Vnesheconombank Chairman V.A. Dmitriev’s Interview to TV Channel Russia 24

17 may 2012 года
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TV Channel Russia 24
OPINION
17.05.2012, 19:22

HOST: 5 years ago on May 17, 2007 President Putin signed a Law on the Bank for Development. This institution’s powers were transferred to Vnesheconombank. 5 years have passed and what results have been achieved? My colleague Evelina Zakamskaya talked to Vnesheconombank Chairman Vladimir Dmitriev.

Interview

Correspondent Evelina Zakamskaya

CORR: Good evening Vladimir Alexandrovich.

Vladimir DMITRIEV, Vnesheconombank Chairman: good evening Evelina.

CORR: Thank you for coming to our studio. Vladimir Alexandrovich I remember quite well a meeting of the government and complex lively discussions in the government on the need for creating such an institution which was supposed to accumulate significant government resources - to my mind about 180 billion rubles. The Bank did not focus on generating profits and was authorized to fund and subsidize major investment projects. Why did you believe in the idea of creating such a bank and did the idea prove its worth?

Vladimir DMITRIEV: At that time, many viewed the idea as unrealistic and sometimes even absurd.

CORR: We can even say who those people were. Premier Fradkov put forward the idea and Alexei Kudrin and Herman Gref argued against it. I remember it very well.

Vladimir DMITRIEV: You are quite right, we had to come up against a lot of opponents; we had to persuade and prove the need for creating such a bank and even talk about its advantages. At that time, Vnesheconombank was still called the Bank for Foreign Economic Affairs of the USSR and we were under a real threat of being transferred into an ordinary agency responsible for assisting the Finance Ministry in servicing foreign debts and claims to foreign states. But for us, VEB’s employees, the bank established in 1924 as a bank for foreign trade had for all those years become a bank for development. It raised investments, rendered financial assistance in the construction of large industrial facilities both in our country and abroad taking on functions of a development institution inside the country and a function of promoting industrial exports. The Bank was the first legal entity in our country to have placed eurobonds in the Soviet time. And by the way, despite the default of the Soviet Union, it was these bonds that were being served promptly and in full but by that time in a sovereign Russia. Thus, the idea came into being in its own right from the bank’s track record since the bank’s inception.

CORR: This means that Vnesheconombank’s main advantage is its image because similar institutions already existed. For example, the Russian Development Bank was already in place in 2007.

Vladimir DMITRIEV: Yes, there were development institutions. The Russian Development Bank was in place but it was for the most part designed to support small and medium-sized enterprises. But in terms of its size, legal and organizational framework, this bank along with the Russian Export-Import Bank were the banks operating in the system of Russian commercial banks. Therefore, all regulations of the Central Bank were applicable to them including provisioning and limits and this limited their operation as full-fledged development institutions designed to support major industrial projects.

CORR: What was the state guided by when it determined the Bank’s status as a state corporation rather than a joint stock company. We know that similar institutions abroad, in other countries have different statuses, for example, I think that the China State Development Bank is a joint stock company.

Vladimir DMITRIEV: It must be kept in mind that our Bank was being set up as a special institution and only after a lapse of several years the question of transforming it into a joint stock company came up. Nevertheless, being a joint stock company, the China State Development Bank is owned by a state-run company, namely, the China Investment Fund. There are other legal and organizational frameworks too. For example, the Development Bank of Germany (KfW) operates in the domain of public law. So, when we were establishing our Bank we relied on the experience of foreign states and were well aware that we should not create another state-run giant with the same powers as commercial banks. First, if we had retained a standard legal framework incidental to ordinary banks we would of course have competed against them. And it goes without saying that we would have driven private commercial banks out of business.

CORR: Other banks wouldn’t have been able to compete against your Bank.

Vladimir DMITRIEV: The most important thing is that competition would have eliminated other private commercial banks. The Bank has a completely different mission than that of commercial banks. So, we chose a legal and organizational network that is stipulated in our legislation, namely, a non-profit organization - a state corporation. I hope that in the near future these debates will die out because as far as Vnesheconombank and the Deposit Insurance Agency are concerned, an unequivocal decision was taken that they are to operate on the basis of a definite legal and organizational framework applicable only to them as  legal entities of public law.

