Vnesheconombank Chairman Vladimir Dmitriev about key lines of the Bank’s activity, development of the Far East, conditions for entering into projects and the situation with the construction of Olympic facilities in the first part of his interview to Gazeta.Ru

Chairman of Vnesheconombank Vladimir Dmitriev
Photo: Alexandr Astafjev/RIA Novosti

- What role do you think VEB as a development institution should play in the midterm? Is the current investment strategy optimal?

- If by the midterm we mean a period of up to 2015, we’ll follow a strategy approved by our Supervisory Board. The strategy provides for the Bank’s loan portfolio to amount to 850 billion rubles by late 2015, but according to our preliminary estimates we would exceed this figure. As of today, our loan portfolio has already increased to 720.02 billion rubles.

In the mid and long-term the Bank for Development will retain its positions as a leading institution in funding and expert’s examination of major investment projects of national significance. As of today, VEB is participating in funding 151 projects and the amount of credit resources extended by the Bank exceeds 831 billion rubles.

As of March 1, 2013, 103 projects worth 1.59 trillion rubles were under Vnesheconombank’s expert examination, with Vnesheconombank’s potential participation being 986.3 billion rubles.

These colossal investment resources are being used to fund major and important infrastructure, industrial and innovation projects. We are going to follow this course in the future. Our activity we’ll be based on our top-priority lines of business if nothing extraordinary happens.

Recently, a lot of worrying and alarming circumstances emerged that make us to respond to them adequately. They include reduced economic growth if not economic slump, reduced GDP growth rates, actually reduced production in some sectors, and reduction in investment in fixed capital.

All this makes us worry about the current situation. The Bank for Development could play a significant role in key, breakthrough sectors. Our economy needs long-term money and here the Bank for Development’s role is crucial.

- What role is assigned to VEB?

- The Bank’s mission as a development institution is above all to participate in implementing projects aimed at boosting Russia’s competitive edge in the sectors identified by the Government. The core sectors include IT technologies, supercomputers, nuclear power engineering, telecommunications and space. New lines of activity are added to our financial memorandum. For example, the Bank’s participation in implementing investment projects aimed at developing mono-cities.

The Memorandum on Financial Policies expires this June. I don’t rule out that in our revised memorandum a list of sectoral priorities might be expanded.

Another key line of VEB’s activity is to provide support for small and medium-sized enterprises (SMEs). We give top priority to SMEs involved in implementing innovation projects aimed at modernizing production facilities and improving energy efficiency.

By the end of 2015, the amount of financial support provided by VEB to small and medium-sized enterprises through SME-Bank will reach 150 billion rubles. Other subsidiary commercial banks joined the program of providing financial support for SMEs implemented by VEB.

Now a guarantee mechanism is being launched and we expect that this June the first guarantees will be granted. We expect that with the help of these guarantees we’ll be able to raise about 80 billion rubles to provide support for small and medium-sized enterprises.

- When will you be able to raise the funds?

- It’s hard to say now. Everything depends on how soon we’ll be able to assess risks of individual borrowers and when financial resources will be made available.

VEB is to receive guarantees worth 20 billion rubles from the Finance Ministry and then it is to extend a guarantee worth 40 billion rubles to SME-Bank. SME-Bank in its turn is to select banks for participating in a guarantee program and is to give guarantees to creditors for businessmen.

Whereas SME-Bank is to guarantee 50% of credits to be extended, a guarantee support worth 40 billion rubles will make it possible to extend credits to medium-sized enterprises for an amount of 80 billion rubles.

Another VEB’s important line of activity is to provide support for Russian industrial exports. A national industrial exports comprehensive support system is being established on the basis of Vnesheconombank Group’s institutions (VEB, Roseximbank and EXIAR). To this end, a special subdivision is being set up at VEB, a relevant decision was taken by our Supervisory Board. At its last meeting VEB’s Supervisory Board considered working procedures for supporting industrial exports by VEB itself, Roseximbank and EXIAR.

A time-limit of 90 days has already been approved; this is a period from receiving an application up to extending a relative form of support (pre-export financing, an insurance police and guarantees).

