Vnesheconombank Chairman V.A. Dmitriev’s Interview to TV Channel Russia 24 (Vladivostok – the APEC Business Summit)

8 september 2012 года
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TV Channel Russia 24,
INTERVIEW
08.09.2012, 06:43

HOST: Good morning Vladimir Alexandrovich. Thank you for finding time for us. Vladimir Alexandrovich, can we already sum up the results of the APEC Business Summit, how did Vnesheconombank benefit from it?

Vladimir DMITRIEV: Vnesheconombank’s Chairman: It’s too early to sum up the results at the moment as we’ll have business meetings and sign a whole number of agreements but in general, preliminary…

HOST: Do you already know what agreements you are supposed to sign?

Vladimir DMITRIEV: We know what we are going to sign, we know our partners and moreover we know what we have already signed and done. When I say “we” I mean Vnesheconombank Group. Perhaps, we have been represented so strongly for the first time and here I mean institutions that have been set up quite recently and that have been operating as VEB’s subsidiaries for several years. These are the SME Bank, the Russian Direct Investment Fund, the Export Insurance Agency of Russia and the Far East and the Baikal Region Development Fund. All these institutions are taking an active part in the APEC Summit, they sign agreements and meet their partners. It’s a good thing that Vnesheconombank and its subsidiaries are in demand in terms of cooperation with foreign partners.

HOST: Can you specify the agreements? Can you name the key ones, your partners, values of agreements?

Vladimir DMITRIEV: It’s important that we have signed agreements with specific partners who are ready to invest in this region and these agreements or memorandums are filled with real substance. I mean yesterday’s agreement with Summa Capital on the construction of a large terminal in the Far East to transship grain crops and soybean products with a capacity of 10 million tons per year which we are going to achieve together with them by 2017. These are significant investments of about 8 billion rubles. We signed an agreement with the Primorsky Territory. It provides for Vnesheconombank to support major investment projects including those in agriculture. This sector is underestimated but in general, has excellent prospects for development. We are going to sign an agreement with our Malaysian partners on providing support for small and medium-sized enterprises and on exchanging best practices in this sector and a whole number of other agreements directly related to Vnesheconombank and its subsidiaries. The Russian Direct Investment Fund has for the first time made public the first projects in which monetary resouces of the Russian Direct Investment Fund and he Fund set up together with the china Investment Corporation are to be invested (a project in the timber processing industry).

HOST: Vladimir Alexandrovich, how is VEB represented in the APEC and what are specifics of the Bank’s operation in this region?

Vladimir DMITRIEV: In my opinion, the region itself and Russia’s territory related to this region – our Far East are in great need of development institutions’ support. Relying on our cooperation with such regional development institutions as the China State Development Bank, the Asian Development Bank and development institutions in specific APEC countries, we look to a significant inflow of investments in the Russian Far Eastern region. And the agreement and specific projects I have already mentioned are very important for the region’s investment climate. Here I mean the Russian Direct Investment Fund and the China Investment Corporation that signed an agreement on providing support for SMEs.

HOST: The Far East is in great need of new infrastructure and transport infrastructure. And this will require long money which is in short supply in Russia and which VEB has. Is there a chance that some pension money will be used to build infrastructure and fund these projects?

Vladimir DMITRIEV: Undoubtedly, this is one of significant sources of long and pretty inexpensive money. We call for changing our investment declaration and a number of legislative regulations for a great amount of pension savings funds under the management of Vnesheconombank as a state managing company to be used for supporting and developing infrastructure in the region and implementing infrastructure projects. Here I above all mean an issuance of infrastructure bonds. In this respect, we have launched a whole number of initiatives. Fortunately, they were supported by the Pension Fund and the Finance Ministry. We hope that both at a legislative level and at a level of government regulatory documents our proposals would be backed and we’ll b e able to fund infrastructure in Russia as a whole and in the Far Eastern region in particular in great amounts.

HOST: What amounts do you have in mind? It’s quite clear that we can’t channel all pension funds to the Far East.

Vladimir DMITRIEV: There is no doubt about it but on the other hand we are responsible for managing funds worth more than1.5 trillion rubles. Out of them perhaps only 20 percent was used to fund projects in the real economy. So, we can’t say that these sums are sufficient to work for the development of the real economy and with profitability above inflation at that. We believe that several hundreds of billions of rubles might be in fact used to fund the development of several sectors of real economy and above all infrastructure. I think that the first projects will result from cooperation between Vnesheconombank and the Russian Railways.

HOST: How do you size up the Bank’s business activity in the Far East and its potential for developing programs to support small and medium-sized enterprises?