CORR: Doesn’t the fact that the Bank doesn’t focus on generating profits prevent it from developing efficient management? It turns out that if you have money you are fine and if don’t have money you are fine too.

Vladimir DMITRIEV: Factually, profits that we generate…

CORR: After all, Do you generate profits ?

Vladimir DMITRIEV: We generate profits. Moreover the law stipulates that the Bank is to operate on a break-even basis. And we use our profits to capitalize our Bank and our subsidiary banks, for example, the Bank for Supporting Small and Medium-Sized Enterprises. This bank’s strategy provides for Vnesheconombank to annually allocate up to 10% of its profits for its capitalization. And this in its turn would allow it to cumulatively increase its loan portfolio and provide support for regional banks operating with small and medium-sized enterprises as well as support infrastructure of small and medium-sized enterprises. We should also keep in mind that profits are used to motivate our employees. But frankly speaking, in terms of salaries, our employees’ salaries are lower than those in commercial banks and banks with state participation but this doesn’t discourage highly qualified professionals from working in our bank.

CORR: In order not to discourage employees you double bonuses for top managers and this results in reduced profits.

Vladimir DMITRIEV: It’s not a matter of doubling bonuses but of implementing a bonus system. We launched it only last year, up until that time the system was out of question. Our employees received bonuses but our top management above all Board members didn’t receive bonuses till last year. So, salaries for 2011 are a lot bigger compared with those for 2010. But I’d like to remind you once more that compared with top management of other commercial banks we are lagging behind a lot.

CORR: Do you think the timing is right for incentivizing employees. Experts say that as salaries and bonuses of top management increase Vnesheconombank’s profits dwindle. What does reduction in profits show as a whole? Looking at the Bank’s track record there remains a big question mark about how much you should invest in long-term risky projects on the one hand and how you should undertake some banking activity working as a bank on the other hand.

Vladimir DMITRIEV: In fact, we undertake a full-fledged banking activity. After all we are working with market instruments including those on the stock market. Therefore, market volatility influences our activity. Let’s recollect the year 2009. Financial resources of the National Wealth Fund in the amount of 175 billion rubles were transferred into our management. After the crisis, the stock market went up significantly and we managed to generate profits from investing the funds in the amount of 100 billion rubles. We returned both 175 billion rubles and interest for using these funds to the Finance Ministry and we also earned 100 billion rubles.  We used them to support the mortgage lending program and to extend subsidized loans to fund Olympic projects. But in 2010 and in 2011 the situation was completely different in terms of the stock market and in terms of projects that we are implementing on the terms that are much favorable for borrowers than those offered by commercial banks. Hence our profits dwindled. As opposed to other development institutions in Germany, Brazil, our Bank operates under less favorable conditions in terms of funding our core activity. For example, Germany’s development bank – all its borrowings are guaranteed by the state. This means that Germany’s development bank borrows at rates at which the state itself borrows. Let’s take for example the Brazil Development Bank. Pension savings funds are a significant part of financial resources used to fund its operations. Here I mean employers’ deductions from salary fund at preferential deposit rates and these rates are significantly lower than market ones and these funds are put in the Brazil Development Bank for a long period of up to 30 years and this allows it to fund its active operations, lend the economy and invest. In 2007, we received a contribution worth 180 billion rubles to our Bank’s capital. Now our charter capital is about 370 billion rubles. And this is the main source to fund our operations besides funding on the open markets – these are syndications and bond issues. We have no other sources. Unlike commercial banks that raise deposits of natural persons in whose accounts they have funds of corporate customers we are not allowed by law to raise deposits of natural persons. We can raise funds for clearing accounts of customers which we lend under investment projects. So, we don’t regard these funds as a source of funding our operations.

CORR: But even if you are given all these instruments, commercial banks won’t be able to compete against you.

