Vnesheconombank PPP Center Director Alexander Bazhenov’s Interview to TV Channel Russia 24
TV Channel Russia 24
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.
Vnesheconombank Trust Management Department Director Alexandr Popov’s Interview to TV Channel Russia 24
TV Channel Russia 24
Host Nikolai Korzhenevsky
HOST: We’ll discuss the situation with pension savings funds and pension money as a source of financing. We’ll talk about it with Vnesheconombank Trust Management Department Director Alexandr Popov. Good afternoon Alexandr.
Alexandr POPOV, Vnesheconombank Trust Management Department Director: Good afternoon.
HOST: Many corporations, many borrowers have been saying for many years that long money for them is either expensive or inaccessible. And they also say that pension money should become a source of these long-term funds. When is this going to happen after all?
Alexandr POPOV: It will probably happen when besides Vnesheconombank there appear some other long-term investors. And we believe some restrictions that we have on investing pension money were needed at some point but now we can see that they prevent us from extending long-term credit resources to the real economy.
HOST: What sort of restrictions are they?
Alexandr POPOV: These restrictions above all are applicable to our share in one issue. Under the investment declaration we are allowed to buy no more than 30% of a corporate bonds issue if they are not secured by state guarantees. And another important restriction set forth by the law: we can purchase no more than 20 % of one issuer’s all circulating bonds. And of 30% percent accessible to us now we have almost exhausted this restriction with regard to a third of them.
HOST: Do you think that this restriction proportion should be increased? Don’t you think that the borrower will become too dependent on you as a creditor and maybe the proportion of such borrowers in your portfolio will be too high?
Alexandr POPOV: To my mind, there isn’t much risk here because we do not offer to increase these proportions for successful and marketable short-term issues. But we propose it as some temporary measure for setting into motion and launching a market for long-term investments in Russia.
HOST: What sort of market?
Alexandr POPOV: A market for long-term corporate bonds with a maturity of more than five years.
HOST: What about possible interest rates? And why is this market evolving so slowly so far?
Alexandr POPOV: We are in contact with many issuers discussing the need for issuing infrastructure bonds and classifying them as a special type of bonds. In our option we shouldn’t classify them as a separate type. Many issuers say that as Vnesheconombank now is a single long-term investor on our financial market it is possible to place 30-40% of an issue: there are banks largely with state participation that have long-term liabilities. But it doesn’t seem to be possible to place 70% of an issue under the current conditions.
HOST: Your portfolio is 1 trillion 300 billion rubles if I am not mistaken. Do you have enough instruments in principle?
Alexandr POPOV: We’ve had enough so far. But the amount of funds is sure to rise. And in the most immediate future we might come up against a shortage of long-term instruments. Summing up the results of the last year we could see that we didn’t have enough time to buy new corporate short-term bonds. We don’t have enough time to buy them while they are being redeemed. They are redeemed faster than we can buy new ones. So, we’d like to increase the proportion of new high-yield instruments and buy long-term corporate bonds.
HOST: In this case, do you expect any issues intended for you? Maybe the abovementioned infrastructure bonds or maybe some others?
Alexandr POPOV: We’ve already had the right to buy new instruments for three years. And we think that the situation has changed a little. And issuers’ stand as investors has also changed a little. Issuers stopped treating pension money as an extremely cheap resource and started issuing bonds that are of great interest for us. These are bonds with floating coupon rate tied to inflation. As our goal in the capacity of the state management company is above all to generate yields at an inflation level in order to really protect pension savings funds, an instrument tied to inflation makes it possible for us to achieve such a goal.
HOST: Will these instruments be issued by a sovereign agent or will they be corporate instruments?
Alexandr POPOV: We would be very happy if the Russian Finance Ministry could issue government bonds tied to inflation. But unfortunately this issue hasn’t been on the agenda so far.
HOST: Who is going to be among corporate borrowers? Risks are great after all. Why don’t they lend those corporate borrowers? Because banks don’t understand what is going to happen thirty years from now?
Alexandr POPOV: Now such bonds can be issued by companies, engineering companies or some infrastructure companies whose incomes often in the form received tariffs are tied to inflation. For example, last year the North-West Concession Company issued its bonds. Their yield rate was inflation plus 3%.