Vladimir DMITRIEV: WE must admit that business activity leaves much to be desired. And it is not because business is passive, it’s because in such remote regions with the infrastructure we know all about and environment conditions, business looks to the state for help. And it goes without saying that Russian business and the more so foreign one is ready to implement projects in the real economy in the Far Eastern region provided that the state shares risks typical of such regions with it on an equal basis. And in this respect, a proactive approach of the state and institutions created by it is of overriding importance. Here I mean the Investment Fund, Vnesheconombank with its subsidiaries and the Far East and the Baikal Region Development Fund which are supposed to effectively operate and effectively demonstrate that the state is ready to incur risks and share risks with investors and make strenuous efforts to support entrepreneurial and investment initiatives in these regions. To my mind, a pretty comfortable situation for investors is developing now and the current APEC Summit testifies to it. Yesterday we held a serious and informal meeting initiated by our President with business circles. The meeting’s participants showed their interest in making investments in this region. But at the same time, they made it clear that foreign business and foreign investors were ready to invest in this region and take risks together with the Russian state and institutions created to form a favorable investment climate.

HOST: And now just a few words Vladimir Alexandrovich. Do you plan in the near future to improve credit terms for your partners?

Vladimir DMITRIEV: It is extremely interesting question as it is addressed to Vnesheconombank as a development institution. I have already mentioned it several times and I’m ready to say it once more that credit terms and conditions for Vnesheconombank’s borrowers are directly linked to market conditions because market is our main if not the only  source of funding our transactions. If market conditions change for the better or worse credit terms and conditions will change too. As opposed to many other development institutions, for example, in Germany all borrowings from the German Bank for Development are guaranteed by the state or, for example, the Brazil Development Bank is funded through using pension funds at preferential rates we rely on the market alone. And although some are tempted to regard us sometimes as a quasi-budgetary source of funding if not free but at least quite inexpensive the situation for our borrowers looks different. Therefore, we are going to change credit terms depending on the market conditions both in Russia and abroad.

HOST: We’ll hope that market conditions will be favorable for your borrowers. Thank you for your interview. I wish you every success.

Vladimir DMITRIDEV: Thank you.

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In Order to Expand Russia’s Presence in APEC Markets We Need to Develop our Country’s Asian Part

28 august 2012 года
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Vnesheconombank Chairman Vladimir Dmitriev told Interfax about how VEB would be represented at the APEC 2012 Summit and what sort of agreement they planned to conclude

Moscow. August 28. INTERFAX.RU – Vnesheconombank acts as one of the APEC 2012 Summit’s organizers. The Summit is to be held in September in Vladivostok. On the threshold of the Summit Interfax asked VEB Chairman Vladimir Dmitriev several questions.

- How is VEB represented in the APEC space and what are the Bank’s further plans?

- VEB is implementing a whole range of projects with our partners from APEC countries. I believe that the Summit will become an important stage in expanding such cooperation.

At present, VEB is involved in implementing 17 investment projects with the participation of financial institutions and companies from APEC countries (Japan, China, South Korea, the US) whose total value exceeds $11 billion.

VEB’s objective as a bank for development is to boost Russia’s economy competitive edge, diversify it and encourage investment activity. We give high priority above all to implementing projects in Russia. These projects are aimed at developing infrastructure, innovations, special economic zones and environmental protection.

VEB has a high international standing, many development institutions from APEC member countries are our partners.

One of new mechanisms for co-investing is the Russian Direct Investment Fund (the RDIF) – VEB’s subsidiary. The Fund is designed to implement major investment projects together with foreign investors including those from APEC countries.

Last October, the RDIF and the China Investment Corporation (a sovereign welfare fund) with assets worth $410 billion) signed a memorandum of intent to establish a Russian-Chinese Investment Fund. The Fund is being established to make direct investments primarily on Russia’s territory and encourage economic development of constituent entities including regions of the Far East and the Baikal Territory. The Fund’s capital is to amount to $3-4 billion.

The recently established Agency – EXIAR gives high priority to the Asia-Pacific region. Even now, the region’s countries account for a significant share of total insurance obligations assumed by the Agency, and two of the first EXIAR’s transactions to insure the supply of Russian-made products were conducted with APEC member countries, that is, China and Vietnam.

- Russia’s role in APEC markets hasn’t been so far in line with its potential. What should be done to reverse the situation?

- A key factor in expanding Russia’s presence in APEC countries is an economic development of our country’s Asian part, above all, the Far East, the Baikal Territory and entire Siberia. Development of Siberian and Far Eastern transport-logistics infrastructure would help to increase Russia’s trade turnover with the APEC and raise additional foreign investments.

The region has a huge potential for creating clusters of economic development: substantial mineral resources, a large variety of bio resources, highly qualified personnel, the tourist and recreational potential. At the same time, despite its huge potential a task of this macro region’s development has not been accomplished. There are several objective obstacles: extreme nature and climate conditions, remoteness and poor accessibility of territories, non-developed infrastructure, multi-sectoral nature of industrial production, specific conditions of farming and sparse population settlement. Traditional nature management of Northern indigenous peoples is the basis of their life and their lifestyle.