Vladimir DMITRIEV: You know, actually we do not insist on this.

CORR: You are indeed insisting on removing restrictions on investing pension savings funds. What additional instruments does VEB need now?

Vladimir DMITRIEV:  There are certain restrictions on purchasing bonds of Russian issuers. For example, we are allowed to buy out only 30% of a total amount of bond issue by using pension savings funds. We can participate only in 40% of one issue of the issuer. Now we are raising a question of doubling these volumes. Now pension savings funds, in the amount of 1 trillion 300 billion rubles are under our management. It’s a huge sum of money. And only 250 billion rubles out of this enormous sum of money are invested in corporate borrowers’ bonds, the remaining funds are invested in government bonds. Nevertheless, not everything depends on our capabilities and expansion of our investment declaration. A lot depends on the quality of issuers, on Russian issuers’ capabilities to issue appropriate bonds. When I’m talking about restrictions I mean that the other part of a bond issue should be purchased on the free market by banks and investment companies and those interested in this customer. And rates at which we purchase bonds should be the same, that is, bond coupons. It’s hard to imagine a situation when, for example, the Russian Railways place a bond issue worth 15 billion rubles a third or half of which will be bought out by Vnesheconombank at a coupon rate of 5% and the remaining part will be bought out by the market at a coupon rate of 10%. Hence, purely objective restrictions on investing our portfolio. But somehow the problem is being addressed. The Pension Fund backs us and I believe that in the Government and in line ministries they realize that pension savings funds must work for the economy (these funds are long money that will see their owners only in 2022).

CORR: Vnesheconombank delivered the best performance on managing pension funds for the past year. You failed to beat inflation but you were maximally close to it. Non-government pension funds and managing companies obtained worse results. What are your projections for this year?

Vladimir DMITRIEV: For all that, performance of the state management company as well as other companies responsible for managing pension savings funds should be assessed at a more long distance because we operate in a volatile environment, conduct transactions with bonds which are instruments of the stock market. And this volatility and fluctuations in market conditions have an impact on our activity. Our two main objectives are to protect pension savings funds and generate yields above inflation. Let’s approach this issue differently. Let’s fight inflation.

CORR: I think there’s nobody against it.

Vladimir DMITRIEV: We are working hard in a professional way but not everything depends on us.

CORR: Summing up the results of Vnesheconombank’s activity for a five-year period it would be wrong not to mention the projects you managed to fund for all this time. Let’s recollect the most important ones. You can start with the Sochi Olympics.

Vladimir DMITRIEV: In fact, we have a good work history. The Bank for Development project proved its worth. I can mention the projects that were recognized as the best ones not only by us but also by competent international experts in terms of project financing and raising foreign investments. This is the Tobolsk Associated Petroleum Gas Processing and Utilization Plant Project. This large-scale plant is to manufacture fully import-substituting products. The project is advancing as a cluster as it will result in creating new jobs around the project area. The project will engage small and medium-sized enterprises. Another project is the Khabarovsk Oil Refinery. Last year, the project was recognized as Best Deal of the Year in the countries of Central and Easter Europe in terms of raising foreign banks’ syndications, credits to modernize this production facility. These are also our infrastructure projects such as Pulkovo, segment 15-58 of Moscow-Saint Petersburg motorway and Olympic projects you have mentioned. Although I travel to Sochi to see how international competitions are held at the Olympic facilities being built through using Vnesheconombank’s funds my dream is to visit the Sochi Winter Olympics to watch competitions with my own eyes. I was in Sochi last week. Vladimir Putin conducted a meeting there devoted to the Sochi Olympics. A great job has been done there. I was in the Imereti plain two years ago, they were hardly finishing the initial construction work. And now there are beautiful buildings, a new ice arena, a media center, a complex for administration of the Olympics and many other facilities constructed through using Vnesheconombank’s funds.

CORR: Olympstroy Corporation has said recently that it is ready to terminate its agreement with Vnesheconombank. What does this mean?