- VEB is also responsible for programs aimed at developing the Far East. It is known they are very expensive. Does VEB have any top-priority lines of activity? And what role will foreign investors play in the development of the region, specifically China and Japan.

- Even before the Far East and the Baikal Region Development Fund was set up (the Fund was established in November of 2011 under the Supervisory Board’s decision) VEB had participated in financing projects in the Far East. As of April 1, 2013, the Bank participated in 16 projects worth 191 billion rubles in the Far East Federal District.

The Bank’s participation is 116.9 billion rubles, 60.9 billion rubles have already been provided.

After establishing the Russian Direct Investment Fund and the Far East and the Baikal Region Development Fund it became a lot easier to support the Far East. Last year, 15 billion rubles were provided for capitalizing the Fund. And this is not a limit. At a meeting in Yakutsk the Prime Minister said the Fund should be capitalized additionally.

Out of 60 billion rubles provided by the Direct Investment Fund last year, 25 billion rubles are supposed to be used by the Fund to make investment in projects in the Far East and the Baikal region. One of such projects has already been supported by the Russian-Chinese Investment Fund established with the participation of CIC (the China Investment Corporation). Here I mean a project in the timber processing sector in the Far East.

Our Chinese and Japanese partners are ready to cooperate and invest in infrastructure and specific industrial projects.

There is a significant pipeline of projects in such sectors as timber processing, fish industry and agriculture, for example soybean production in the Primorsky Territory. We are giving high priority to a project in the Jewish Autonomous Area on the construction of a bridge connecting us with China. We invest in this project together with our Chinese partners.

But many projects that are offered to us are just wishful thinking, they are poorly prepared, there is no money and there are no investors behind these projects.

Unfortunately, we have often to hear the following things including from the heads of constituent entities of the Russian Federation, “We have submitted projects worth hundreds of billions of rubles to consideration by VEB Group’s institutions and none of them have been funded”. They just overlook the fact that there are no specific investors behind 99% of projects.

If there is an investor there is no project. And if there is an investor and a project, the investor doesn’t have any money.

- Aren’t investors supposed by definition to have money?

- Unfortunately, we have this sort of investors. I can give you an example without naming names. A governor comes and says, “We have a good project, it will create new jobs and address social issues. It should be funded”. We ask them to give us the project. They say to us, “No, first take a decision on funding the project and then the project’s initiator will fund design and estimate documentation, feasibility study and pay for structuring financial model”.

But we make a decision on the basis of the listed documents, we need to understand risks and know who we are dealing with. And they start to complain.

They complain to the highest-ranking officials saying how bad VEB is because it refuses to support projects that are of key importance for regions. We face this sort of situations rather often.

- I’d like to clarify the following point: do you enter into a project if besides VEB’s there are some other investors there?

- Basically, we are responsible for project financing and request an investor to share risks with us otherwise it is not motivated in participating in a project and in developing it properly, in this sense we do not differ from commercial banks. Otherwise we risk dealing with a project single-handed.

We received applications for an amount exceeding 10 trillion rubles. I’d like to stress it once more that they are very often divorced from life.

This region could become a large-scale test-ground to test territories comprehensive development approach. This means that infrastructure (railways, power transmission lines) should not be created for their own sake but be instrumental in raising investments in those sectors that can’t develop without infrastructure.

These sectors include production of mineral resources, existing and abandoned construction projects, agriculture and timber processing. This is the only approach to raise large-scale-investments for the region.

- In our country people tend to be careless about state money, it is assumed that it is nobody’s and at the same time everybody’s money. It is suffice to recollect recently revealed case of embezzlement in Rosselkhozbank which is to some extent a state corporation. How do you address this problem?

- Abuses are related to budgetary money’s status. As the saying says “All that belongs to all belongs to me too”.

Mechanisms that VEB uses have a definite advantage - they provide for a co-investor to be a private person which is not interested in stealing from itself.

But we offered to take an inventory of federal target-oriented programs and other programs of national significance that are funded from the budget.

This is a “black box” where money gets into and then disappears, no one knows where. As a result we have incomplete construction projects, absence of facilities despite the fact that money was allocated. So, we tend to say, “Let’s see if we can implement these programs through raising non-budgetary sources”.

