consider these complex, major projects, they are to be structured in such a way as to be self-payback projects and guarantee recoverability of monetary funds for the Bank. And in this case, our Bank as a development institution tries to extend credit for a long period of time and at the most favorable interest rate with regard to a specific project.
HOST: There are several institutions responsible for business development in Russia. VEB is involved in funding complex, large-scale projects. We also have the Russian Direct Investment Fund which raises funds of major Western investors for a strategic sector. We also have the Strategic Initiatives Agency which helps to find adequate solutions for business to operate efficiently. What about SMEs? Are you focusing on large-scale projects alone?
Mikhail POLUBOYARINOV: Undoubtedly under our Memorandum we are focusing on large-scale projects. In the energy efficiency sector we consider projects not only in terms of their scale because energy efficiency projects are not that large. So, the Agency makes it possible to support medium-size projects worth less than 2 billion rubles but nevertheless we are going to fund them. What else can I say here? When we consider large-scale projects we try to find something interesting in each of them. We focus on our main lines of activity that are determined by the Government and the President but they also include such projects as for example a project with Nord Hydro Company. This project is in the mini hydro generation sector. On the one hand this project is worth less than 2 billion rubles and on the other hand it is a pilot project in the field of green tariffs – a combination of large monetary funds, energy efficiency elements and innovations. Another example is funding of the Skolkovo project – the construction of an innovation cluster. This major infrastructure project is highly instrumental in developing innovations.
HOST: The trend is clear. Now I’d like to ask a question about another major project, here I mean the construction of Olympic facilities. What role does Vnesheconombank play in this project? Maybe there is a need for making some adjustments, we know that there are certain problems and successes in Olympic project but I’d like to discuss difficulties.
Mikhail POLUBOYARINOV: What’s the connection between Vnesheconombank and the Sochi Olympics? Vnesheconombank is a principal creditor of Olympic facilities’ commercial part. So, as of today, we have stated and signed credit lines worth more than 150 billion rubles in our portfolio. All the projects are developing differently but as a whole all of them are developing at high rates and are being funded sufficiently. One major project is Roza Khutor where test competitions were held, it is a flagman now and it is being funded without fail. At its meeting on April 2, Vnesheconombank’s Supervisory Board considered an issue of leverage ratio and went along with investors on this issue. The proportions were specified and approved as a general rule for all in 2009. The financing proportion was 30 to 70: 30% - investors’ own funds and 70% - the Bank’s funds. By force of various circumstances, investors appealed to the Russian Government to reduce their proportion of funds and the Government went along with them. Investors who want to reduce the proportion of their own funds in a project can do it now, they have a chance to finish a project, go on implementing it but against certain guarantees and as a whole it’s pretty fair.
HOST: Are new facilities appearing?
Mikhail PLUBOYARINOV: As of today, we are funding about 14 facilities. So far, this list has been rather limited. And I think there won’t be any new facilities because final completion dates are nearing – by mid 2013 many facilities are to be commissioned and tested, so we are working with these projects, with these facilities. We believe that everything is going well.
HOST: In general, one of the most important Russian strategic projects is being implemented on schedule, in any case in so far as it relates to financing.
Mikhail POLUBOYARINOV: Yes, it is.
HOIST: Mikhail Igorevich, thank you very much for finding time to answer our questions.
Mikhail POLUBOYARINOV: Thank you.
Director General of the North Caucasus Development Corporation Anton Pak’s Interview to TV Channel Russia 24
HOST: This week Vnesheconombank’s Supervisory Board has approved a new strategy and several projects. One of them is the Kazbek Technopark where construction materials are planned to be manufactured. The transaction provides for Vnesheconombank to enter into the capital of the North Caucasus Development Corporation as the facility will be located in Chechnya.
We’ll discuss these plans with VEB’s representative, Director General of the North Caucasus Development Corporation Anton Pak. Good afternoon, Anton. We’d like to talk with you about your plans as a whole and about what you are going to do in the North Caucasus and how you are going to develop the region rather than about your concrete plans.