HOST: It turns out that all are happy in this situation. But what’s the volume of such market then? How great is these companies’ need for borrowings?
Alexandr POPOV: So far, in the absence of such government bonds tied to inflation the corporate market will be unfortunately limited only to issuers whose incomes are also tied to inflation. Although ROSNANO has made an issue of bonds lately they also issued bonds tied to inflation.
HOST: Would you like to invest more in companies with state participation?
Alexandr POPOV: Our investment declaration’s requirements are requirements for credit quality, this is a credit rating. If an issuer has an appropriate credit rating we can buy its bonds whether it is a state-owned or private company.
HOST: I’d like to ask another question about infrastructure bonds. What’s the amount of funds available for such long-term instruments?
Alexandr POPOV: You know, so far we have invested an insignificant sum of about 60 billion out of our portfolio of 1.3 trillion in the bonds of infrastructure and engineering companies. We can see that with a developed market for long-term instruments, we could easily invest up to 300-400 billion rubles in infrastructure in the coming several years.
HOST: Moreover, as far as I know there is a demand for such credits, especially on the part of electric energy companies, there are a number of interesting players there. There is another market I’d like to talk about. I mean the mortgage market. Vnesheconombank is an active participant in this market and the Bank’s role in its development is evident. What are you planning to do on this market? W hat are your plans for 2012-2013?
Alexandr POPOV: In the first place, Vnesheconombank is implementing a mortgage program worth 150 billion rubles, in which 12 banks and the Housing Mortgage Lending Agency participate. Factually, we are responsible for preferential refinancing of mortgage credits extended by banks.
HOST: What’s the preferential rate?
Alexandr POPOV: Preferential refinancing is 11% (a maximum rate of banks) for end borrowers. This is an effective rate; everything is included in this 11%. This is our program’s requirement. We do not accept other credits in mortgage coverage. So, banks are refinanced at 7%. As far as long-term borrowings are concerned 7% percent is still an attractive rate.
HOST: You’ve mentioned 150 billion rubles. How much of these funds have you already spent?
Alexandr POPOV: Our program is to be completed till the end of 2013. We have already bought out bonds of the program’s participants in the amount of 9 billion rubles. This year we’ll bring this sum to 10-15 billion and the remaining funds will be spent in 2013.
HOST: It will be more than a hundred billion rubles.
Alexandr POPOV: You are right. Of these funds one hundred billion is pension money to be invested on the basis of market profitability alone. There will be no preferential lending here. Preference is ensured by Vnesheconombank’s investing its own funds at a rate of 3%. This makes it possible to bring an average rate to 7%.
HOST: A mortgage credit rate of 11% in rubles is of course not bad. Nevertheless, I’m sure that many Russian would like to buy this product at lower prices. Are you planning to take any steps? What are the obstacles on the way of making mortgage lending less expensive using a large amount of funds?
Alexandr POPOV: Factually, given issues made by participants in the mortgage bond program we’ve got about twenty billion. It’s not much of course. But this market is developing slowly. Undoubtedly, we have problems with legislation. Not everything is perfect because here the fight is taking place between American and European ways of funding mortgage lending.
HOST: After all, American or European models?
Alexandr POPOV: In fact, during the crisis years the Housing Mortgage Lending Agency was basically the only mechanism for funding mortgage credits for regional banks but now we are approaching a European level when banks themselves can issue mortgage bonds both from their own balance and through a mortgage agent.
HOST: And now the main question again. When will additional funds that get into the mortgage system result in reduced rates? What prevents rates from going down?
Alexandr POPOV: The reason for it is the general level of market rates. Mortgage is a credit facility and it is of course secured. But in any case it is a credit facility. And you can’t grant a credit at rates that are substantially lower than market ones. And where can we get funds on preferential terms? We found some. Factually, Vnesheconombank invests all its profits in the amount 50 billion at a rate of 3%. But others do not have such funds. And mortgage credit rates are sure to go down but they will go down together with market rates.
HOST: Here we are coming up against a fundamental problem of inflation.
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.