Vladimir DMITRIEV: This means that a decision made by Vnesheconombank’s Supervisory Board is being implemented. Under this decision Olympstroy’s surety is to be replaced by budgetary guarantees to compensate Vnesheconombank, in case of a project failure, funds allocated for this project’s implementation. It’s quite natural. It’s another matter that the surety will be replaced only when a law on the budget for 2012, 2013, 2014 is enacted.

CORR: Another result of the five-year-period is that today we are talking not simply about Vnesheconombank but about Vnesheconombank Group which is comprised of VEB-Leasing, the Direct Investment Fund, Bank Globex and others. What functions in this case does VEB retain as a head office? Maybe the Bank for Development will be divided into sectoral institutions.

Vladimir DMITRIEV: You should take into account one important special feature – none of development banks in other countries has accumulated as many functions as Vnesheconombank has. I’d like to remind you that our Bank is still the agent for the Finance Ministry in servicing foreign debt and financial assets; our Bank is also an agent for extending guarantees to enterprises operating in strategic sectors. Many of the assets you’ve mentioned engage in activities which we are not supposed to undertake. We were compelled to provide support for such commercial banks as Globex and Svyazbank in 2008 because there was no mechanism at that time to enable the Deposit Insurance Agency to cope with such situations and rehabilitate banks that were at the pre-bankruptcy stage. Of course, several years from now we’ll raise a question of selling these banks to the market: either to a strategic investor or through IPO. You’ve mentioned VEB-Leasing. It’s the largest leasing company in our country in terms of leasing transactions volume and leasing portfolio volume. But it has the same mission as Vnesheconombank. It supports infrastructure, provides support for major enterprises, shipbuilding industry, automotive industry. In fact, SME Bank provided support for small and medium-sized enterprises and regional banks.

CORR: Should all these institutions be under your management or should they become independent in the long run?

Vladimir DMITRIEV: I do not rule out that in prospect they will become independent entities but if the state believes that these institutions should pursue some government policy we have to find appropriate forms of corporate governance for this policy to become these institutions’ mission.

CORR: Having become independent in the long run should your subsidiaries remain to be state-run institutions or might they be transformed into joint stock companies?

Vladimir DMITRIEV: They might as well be transformed into joint stock companies. Let’s for example look at the track record of Germany’s Development Bank. Earlier, it combined functions of supporting small and medium-sized enterprises and functions of supporting industrial exports. Later on, these functions were assigned to individual institutions and now this development bank is comprised of several banks responsible for implementing various missions.

CORR: And now my last question. What else would you like to do? Have you got a plan for the next five-year period?

Vladimir DMITRIEV: We have a strategy. We’d like to do a lot of things and most importantly, we would like our Bank to sustainably and steadfastly implement its main mission of supporting the Russian economy, small and medium-sized enterprises and Russian industrial exports and operating in top-priority sectors. And we expect our partners and the state to help us in this mission.

CORR: A very good mission and an honorable one. I wish you every success. Thank you.

Vladimir DMITRIEV: Thank you.

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Vnesheconombank PPP Center Director Alexander Bazhenov’s Interview to TV Channel Russia 24

16 may 2012 года
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TV Channel Russia 24
INTERVIEW
16.05.2012, 18:15

Host Nikolay Korzhenevsky

HOST: Let’s go on discussing economic issues, namely, development of the Far East and the Baikal region. Our guest in the studio is Vnesheconombank Public Private Partnership Directorate Director Alexandr Bazhenov. Good evening Alexandr. There is a special corporation to be responsible for this region’s development. Could you tell us about what sort of institution it is and about its functions.

Alexandr BAZHENOV, Vnesheconombank Public Private Partnership Directorate Director: I have to explain here. We have the Far East and the Baikal Region Development Fund. It was set up by Vnesheconombank last year under its Supervisory Board’s decision. We spent a lot of time with the regions to launch this Fund and work out its business concept. And idea of establishing a state corporation was put forward by Sergei Shoigu last January and it was presented to the Prime Minister. And it took a lot of time to develop a potential special draft law on special conditions for economic management and development of the Far East and Siberia as the center of economic activity was moving to the Pacific Region.