Anton PAK: Director General of the North Caucasus Development Corporation (OJSC): Good afternoon, in fact, we have pretty extensive plans in the North Caucasus; we’ve already been operating for a year. The Corporation was established in December of 2010 and in February we opened our office in Essentuki where we have been based to the present time. During the year, we managed to form the first pool of investment projects and we have already invested our own funds in some of them and we are planning to invest funds in some others in the near future. These projects are in utterly different areas. We have projects in the tourist sector as well as industrial projects such as the Kazbek project that we’ve already mentioned or the National Aerosol Cluster Project in the city of Nevinnomyssk. We have also the so called business infrastructure projects, for example, an Expo-Center in Caucasian Mineralnye Vody. And naturally, we have projects in one of the most important North Caucasian sectors, namely, agro-industrial complex.
HOST: So, there are three top-priority, promising sectors in the North Caucasus: tourism, some industrial facilities and agro-industrial complex?
Anton PAK: I think it’s most logical to develop them. Of course we can develop other sectors too. It’s a matter of determining priorities for the region taking into account its competitive edge as we should develop sectors that have competitive advantages.
HOST: Do you mean these three sectors?
Anton PAK: Yes, I do. We view them as our most important sectors.
HOST: And how did you identify priorities inside these sectors? Could you tell us now about specific projects?
Anton PAK: The first project we have started to fund in the tourist sector is the Arkhyz All-Season Ski Resort in Karachaevo-Cherkessia. It’s the first one of 5 and now I think of 7 North Caucasian resort projects. We have been working in partnership with this corporation here. On March 18, the first ski-lift was launched in Karachaevo-Cherkessia. And now we are building the first stage of hotels and I hope that by a new season somewhere in September-October this year tourists will be able not only to go skiing but also stay at hotels.
HOST: How would describe the situation in the industrial sector?
Anton PAK: We started to fund a very interesting project in Nevinnomyssk. The Russian largest aerosol manufacturer is located there, here I mean Arnest Company. It accounts for 70% of Russia’s and even in my opinion CIS’ market. We have set up an enterprise jointly with them. It is to deal with localizing production of component parts for their core business. These are component parts for manufacturing aerosol containers.
HOST: What about projects in agro-industrial complex?
Anton PAK: We are working on three very interesting and large projects in agro-industrial complex. Due to their technological complexity which requires a lot attention we haven’t started to fund these projects yet but we have plans to launch the first project in one-two month’s time in Karachaevo-Cherkessia jointly with Razgulyai company. This is a large-scale agro-industrial park. At the first stage the existing sugar factory is to be reconstructed and a vegetable storage facility is to be built. An agro-park is to be created on the basis of this vegetable storage facility. I’d like explain an idea behind an agro-park and why it differs from an ordinary storage facility. The fact is that it’s no secret that there are very favorable natural conditions in the Caucasus and when fruits and vegetables are in season you can buy them at low prices but unfortunately, in order to attract fruit and vegetable processors to the region we should be able not only to buy them for a period of 4-5 months but also to store them. So, we developed this project to attract medium-sized companies to this agro-park for them to be able to come and deploy their production facilities to process agricultural produce which is grown there.
HOST: How much money is needed to finance projects in the North Caucasus?
Anton Pak: The projects that we have started to fund are worth about 3 billion rubles; here I mean the Corporation’s participation in those 5 projects. We won’t spend all the money this year because projects are funded on a step-by-step basis and as a result the Corporation will invest in these projects about 3 billion rubles for a period of 1-2 years.
HOST: What’s next?
Anton PAK: The total value of these projects if I’m not mistaken is about 14 billion rubles, all the rest money will be invested by commercial banks responsible for funding these projects or private investors who participate in the charter capital together with us.
HOST: Do you participate in the charter capital as shareholders?
Anton PAK: Yes, we participate as shareholders but we are also supposed to have an operational partner who will manage this business and invest money together with us.
HOST: How do you work as shareholders in the North Caucasus?
Anton PAK: In general, the territory is not principally different from Russia’s all other regions. People are very energetic, enterprising; they generate a lot of various ideas, so our work is going pretty well.
HOST: But there must be some problems after all. It’s common knowledge that somehow the North Caucasus is a peculiar region. Could you specify any problems?
Anton PAK: Seriously speaking, our main problem is related to low-skilled managerial personnel. We have to admit that the level of corporate governance in many companies we are starting or trying to work with in the North Caucasus is not very high. So, the main problem that makes us prepare projects for a long time is the low quality of managerial personnel.