VEB takes an active part in the development of territories. Even now, the total value of projects in which the Bank participates on the territory of the Far East Federal District exceeds 93 billion rubles and the amount of VEB’s investments is more than 57 billion rubles. The Bank implements projects in transport infrastructure, aircraft construction, petrochemical industry, timber processing and tourism.

To address main objectives of the macro region’s development we create a specialized development institution – OJSC the Far East and the Baikal Region Development Fund. As of today, the Fund has performed work on analyzing and systematizing investment initiatives of all 12 regions and made a preliminary list of investment projects.

By 2015, VEB’s loan portfolio with regard to projects with the Fund’s participation might grow to 70 billion rubles and this will result in forming and supporting projects by the Bank for a total amount of more than 350 billion rubles.

Territorial-production complexes are the only type of investment projects that can ensure development through using non-budgetary sources. In order to implement this approach we need appropriate political decisions.

It’s important to avoid a one-sided approach when high priority is given to the export of resources. We focus on projects aimed at creating export-oriented production facilities with a high level of processing and a significant proportion of value added. In the future, such production facilities might receive support from the Export Insurance Agency of Russia (EXIAR).

- Might the APEC become an instrument for transforming the region’s countries’ growing economic role into a political one?

- Since its inception the APEC has regarded itself as a free “aggregate of economies” rather than a politically well-consolidated group. This means that the organization gives high priority to economic rather than political issues. The organization’s long-term objective is to deepen intraregional relations through eliminating obstacles in trade-investment and technological interaction. Successful economic development and integration of APEC countries is sure to increase their influence on the world’s economic agenda. This is a natural process and there is no need to speed it up.

In terms of its geographical coverage and presidential format an APEC summit is the most representative and unparalleled business forum in the Asia-Pacific region where the world’s experts hold a multilateral dialogue and cooperate on key issues of trade, investments, economic and technical cooperation as we’ll on topical world problems and challenges.

Despite a mosaic nature of the APEC as an organization comprised of countries with incompatible levels of economic development and political systems it is a pretty homogeneous institution in terms of interests and development vector. Regionalization acts as a common denominator implying that high priority is given to intraregional cooperation and integration and to creating zones of free trade. This guarantees a strong consensus of opinion within the establishment of APEC member countries on key issues of intraregional trade and investment interaction as well as the world’s economic agenda. An APEC business summit has factually become a mechanism for drawing up regional rules on carrying on trade and undertaking investment activity and for formulating unified principles of doing business binding to all countries.

From the outset, one of APEC’s operating principles was to reach consensus through consultations. Success stories of neighbors act as powerful incentives.

- What agreements does Vnesheconombank Group plan to conclude in the course of the APEC 2012 Business Summit?

- On September 7, we plan to conclude an agreement with the Primorsky Territory Administration. This agreement provides for long-term cooperation in investment activity. We are to cooperate with the region in making arrangements for financing investment projects including those on PPP terms, work out schemes for their financing, participate in preparing project opinions and in raising funds to provide support for small and medium-sized enterprises. Currently VEB is already funding three investment projects in the region for an amount of 12.7 billion rubles (Vnesheconombank’s participation share is 7.6 billion rubles).

Moreover, our subsidiary bank – SME Bank plans to sign a memorandum of understanding with SME Bank Malaysia and with the Indonesian SME Development Ministry.

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“There isn’t enough money for all”

31 july 2012 года
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Elena Shmeleva
Russian Business-Gazeta (RBG)
№ 857 (28), 31.07.2012

About 40% of small and medium-sized enterprises complain of being underfunded

The International Entrepreneurship Support Fund is to start operating in the first quarter of 2013. Board Member, VEB Deputy Chairman Mikhail Kopeikin told RBG about the new institution’s objectives and missions.

- What’s behind the idea of creating the Fund?

- The Fund’s main objective is to provide additional financial resources and boost access to investment financing for above all medium-sized enterprises in the production sector. According to surveys about 40% of small and medium-sized enterprises’ executives complain of being underfunded or unacceptable terms on which commercial banks are ready to extend credits. This is particularly important for the production sector where there is a substantial gap between requirements for investment financing and potential for collateral security of such credits. And in the last years, the state has focused its efforts on developing small-sized enterprises and on large-scale infrastructure projects. Factually, medium-sized enterprises have been left without support.

- Why did such a situation develop?

-We are actively funding small-sized enterprises through the program of providing financial support for small and medium-sized enterprises (SMEs), the amount of support increased now to 185 billon rubles. But there is a regulatory limitation – under the program a maximum size of a credit is to be 150 million rubles. And the amount of VEB’s financing is to be no less than 1 billion rubles, with a project’s total amount to be no less than 2 billion rubles. Therefore, there is a certain gap in our range of instruments in which medium-sized business falls. And now we are making efforts to fill this gap taking into account that medium-sized enterprises are of vital importance for the country’s economic development. They generate demand for innovations, create new markets, have a good credit history but they don’t have enough funds to finance the projects they would like to implement.