HOST: What did this discussion result in the end?

Alexandr BAZHENOV: It’s still going on. We’ll find out pretty soon.

HOST: What are the preliminary results?

Alexandr BAZHENOV: Nevertheless, we know that at a meeting of the United Russia faction when Dmitry Medvedev was being approved as Prime Minister he said that at this stage we had to form mechanisms for managing the Far East and the Baikal region similar to those that already existed in the North Caucasus. We know that in the North Caucasus one person holds the post of Presidential Envoy and Prime Minister of the region. There is also a special government commission headed by the Prime Minister. At the same time, there is also the North Caucasus Development Corporation – a special institution created by Vnesheconombank to support investment processes and a whole number of special instruments also designed to support investment processes, for example, such as mechanisms of state guarantees for investment projects in the North Caucasus and a special mechanism of state guarantees for investment projects to be implemented in the Chechen Republic. And a special program of the North Caucasus development is being drawn up now by the Regional Development Ministry. There is also a special institution there which is responsible for creating a whole number of special economic zones designed to develop tourist activity in North Caucasian resorts and Vnesheconombank is also represented in this institution’s management. As applied to the Far East, it means that we also should take into account its specifics and develop appropriate instruments. My understanding is that a special corporation responsible for development of such macro region that accounts for 49% of the entire Russian territory is of cause a challenge and this challenge should not undermine the whole economic and political management system.

HOST: To my best knowledge, there were ideas of setting up a Direct Investment Fund in this region. Why did the ideas fall through?

Alexandr BAZHENOV: Some time ago, Presidential Envoy Victor Ishaev proposed that  the Government should appoint Vnesheconombank as general investor in the development of the Far East. He made this proposal during the crisis when it became evident that it was quite difficult to ensure the development of the Far East through using only budgetary funds to finance capital investments. This is quite obvious because in the time crisis most of funds are channeled to the most populous areas with highly advanced economy to ensure economic and political stability and the Far East has a sparse population and an undeveloped economy. So, in the time of crisis we could have sustained development through non-budgetary financing. So, Vnesheconombank came into play. Vnesheconombank’s Supervisory Board instructed us to develop a concept of setting up a Direct Investment Fund of the Far East. And we dealt with it for almost the whole last year together with Russian constituent entities, the Economic Development Ministry, the Regional Development Ministry and the Finance Ministry. What conclusion did we arrive at? We decided to determine the kind of projects, their status and a potential for making direct investments in them as well as investors’ attitudes and the kind of investment base. As far as projects are concerned the situation there is pretty complex. There is a huge demand for investments there. It exceeded 10 trillion rubles and there were about 2800 project initiatives at a time of developing a program aimed at the Far East development. And we always have problem understanding where we have an investment project and where we use budgetary funds to finance capital investments. An investment project is based on the following principles: a project period, interest payments on credits and recoverability of used funds. 12 Russian constituent entities that are included in the region offered us about 195 projects. Out of these 195 projects only about 20% projects could be good for project financing and for financing in the form of direct investments, that is, for entering into capital of relevant engineering companies.

HOST: What amount of funds is needed for 20%?

Alexandr BAZHENOV: About 350 billion rubles. About 10% of projects with the stated amount of funds is currently in the advanced stage and can be supported by Vnesheconombank and other investors. And 60% of projects, given their current structuring status, can’t be financed by private investors or funded with non-budgetary funds because they are not structured properly. They do not provide for recoverability of funds.

HOST: 10 trillion rubles – how much time is needed to invest these funds? How much money out of this sum can be in fact invested in projects?

Alexandr BAZHENOV: Some research has been done by the Academy of Sciences and Moscow State University (MGU) on investment potential for this region’s development till 2030. Their estimate is 20 trillion till 2030. We are talking about 195 projects worth 3.5 trillion rubles that regions regard as realistic ones. One project in this list is worth 800 billion rubles, it is aimed at increasing BAM’s throughput capacity to ensure the development of all territories to the north and east of Siberia. This is a huge amount of funds. But even 3.5 trillion is a justified demand. Projects worth 1.5, 2.5, 8 billion rubles associated with comprehensive development of territories, infrastructure and industrial development are implemented every year throughout the world and we can offer them to the market but we have to structure them in such a way that they are attractive to the market.