HOST: And what about pluses? Can you highlight any positive sides of working in the North Caucasus?
Anton PAK: The main positive side I’ve already mentioned is that people there are very energetic and enterprising; there are almost no lazy people there. It’s another matter that sometimes we have to channel this creative energy into the right direction but as a whole our work is going very well.
HOST: The manager’s responsibility is to guide. To my best knowledge there are advantages of working in the North Caucasus in the form of various federal privileges – federal programs, subsidies and etc. Do the take advantage of these privileges in the North Caucasus? And do you take advantage of these programs?
Anton PAK: You know that the Corporation’s second most important function after the investment one is to provide consulting and information support because there are very many state support measures designed to encourage federal business, foreign investors and local business to invest in new projects.
HOST: What are these measures?
Anton PAK: A set of state support measures is very large. In general, there is a program of government guarantees. Under this program the federal budget is to provide a guarantee for a commercial bank’s credit extended for implementing a project in the North Caucasus. 70% of this credit can be covered by a guarantee granted by the Russian Government. This program is pretty large. About 100 billon rubles have been approved for 2011 or 2012. I think that the first projects will receive guarantee support as early as within 2-3 months.
HOST: Therefore, can we say that money is coming to the region because of this program?
Anton PAK: Yes, there is no doubt about it. And this is not the only program. There is a program of subsidizing interest rates.
HOST: How does this program work?
Anton PAK: It works not for all projects, for the most part; it works for projects in agro-industrial complex. Factually, it makes it possible to compensate for a part of interest rate that the borrower has to pay to a bank through using federal or regional budget funds. Naturally, projects seeking this compensation have to meet a whole number of criteria but it is an absolutely realistic list of projects because almost all interesting projects can receive this sort of support.
HOST: Do you work with major corporations? Do federal corporations come to this region?
Anton PAK: This is one of the most important objectives our Corporation in our opinion should address. And we are trying to engage federal business because local businessmen’s financial resources are not always sufficient for implementing large-scale projects in the North Caucasus. For example, the agro-industrial project I mentioned earlier is being implemented in Karachaevo-Cherkessia jointly with Russia’s largest agricultural holding, namely, Razgulyai company. Vnesheconombank is its minority shareholder and to a large extent their decision to come to the Caucasus and participate in implementing this project was brought about by our Corporation’s efforts. So, we hope that in the near future the number of such investors will increase greatly and we’ll be able to change the region’s negative image.
HOST: Could you open a veil of secrecy and tell us about future projects? What else does the Corporation plan to do in the North Caucasus? In what sectors do you plan to operate?
Anton PAK: We plan to operate in those sectors where we have already started to fund projects. We have a very interesting project that we are going to implement in Dagestan. This is a project on the construction of a ceramic tiles production plant. The project is to be funded by a local investor and a federal bank. I hope that we’ll be able to launch this project in 2-3 month’s time. There are also large-scale industrial projects, for example, a copper ore deposit in Kyzyl-Dere in Dagestan. Naturally, a project of such a caliber requires a very serious preparation and engineering research. That is why sometimes it takes months or even years to prepare and develop a project. But we have been involved in this project for a year already and I think that this year we’ll try to start taking some practical steps.
HOST: Anton, just a few days ago I talked with your colleague Petr Fradkov. We discussed his Agency and talked about sources of financing. As far as I understand in case of the North Caucasus Development Corporation VEB is the only source of its capital. Do you plan to diversify sources of capital?
Anton PAK: Yes, we are supposed to do it and it is a key element of our Corporation’s development strategy. At present, the only source of our capital is Vnesheconombank. But in about a year from now I think next spring we plan to engage other investors into our Corporation’s capital. In order to do it we must show tangible results of our activity rather than limiting ourselves to declaring some goals and tasks. In our case these are successfully implemented projects. Hopefully, in a year’s time we’ll manage to form a portfolio of such projects and we’ll be able to inform Russian federal and foreign investors about concrete results of our activity with certain profitability indicators and persuade them to invest in the North Caucasus on the basis of our successful performance.
HOST: Anton, I wish you every success, thank you very much for your answers.
Anton PAK: Thank you!
HOST: I’d like to remind you that our guest today was Director General of the North Caucasus Development Corporation Anton Pak.