- Is the Fund going to give top priority to funding medium-sized enterprises?

- Yes, it is, medium-sized enterprises will be its top priority. The Fund will have a potential for direct financing and target-oriented lending to commercial banks. And direct financing will be provided only to medium-sized production facilities through long-term investment credits, mezzanine financing and maybe participation in capital. We’ll provide support for real sector enterprises. These include manufacturing industry, construction, transport, and communications. The demand for this sort of financing is pretty great. We did a research and it found that SMEs operating in the production sector needed additional investment resources for an amount of 900 billion rubles per year. A significant part of this demand is generated by medium-sized enterprises. Maybe it’s not very much (the total amount of lending to SMEs exceeded 6 trillion rubles last year) but this is a demand in long money that enterprises find it particularly difficult to raise.

- Will the terms of funding offered by the Fund differ from market ones?

- We expect the terms to be market ones. We might accomplish this through engaging foreign development institutions whose cost of raising funds is lower than ours. We believe that this will enable us to extend funds on more favorable terms as compared to commercial banks. Credit periods will depend on an enterprise’s financial standing, profile, projects and a form of funding chosen.

- You are setting up another institution, namely, a Federal Guarantee Fund. What is it designed for?

- Guarantee mechanisms are created to address an issue of credit collateral security in the case that classical liquid security, for example, in the form real property is not sufficient. These mechanisms are actively employed in Europe and the US. For example, financial resources of European guarantee institutions exceed 20 billion euros making it possible to cover credits for an amount of 70 billion euros. In the last years the Economic Development Ministry has been making strenuous efforts to set up regional guarantee funds for SMEs. These funds act as guarantors to banks where borrowers take credits. This measure alone produces a significant effect. Given that guarantee funds’ total capital across Russia is about 30 billion rubles, guarantees and sureties were issued in the amount of 130 billion rubles, almost 1 to 4.5. At the same time, there are certain limitations in the regional guarantee funds because they as a rule are not capable of extending guarantees worth more than 100 million rubles. Therefore, for the most part only small-sized enterprises take advantage of sureties rather than medium-sized enterprises.

We believe that the Federal Guarantee Fund will be an addition to the system of SME support that was created by the Economic Development Ministry designed to fund not only medium-scale projects but also large-scale ones. In parallel with creating such a Fund we might also perform a function of coordinating and methodological center with regard to the system of regional guarantee funds. This will enable us to coordinate instruments of guarantee funds with the SME financial support program and introduce unified operational standards for the guarantee funds and improve the quality of supported projects.

- What’s the amount of the Guarantee Fund’s capital?

- It is to amount to about 10 billion rubles. And this will make it possible to issue sureties and guarantees for at least 70 billion rubles. We believe that the Fund will have commercial partner banks. High priority will be given to extending sureties to medium-sized enterprises that will borrow money from partner banks.

- When will the Fund start operating?

- The Federal Guarantee Fund’s operational scheme is to be prepared till the end of the year. It’s also worthwhile linking activities of the Federal Fund and regional guarantee funds with the SME support program that is being implemented. It’s necessary to engage partner banks and infrastructure support organizations in the system of extending guarantees formed by the guarantee funds.

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“We Learn to Take Intellectual Property as Collateral”

10 july 2012 года
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An Interview of Vnesheconombank’s Innovations and High Technologies Department Director to the Program “Development Projects” (TV Channel Russia-24)

- Oleg Yurjevich would you specify the role of the state, development institutions including that of Vnesheconombank in encouraging the development of the pharmaceutical sector?

-We have been cooperating with the pharmaceutical sector for a short period of time; this is a new sector for us. It was included in the Bank’s Memorandum on Financial policies only two years ago but nevertheless we have been closely cooperating on a number of projects. In my opinion, VEB’s role is to fund those projects which ordinary commercial banks are not able to fund because of rather long payback periods and the need to introduce new technologies etc. I’d like to stress that we are learning to take intellectual property as collateral, that is, intellectual and innovative content of projects. This is quite a new situation for Russia’s banking sector. And I’d like to stress it once more that to my mind, development institutions’ role is to fund interesting high-technology innovative projects with long payback periods which require low interest rates. Moreover, we participate in preparing technological platforms jointly with the Economic Development Ministry and we are also involved in developing legal framework.

- What projects is Vnesheconombank implementing in innovative biotechnological and pharmaceutical sectors, how much money is committed for them, what’s VEB’s specific approach to funding projects in these sectors?

- I’d like to highlight three main projects we are funding properly now.