HOST: If we are talking about 3.5 trillion rubles, how much money out of this amount can Vnesheconombank invest using various mechanisms? How are you planning to fund these projects in the near future, I mean those 195 projects that are in a rather acceptable condition?

Alexandr BAZHENOV: Using its set of instruments Vnesheconombank is already participating in funding investment projects in the Far East and our participation share is about 270 billion rubles and earlier we assumed obligations worth 195 billion rubles. And now we understand that 3.5 trillion rubles are a huge amount of funds and one institution can’t provide this amount of financing. We have to create conditions for engaging other investors. In this respect, VEB’s Supervisory Board took a decision that provides for Vnesheconombank to create special conditions for its participation in funding projects in the Far East. A principal condition provides for Vnesheconombank’s participation in funding investment projects in the Far East in the form of subordinated credits provided that 20% of projects’ value is to be funded by private investors. Up to 20% of a project’s value can be funded by Vnesheconombank’s credits that would be subordinated with regard to other credit from commercial sources, maybe from international sources, maybe through using pension funds. Thus, we reduce risks for these other sources of funding.

HOST: So, there is some concession, some privilege for other creditors. In this respect, won’t Vnesheconombank be particularly demanding in selecting projects? That is, VEB will be afraid that this money might be lost and will be reluctant to extend credits because you will be responsible for losses above all.

Alexandr BAZHENOV: First of all, our Bank is a development institution and it is designed to promote appropriate projects. Undoubtedly, we are not designed to lose money but there should be a reasonable balance because for the most part we represent the state. Therefore, we should create mechanisms for managing risks. Having a chance to participate in managing risks we can assume somewhat greater risks than traditional financial institutions. Assuming these risks we do not wait for them to become a reality or not to become a reality. And it’s not a privilege. It’s standard practice of many development institutions and, for example, the International Finance Corporation has two categories of loans, that is, those intended for standard commercial projects and those intended for projects where they assume somewhat greater risks.

HOST: You’ve mentioned foreign investors. And what about Russian money? Are you going to use pension funds to finance these projects? What should be done to ensure the use of these funds?

Alexandr BAZHENOV: A lot of people talk about how these funds should be used to fund infrastructure development, for example, to upgrade BAM. A very important meeting was held in January. Vnesheconombank signed an agreement with many consignors of Russian railways on how to increase throughput capacity of Russian railways. OJSC RZHD’s idea is to issue special government bonds in which both pension funds and international funds can be invested. And these bonds should be redeemed through general economic growth which occurs to some extent because transport makes it possible to develop many various industrial sectors. We can use this pattern with regard to projects in the Far East. The most important thing is that projects should be structured properly so that pension funds can be invested in them. And we can use such mechanisms as concession, state guarantees and Vnesheconombank’s guarantees.

Our participation in projects, our capacity to manage risks will enable us to create such mechanisms.

HOST: Alexandr, we’v got only one minute left and I’d like to ask you the following question – what projects and in what sectors do you think will be most attractive for investors?

Alexandr BAZHENOV: We received 2635 initiatives in the regions. We should adopt a reasonable balanced approach to build a balanced economy. As we can see today, investors are more interested in projects in such sectors as tourism, agriculture and construction materials industry. These are not large-scale projects. Large-scale projects are related to developing mineral resources deposits. Great demand in this sector is not met due to problems related to infrastructure development. So, we believe that our participation in projects should focus on developing transport and power engineering infrastructure and to some extent social infrastructure. These sectors will make it possible to unlock these regions’ potential for economic growth.

HOST: Alexandr thank you very much. I’d like to remind you that our guest today was Vnesheconombank Public Private Partnership Directorate Director Alexandr BAZHENOV.

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