Vnesheconombank’s Board Member, Export Insurance Agency of Russia Director General Petr Fradkov’s Interview to TV Channel Russia 24
HOST: At a recent Vnesheconombank’s Supervisory meeting they discussed the Export Insurance Agency of Russia’s (EXIAR) activity. They also announced the launch of a project to insure small and medium-sized enterprises. What enterprises will EXIAR support and what will the amount of support be? We’ll discuss these issues with the Agency’s CEO Petr Fradkov.
Petr FRADKOV: CEO of the Export Insurance Agency of Russia. Good evening.
HOST: What decisions have been taken? What’s the Agency’s strategy?
Petr FRADKOV: We have approved the Agency’s development strategy for a period of three years up to the end of 2014 and it was the most important decision taken. The strategy specifies basic volumes of insurance coverage to be provided by the Agency, the number of companies, customers supposed to receive this kind of support, and absolute volumes in terms of our products and insurance coverage markets.
HOST: Let’s discuss these points more specifically. What’s the amount of support during a three-year period?
Petr FRADKOV: We proceed from the assumption that by the end of 2014, the Agency is to provide insurance coverage worth up to five hundred billion dollars.
HOST: Insurance coverage, that is, the amount of export transactions to be insured?
Petr FRADKOV: You are absolutely right. Our Agency’s main function is to provide support for our exporters or banks that fund exports on foreign markets.
HOST: 500 billion dollars.
Petr FRADKOV: Rubles. 500 billion rubles.
HOST: How will you break down this sum for a period of three years?
Petr FRADKOV: We proceed from the assumption that by the middle of this year we’ll have to establish our internal regulatory framework. And starting from this summer we’ll begin to operate systemically providing our insurance coverage during this three-year period of time in approximately equal amounts.
HOST: Which line of activity is the most important for you?
Petr FRADKOV: Our strategy provides for several lines of activity. Above, all these are such sectors with high added value as electrical power engineering, transport mechanical engineering, microelectronics, aerospace industry and some others. Less priority is given to chemical industry, agriculture. The only thing we are forbidden to do is to provide support for the raw materials sector. In general, it’s quite logical.
HOST: EXIAR is trying to develop the non-raw materials segment of the Russian economy.
Petr Fradkov: The non-raw materials sector. And this is our primary objective. In parallel, we have regional priority distribution. Our unquestionable priority is CIS. The reason for it is that Russia is quite a serious player in these countries foreign trade. The second top priority region is likely to be South-East Asia.
HOST: What’s behind this choice?
Petr FRADKOV: We have traditional ties here. And exports from the Russian Federation went to this region. Objectively, it was one of sale markets. And we believe that we’ll be able on the one hand to enhance Russia’s export positions there and on the other hand to win new markets. And the third region is Latin America. Strangely enough, this region is moving to the forefront and they are expecting Russian exports there.
HOST: We are staying away from industrialized countries. Can you specify companies excluding those in the raw materials sector that could receive insurance coverage? They are unlikely to be large companies.
Petr FRADKOV: We are also trying to apply a rather innovative approach here. The fact is that as a rule large companies used to be provided with state support because of their administrative resources and competence. Our task is to create an exports market, an export infrastructure so that small and medium-sized enterprises could have access to state support measures, financing and market financing. Our task is to take these companies to new markets.
HOST: How many companies?
Petr FRADKOV: The strategy provides for us to have 3300 customers in 2014 and 3000 thousand of them are small and medium-sized enterprises.
HOST: How did you manage to precisely determine this number of 3300? What is it based on?
Petr FRADKOV: This is a sort of estimated quantity. We looked through statistics and found out the number of small and medium-sized export-oriented enterprises involved in various kinds foreign trade activities and studied prospects for growth for some sectors. We used an overlap method and projected that the number of 3000 thousand companies was a pretty ambitious but realistic target that we could reach in the near future.
HOST: Any company has the right to turn for insurance?
Petr FRADKOV: Absolutely any company. There are no formal restrictions. The most important thing is to have an agreement with a contracting party. And we’ll be ready to provide consulting services.
HOST: How can one make sure that no bureaucratic barriers will emerge as it is unfortunately often the case?