The first of them is the Fort Project in the Ryazan region. It provides for constructing Europe’s largest integrated pharmaceutical plant to manufacture a number of medical products including innovative ones and above all flu and hepatitis vaccines developed in Russia. This project is being implemented jointly with State Corporation Rostechnologies under the Memorandum on Cooperation that we signed in 2011. The plant is scheduled to be launched in 2013. The project’s value is more than 4 billion rubles.

We are implementing the second project together with Sphera-Farm Company. This is a project on manufacturing dialysis solutions under GMP standards in the Kaluga region. As distinct from the past practice of mixing all dialysis solutions in pharmacies, with introduction of new requirements and standards, this practice is forbidden now and the demand for these solutions is gigantic: factually almost all medical interventions are associated with the use of infusion solutions.

The third project. We agreed with Biocad Company on constructing the second stage of the pharmaceutical plant to manufacture cancer drugs in the Neudorf special economic zone outside Saint Petersburg.

In general, I estimate the sector’s requirements at tens of billions of rubles. We have to go a long way as the process is not limited to pharmaceutics alone: we need to produce medical equipment (from the simplest to the most sophisticated devices), prosthetic equipment. We have promising projects on producing stents for heart operations etc. I have already mentioned that in implementing such projects a development bank’s role is especially important as it can provide long-term inexpensive credit resources and does not focus on commercial efficiency. Undoubtedly, under our Memorandum on Financial Policies all projects supported by VEB are to be implemented on a break-even basis and we do not seek to earn high interest, our activity is above all aimed at developing the sector.

I’d like to note that VEB’s Development Strategy till the Year 2015 provides for 20% of our loan portfolio to account for investment projects related to innovation and high-technology sectors. We have a high stake in implementing this sort of projects because besides their commercial component they result in introducing Russian technologies, training young specialists. It’s very important for us that we are in a position to provide pretty long-term and inexpensive credit resources to encourage innovation projects. So, we are particularly interested that project initiators submit their applications for such credit resources to us.

- When do you think we’ll be able to reach a pretty sufficient level of import substitution in the Russian pharmaceutical sector and a significant level of innovative medical products development?

- The process is already taking place although not so fast as we would like it to but we can see excellent prospects opening. We shouldn’t forget that investment cycle in pharmaceutics is rather long: a preparation stage of any medical product alone takes at least a year and a funding stage takes at least two-three years. And I think that somewhere in 2016-17 we could reach a sufficient level of import substitution and the country will be able to provide itself with medications.

And our objective is not only to saturate the Russian market but also enable our partners to tap foreign markets to build plants, export technologies to other countries. And these prospects are opening because our developments are absolutely competitive and are rated highly on the market. And we hope that with the assistance of Vnesheconombank’s subsidiary, namely, the Export Insurance Agency of Russia (EXIAR), we’ll be able to implement a whole number of projects. It’s too early to name them but this is a very promising and interesting line of activity for us.

- What results do you expect from implementing the Biocad project, are there any preliminary estimates, to what extent will Biocad medical products be cheaper in comparison with their foreign analogues?

- The main result is that innovative medical products scheduled to be manufactured by Biocad will be a lot cheaper than imported ones. Generally speaking, treatment of serious diseases like cancer is very expensive. Those who experienced this know that one injection might cost several thousand euros. The situation is exacerbated if a country relies entirely on imports: by monopolizing the market sellers is in a position to impose their price terms that are prohibitively high for Russian consumers. Moreover, as budgetary funds allocated for purchasing vitally important medications are limited there arises a need to introduce quotas for them. It goes without saying that such a situation is unacceptable. We’d like all people to have enough medications at prices affordable for them. Therefore, we seek to implement this sort of projects in pharmaceutics. And in examining investment projects we pay particular attention to their financial component. Judging by a financial model that we have developed jointly with Biocad Company with regard to a number of vitally important medications, prices will be affordable for people to treat diseases they unfortunately suffer from. On average, these medicines will be 2-3 times cheaper than foreign ones and their quality will be no worse and often even better than that of their foreign analogues.

 

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“VEB Will Show a More Impressive Performance if it is not Diverted from its Core Activity”

29 june 2012 года
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Nationally significant, infrastructure, industrial and housing projects are funded by development institutions all over the world. Five years ago, Russia staked on such institutions establishing, in particular, a Bank for Development on the basis of Vnesheconombank of the USSR. Today, hundreds of major infrastructure, modernization or import-substituting production facilities construction projects are being implemented across the country. Most of them – with VEB’s assistance. Nevertheless, the track record of Brazil’s China’s and Germany’s development banks demonstrates that Vnesheconombank’s capabilities are not used to 100% yet for a number of reasons, Vnesheconombank VLADIMIR DMITRIEV told about this in his article specially written for the newspaper Kommersant.

Logic of Assets and Liabilities

In the past ten years development banks have been increasingly coordinating their activity with each other upgrading the paradigm of sustainable national and supranational development, project finance, corporate and social responsibility. To this end, international consortiums of development institutions are created, specifically, the International Development Finance Club, (IDFC) in the activity of which Vnesheconombank takes an active part.

Regular contacts between development banks of various countries help to thoroughly study their track record. Many of best practices used by our colleagues abroad might be effectively adopted in Russia.

Let’s look, for example, at the Brazil Development Bank – BNDES. This is the country’s leading financial institution responsible for providing long-term financing in line with the Brazilian Government’s strategic priorities. In 2010, it was ranked second among development banks of BRICS countries (after the China Development Bank). More than half of its liabilities are formed by two Brazilian state-run funds – Brazil’s Workers Support Fund (FAT) and the PIS-PASDEP FUND. These Funds are financed through tax payments from the labor remuneration fund made by employers. In their turn, the Funds deposit a significant part of accumulated financial resources in BNDES at a preferential rate that is lower than a market one. Such deposits’ maturity is 30-40 and it exceeds maturity of any market financing sources thus enabling the Bank to work the most complicated projects with long payback periods. Therefore, BNDES has no problem funding. For example, in 2010, BNDES’ capital increased by 2.5 times through using government budgetary funds. Financial resources were made available to support investment projects under the Growth Acceleration Program (PAC) and the Sustainable Investment Program (PSI).

BNDES’ example demonstrates an inexorable logic of its liabilities to assets ratio. Given that investments made by a classical development bank go by definition beyond purely market projects, it’s logical that sources of funding a development bank can’t be purely market ones.

It should be noted that at present this operating logic isn’t being followed to a full extent as Vnesheconombank has a significant portion of purely market liabilities. After the state’s contribution to the Bank’s charter capital VEB didn’t receive any budgetary or quasi-budgetary resources not directly linked to specific projects. The Central Bank’s deposits placed with the Bank are paid ones – the Bank makes interest payments on them in the amount of 13 billion rubles per year.

And VEB’s assets are largely non-market ones. These are investments in projects whose payback periods are a lot longer than average market ones but they have high social externalities. All over the world, high social externalities of infrastructure and economic projects are funded by taxpayers.

In this sense, Vnesheconombank set a precedent: it made a number of successful borrowings on domestic and foreign markets and this allows the Bank to undertake its core activities. At the same time, some alarming signals we received from the market at the end of 2011 show that for the Bank to develop continuously and fund investment projects it is extremely important to have room for maneuver. In our opinion, one of such opportunities is to expand the list of instruments for investing pension savings funds as well as financial resources of the National Wealth Fund. We discussed this issue at a collegium of the Finance Ministry in April of 2012. We believe that it makes sense to include infrastructure bonds into VEB’s investment portfolio. It’s of primary importance to use resources mobilized through issuing the said bonds in a strictly targeted way against direct guarantees of the Finance Ministry.

We need to connect the country

It’s pretty logical to use infrastructure bonds for building railways. In this sense, China and the China Development Bank are success stories. The China Development Bank (CDB) is designed to extend credits at low interest rates to fund infrastructure and basic economic sectors. China’s National Development and Reform Commission is responsible for selecting facilities for funding. One of CDB’s priorities over the last years has been to fund the construction of a high speed railways network. In terms of high-speed railways mileage (about 8 thousand km) China is ranked first in the world today. The amount of funds that CDB invested in the construction of national railways was $25.7 billion by the end of 2010. The following railway lines were built – Guangzhou – Wuhan line with a mileage of 1068 km and with an average commercial train speed of 350 km/h (maximum speed is 394 km/h), this speed is a lot higher than that of high-speed lines in Japan and France. The key funding source of these and other sectoral investments is CDB – it issued special bonds - the so called policy banks financial bonds.

We have also high-speed railways construction projects in Russia but their practical implementation is hampered by problems associated with raising funds. OJSC RZHD’s investment program deficit only for the coming years is estimated at 400 billion rubles and a scheme for closing this deficit through issuing infrastructure bonds with state guarantees hasn’t found any support so far. At present, an estimated amount of investments in the high-speed rail project-1 – a railway that would connect Moscow and Saint-Petersburg is 500-700 billion rubles. This project’s funding is not allowed for in the federal budget for 2012 and 2013. In our opinion the said deficit might be closed through issuing infrastructure bonds.

Skeptics say that if these bonds are not secured by direct and full guarantees their investment appeal will be low. But the world’s experience in funding infrastructure projects is pretty considerable. In particular, such infrastructure bonds can be secured through using tax increment financing generated as a result of implementing projects.

Financing requirements of Russian project-initiating companies are extremely high and they of course exceed Vnesheconombank’s current capabilities. And in connection with this we believe that it is of overriding importance to maximally concentrate the Bank’s resources on undertaking its core activity and reducing the amount of its non-core activities. Unfortunately, at present we often come up against important and responsible objectives that must be accomplished but they are not fully in line with the Bank’s core activities.