Petr FRADKOV: Our entire idea is to offer a flexible state support market mechanism. In this sense we are following best foreign practices. Above all, this is business experience of Italy’s export credit agency SACE and Germany’s export credit agency Hermes. For many years of operation these agencies developed a flexible mechanism for assessing risks, which makes it possible to assess risks rapidly through existing models, through the existing systemic regulatory framework.
HOST: You stress the fact that the Agency is registered as a joint stock company.
Petr FRADKOV: You are absolutely right.
HOST: The countries you have listed have the same form of ownership. But in some other countries it is not the case. In Great Britain and the United States these agencies are state-owned. Why did you choose a form of joint stock company?
Petr FRADKOV: It’s not even a matter of type of property here. It is important for this agency to provide state support through the existing mechanism. Here I mean sufficient capital; state guarantees for this agency’s liabilities and the existing regulatory and legal framework, above all, the internal regulatory and legal framework which is in line with international institutions’ standards – above all with OECD standards.
HOST: Can you say a few words about this internal regulatory framework? What kind of documents are these?
Petr FRADKOV: These documents are a set rules, products and payment methods that are easy to understand, transparent are accepted by contracting parties all over the world. They have been approved and recommended by such a regulator as the Organization for Economic Cooperation and Development. This organization is a global regulator of export insurance activities all over the world.
HOST: Will the Agency’s capital be formed only through using government financial resources or are there any other sources?
Petr FRADKOV: So far, capital has been formed through using government funds. And if there is a need to increase it, budget funds are most likely to be used. Now the Agency’s shareholder is Vnesheconombank and this allows it to act in a pretty flexible way. And the second and main form of state support, as I’ve already said, is a state guarantee which is granted in the name of the state and in the amount no less than insurance obligations of a company itself. Factually, we offer Russian sovereign risk to our customers.
HOST: This sounds attractive for customers. You’ve mentioned 3300 companies, an approximate estimated number. And what percentage of exports will the Agency account for in this case?
Petr FRADKOV: Our goal is pretty ambitious. I hope that in three year’s time we’ll be able to insure up to ten percent of Russian mechanical engineering exports.
HOST: Up to ten percent of mechanical engineering exports or Russia’s entire exports?
Petr FRADKOV: Mechanical engineering exports.
HOST: Even ten percent of mechanical engineering exports is quite a lot.
Petr FRADKOV: It’s a big stride forward because frankly speaking, this figure today is less than one percent.
HOST: And if we compare this figure with other international export credit agencies, what’s their market share?
Petr FRADKOV: It depends on the size of an agency, its activity history but in any case it’s thirty-forty, up to fifty percent. Our growth potential is enormous.
HOST: You started to operate as far as I know less than a year ago.
Petr FRADKOV: You are quite right. We were registered as a company in October of 2011. Just a few days from now we’ll mark our first six months of operation. But I hope we managed to do quite a lot because we had worked a lot on certain additions to the legal framework before the Agency was established and we continue to do it now. To my mind, we are moving forward pretty quickly.
HOST: As a whole, lately, Vnesheconombank has been developing its projects pretty aggressively and quickly. Now the Direct Investment Fund and the Export Insurance Agency of Russia have been established. Legal framework is scheduled to be completed by this summer as you have said…
Petr FRADKOV: Yes, our internal framework.
HOST: Is the Agency doing anything in the real economy, real business given that the framework hasn’t been fully formed? Have you conducted any transactions?
Petr FRADKOV: In principle, we have basic conditions for operating. These are pretty small projects because now we need to gain experience and establish first ties. We have first six approved projects. They are not large ones as I’ve already mentioned. But these projects’ geography is pretty wide – CIS, South-East Asia, Latin America. So, in terms of gaining experience, these are right partners. Largely, these projects deal with power engineering equipment and engine building. So, we got off to a good start.
HOST: After listing all these countries, could you tell us what risks you insure?
Petr FRADKOV: It’s a very important question. Globally speaking, we insure two types of risks. The first type includes default on obligations by a Russian partner’s contracting party. Commercial risks include project failure, a contracting party’s default or bankruptcy abroad. The second type includes political risks. Regrettably, these risks can actively emerge in the regions where Russian exports go to. These risks include expropriation, certain administrative decisions, for example, a ban on currency exchange and so no and so forth. There are a lot of them.
HOST: Are these first six companies large or small and medium-sized ones?
Petr FRADKOV: They are different companies. They are medium-sized ones closer to large companies. These are not natural monopolies, these companies have been operating on foreign markets for quite a long time. Our insurance coverage allowed them to feel more comfortable in some lines of activity and conduct some transactions on more preferable terms and win tenders.
HOST: We have already talked about thousands of small and medium-sized enterprises scheduled to receive support. Is big business going to participate in this process? Are you going to support large companies?
Petr FRADKOV: Yes, we are. Formally, we have no restrictions here. And of course, we look upon hallmark, large-scale projects that will be implemented by large companies. Naturally, we are going to balance our portfolio in terms of its capacity to provide enough room for small and medium-sized enterprises. Above all, we are going to work with large Russian banks. We shouldn’t forget that besides export support measures we are trying to create an exports support market so that we could have a constantly functioning commercial mechanism to enable large Russian banks, leasing companies to support Russian exporters applying market-oriented principles.
HOST: What sort of support is it? Extending credits or providing insurance coverage?
Petr FRADKOV: Banks extend credits to exporters and we insure credits.
HOST: It’s clear now. Do you have any statistics? To what extent does your Agency’s activity promote exports?
Petr FRADKOV: We haven’t got this sort of statistics so far because we have just started operating. And we didn’t even want to make any estimates because we had to understand dynamics of development. We set a goal to insure ten percent of Russia’s entire mechanical engineering exports. In our opinion we’ll be able to reach this target in three year’s time.
HOST: Petr, I am sure that you have assessed systemic risks. The Agency might have to make a lot of payments if something goes wrong in the global economy. As you are an expert in insurance business I’d like to ask you the following question. How do you size up risks in the global economy, in the global demand?
Petr FRADKOV: Paradoxical as it may sound, in crisis situations this kind of insurance activity is a sort of life line for national economies because it’s a direct measure of state support for producers that enables them to get access to third markets, foreign markets, to rapidly reorient production if problems emerge on domestic markets. And we proceed from the assumption that this insurance activity would encourage the development of economies even under crisis conditions. And the 2008-2009 crisis demonstrated it.
HOST: But the Agency didn’t exist at the time yet.
Petr FRADKOV: I’m not referring to Russia now. I’m talking in terms of a global approach when tied loans against world export credit agencies’ insurance coverage provided the only opportunity for companies and banks to raise financial resources on the absolutely moribund capital market. And their role increased dramatically during these years.
HOST: Does the Agency run any risks or are its risks equal almost to zero?
Petr FRADKOV: The Agency’s entire activity is a sort of mathematical model that assumes the emergence of some turbulent situations both on a national and international level.
HOST: What do Russian exporters say? Have you received any applications for participation?
Petr FRADKOV: The interest is great. There are interested companies that turned to us. We have received about fifty applications. I wouldn’t say there is a massive demand now because we haven’t offered this product to the market to the full extent. Not all have a clear idea of our activity. Our objective is to show, tell and explain and in the regions too. I think that as we develop our product line the number of interested companies will rise.
HOST: What are the criteria for refusing applications?
Petr FRADKOV: It’s very important; it’s a very good question. Our main criterion is that we should support top-quality, competitive products. We should provide support for truly innovative companies.
HOST: Thus, you can cut off a lot of companies if you evaluate their activity critically and seriously.
Petr FRADKOV: If we support an inefficient transaction that fails to meet market conditions we’ll increase the risk of default on this transaction for us.
HOST: And this will affect your image.
Petr FRADKOV: There’s no doubt about it.
HOST: Is there any progress in the insurance sector, are there any specific competitive projects that look attractive on the world arena?
Petr FRADKOV: Yes, and there are quite a few such projects. This is our aviation industry and this is also the Sukhoi Superjet project in which we participate. This is MS-21. This is undoubtedly our power engineering equipment as well as microelectronics and many, many others. And Russia’s high-tech exports potential is not limited to the said sectors.
HOST: Petr, thank you very much. I hope that a slip of the tongue about five hundred billion dollars you made at the beginning is not a mistake but an ultimate goal. Thank you.
Petr FRADKOV: Thank you very much.