Frontal coverage

As opposed to Vnesheconombank, Brazil’s BNDES hasn’t factually any sectoral restrictions in terms of sectors where it can invest funds. VEB’s Memorandum on Financial Policies bars Vnesheconombank from investing credit resources in oil production but BNDES is actively lending to Brazilian oil companies, specifically, to Petrobras and mining giant Company VALE. It also funds bioethanol production projects, beef stock farming as well as power engineering and high technologies.

We can say that although sectoral restrictions in Russia are justified because the country seeks to overcome its dependence on raw materials we believe that another restriction that BNDES doesn’t have is unnecessary. Here we mean that companies that receive BNDES’ financial support can be controlled even by foreigners. The only principal requirement is that they must be registered in Brazil and have their headquarters and corporate governance bodies on the country’s territory. It is an instructive example of creating a clear incentive for refusing to register  companies operating national assets  in offshore zones.

Stages and sequence of removng industrial and scope constraints on businesses and projects supported by VEB are a matter of serious analysis and discussion. Vnesheconombank has already initiated the removal of a 25 percent limit on foreign ownership in those SMEs that receive support from Vnesheconombank Group, including through our subsidiary SME Bank. Relevant discussions with legislators are already underway.

Another aspect of our business, which requires thorough consideration, is a kind of problem faced by medium-sized enterprises. The fact is that a lower limit of loans amount granted by Vnesheconombank directly to end borrowers, is today 1 billion rubles. At the same time, an upper limit of SME loans, refinanced under the program of our subsidiary SME Bank is 150 million rubles. As a result, all mid-term loans ranging from 150 million to 1 billion rubles are regulatorily excluded from the area of our expert examination and support, although in this range of loans there is a huge loan gap that can’t be closed by commercial banks.

There may be different solutions to this regulatory conflict. They might include additional capitalization through using budgetary funds, and expanding the functions of SME Bank (Vnesheconombank has already decided to transfer 10% of its profits to SME Bank each year). However, international practice suggests that we should create a special mechanism, a special window to provide support for the fast-growing medium-sized enterprises. For example, BNDES has a program of opening automatic credit lines - BNDES Automatico. Credits are extended through authorized banks and organizations for a long period of time with a grace period. Therefore, this is another possibility, which we use in our practice, that is, a creation of specialized structures to support medium-sized enterprises. VEB is currently holding negotiations with German corporation KfW to establish a fund which would meet financing requirements of medium-sized enterprises. At the same time, we are actively cooperating with the Strategic Initiatives Agency, which supports medium-sized enterprises. At the same time, there is no doubt that this line of activity should be improved.

It would be wrong to think that development banks’ activities focus exclusively on mega projects in infrastructure and heavy industry sectors. The most important line of their activities is to provide support for housing construction and development of housing market. In this respect, business experience of the German development bank, Kreditanstalt fuer Wiederaufbau (its assets as of the end of 2010 were $591 billion, second place in the world) is extremely instructive. It is worth noting that KfW is the largest issuer of corporate bonds in Europe, with all its borrowings being covered by a sovereign guarantee.

There are currently ten programs of KfW to support and develop housing stock in Germany. Their total financing amount in 2010 reached 18 billion euros. The programs are aimed primarily at energy-efficient modernization of housing stock, and at adapting housing for the elderly, energy-efficient construction and maintenance, assisting in acquiring stakes in housing co-operatives.

It is important to note that KfW does not provide funding for all these programs directly to consumers, but through refinancing commercial banks and specialized financial institutions.

VEB’s support for the housing market today is limited to relatively small amounts of bonds that it buys out from the Housing Mortgage Lending Agency and bonds of commercial banks, secured by pools of standard mortgage loans, with the said bonds’ limited yields (weighted average coupon yield of not more than 7% per annum). The severity of the housing problem in Russia today, where 60% of its population is unable to improve their living conditions in a market or non-market way, and 15-20% of households have to live under one roof, makes it necessary for Vnesheconombank to step up its efforts in this line of activity. It seems justified to expand forms and ease terms of VEB’s refinancing commercial banks’ mortgage lending programs.

Hard-won victory

In the coming years, Russia will embark on a massive re-industrialization. In this regard, it is obvious that the Bank for Development will play a significant role in this process: we have gained extensive experience in arranging for financing large-scale and very complicated projects, we have an excellent reputation that enables us to arrange for borrowings on unique terms and we set up Vnesheconombank Group which is capable of taking various measures for diversifying the Russian economy.

At the same time, in order to achieve major and ambitious objectives we need to maximally concentrate all our resources in the most efficient way. I am sure, Vnesheconombank will be able to show more impressive results if it is not diverted from its core activity and legislative restrictions in its activity are eased and it is given a chance to use monetary resources at the state’s disposal in the most efficient way. And in this case, the last component of success will be prioritization: we need to choose several sectors in which Russia hasn’t lost its competitive edge and base new reindustrialization and modernization on them. In this respect, it makes sense to look at Brazilian company Embraer’s track record. It has been trying to become a member of the world’s elite of aircraft manufacturers since 1969. The company became successful only in the mid 1990s when it concentrated its efforts on creating small regional aircraft having frozen for the time being all other lines of development and manufacturing. Having produced its first aircraft in 1996, the company started to energetically tap the national market gradually going beyond its limits and establishing distribution centers in the U.S., Asia, Europe and even in Africa.

Embraer was among the Brazilian Bank’s top-priority projects for many years being one of the largest and credit recipients and the main beneficiary of the support program. Moreover, BNDES’ support for Emraer was not limited to money alone. Having locked horns with Canada’s Bombardier in a fight for air carriers’ orders throughout the world, BNDES managed to beat off Canadians’ claims fraught with severe sanctions within the WTO when they accused Embraer of enjoying government subsidies. Investigations and negotiations reached a deadlock when Brazilians put forward convincing arguments that Bombardier used similar but although intricately structured preferences from their government.

Today, Embraer’s planes are operating in airlines of many countries including CIS and Russia competing fiercely with Russia’s new regional SSJ-100 aircraft created with Vnesheconombank’s financial assistance.

Embraer’s success story shows that it is extremely important for development banks to conduct expert examination of projects they fund at the initial stage of their development and then support export expansion of proven industrial models and it also confirms that we should concentrate our resources on boosting competitive edge. There are a number of efficient sectors in Russia such as its defense industry, aviation industry, pharmaceutics, power engineering industry, space technologies. If we stake on them we’ll succeed.

Specifics of model or growth ceilings

A choice of operating model used by a development bank has its pluses and minuses. I have already mentioned that unlike leading national development institutions whose resources are replenished by the state on a regular basis, VEB has to replenish its resources through raising funds on the market. And the Bank does not have current accounts of corporate clients and natural persons. The Bank is not allowed to compete with commercial banks. This requirement was formulated and set forth in Vnesheconombank’s Memorandum on Financial Policies. This means that Vnesheconombank’s financial capabilities depend on the conditions of world financial markets and the Bank itself is audited by international companies and rated by international rating agencies and the cost and potential amount of borrowings depend on our balance. Despite the unfavorable market conditions in the past four years, VEB has been doing pretty well on the borrowings market. Up until now the Bank has been able to make borrowings on the most favorable terms and factually VEB managed to borrow as much capital as it needed. But it’s obvious that the Bank’s borrowing capabilities and hence its investment potential depend heavily on market conditions and any deterioration in the global economy will immediately trigger increased competition for credit resources and toughen policies of international issue centers.

We have often heard that VEB could replenish its investment purse through selling a number of its assets and above all non-core assets it received during the 2008-2009 crisis. They offer us to get rid of Globex Bank and Svyaz-Bank before the end of the current year. We are sure to withdraw from these banks capital but we’ll do it when we are able to generate proceeds for them and for problem assets bought out from their balances that are no less than the funds we spent to purchase them in order to avert negative budgetary efficiency of rehabilitation procedures. But it would be wrong to rely on these transactions as substantial sources of replenishing VEB’s resources. It would be more realistic to repay the Central Bank’s deposit. We can’t sell these banks on the sluggish market today. There are no buyers ready to pay for Svyaz-Bank and Globex as much as we would like to get. And these assets are pretty large. The banks are among the thirty largest banks in terms of assets and their total capital is 44 billion rubles.

A conservative approach to a policy of borrowings used by VEB implies that an amount of funds the Bank plans to raise on the capital market is no more than 4 rubles for one ruble of is charter capital. We’ll reach this ceiling by 2015. And this is a minimum that Vnesheconombank can reach, given its current amount of charter capital. The amount of VEB’s assets has already exceeded 2 trillion rubles. It’s quite a number but as compared with a number of colleagues, for example, with Germany’s KfW (the amount of its assets in 2010 was 442 billion euros) and BNDES (the amount of its assets in 2010 was $331 billion) and against the backdrop of Russia’s increasing demand for investments, it’s not much.

Nevertheless, development banks’ activities are associated with serious risks and in order to take them on their balances such banks should have significant capital. Therefore, our task today is to expand VEB’s funding base and this task can be fulfilled only by the economic authorities, given the Bank’s limited room for maneuver.

Perhaps, the most important lesson we should learn from analyzing foreign development banks’ track record is that their efficient activity is directly linked to identifying strategic objectives of their countries’ economic and social development. Development banks are highly instrumental in developing, examining and implementing national economic policy. And they can achieve more ambitious objectives if they adopt a more systemic and strategic approach.

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