In any case all projects of national significance should be subject to technological, financial and economic expert examination. We should use services of independent experts and outside auditors. This is the case at our Bank with regard to all projects including Olympic facilities and projects that have nothing to do with budgetary money.

- You have mentioned an issue of expert financial examination of Olympic facilities but by judging by official statements there are problems there related to repayment of credits extended by VEB?

- It’s a good thing that network schedules are being met according to the program of Olympic facilities construction. Their commissioning dates are with the target dates.

Failure to follow the principle of target use and repayment of credits really worries us.

We made a conclusion that 8 out 19 Olympic projects are estimated unprofitable.

This means that we have serious doubts that borrowers will fulfill their obligations under these credits. It is for these reasons a whole number of projects won’t pay back investments made.

As of today, we funded facilities for an amount of 110 billion rubles and by the end of the year this sum will increase to 220 billon rubles. And we’ll extend credits worth 170 billion rubles by 2014 to fund those 8 projects that are estimated unprofitable by our estimates.

A significant part of risky projects is a result of borrowers’ and investors’ miscalculations. In the course of their implementation additional requirements had to be met that had not been taken into consideration in full before. Here I mean ecological, geological and security requirements as well as purely sports standards. As to a number of projects their budgets increased by two or even more times and this worries us a lot.

And this is the case despite the fact that together with the Government, Olympstroy and the Ministry of Regional Development we exercise a weekly control over the way schedules are met. If an investor doubts that it will be able to fulfill obligations under a credit we address emerging problems by taking urgent measures.

Here we need “hand control”.

These are special construction projects, facilities are to be commissioned in due time. This is bound to be done. But we don’t want any damage to be done to the state’s and VEB’s interests after the Olympics when credits are to be repaid.

- 220 billion rubles to fund the construction of Olympic facilities, are these budgetary funds?

- No, these are VEB’s credits.

These are borrowed funds for us. We have no other sources. We raise funds on the market to fund our transactions. Moreover, when we extend credits for the construction of Olympic facilities we are limited by interest rates set by our Supervisory Board.

We have another problem with regard to many projects including those with an increased level of risk; we fail to receive project-estimate documentation from investors in full.

- Up till now?

- Yes, hence we can’t check if funds are used in a targeted way and can’t be sure if credits will be repaid. Documentation of a whole number of projects didn’t go through expert examination as it does not exist.

The fact is that we extend credits as soon as problems emerge.

- This means that when projects become very urgent you have to go against principles of mandatory expert examination?

- You are right.

- Do you think that investors will participate in major construction projects in the future or will they reconsider their risks because of the emerging problems?

- You should not forget that as far as Olympic construction projects are concerned we have received guarantees from Olympstroy.

Basically, the federal budget assumes risks that emerge with regard to projects.

For an investor that could participate in complicated projects that carry unforeseen risks it’s very important that the state shares responsibility with it.

Olympic construction projects are unique. There were no analogues in our country.

It’s one thing when you invite a foreign company to design Alpine skiing routes. But it’s quite another thing to perform engineering survey work including on the territory of national parks where seismic prospecting and geological exploration were never conducted and where we come up against landslide, ecological and security risks. And investors have to invest 25 billion rubles instead of 60 billion. Landslide threats necessitate to increase investments in foundations and supporting walls. A whole number of problems emerge as the work advances. And we can’t resolve them without additional funding.

I’d like to give you an example with a cargo side port in the Imereti lowland. Investors were told that the port would handle the bulk of Olympic cargoes but in fact 80% of Olympic cargoes were transported by rail and road. And certain restrictions were imposed on investors – other cargoes were not allowed to be transported through the port.

How can you get credits repaid without cash flow?

Investors should take such things into consideration. Given that we undertook the work of such magnitude, let’s share responsibility and be correct to one another. It’s a serious lesson for all of us to learn.

- Might a similar situation develop with preparations for the 2018 FIFA World Cup?

- I’m sure that we’ll learn all the lessons from the Sochi Olympics by 2018 but we are not involved in preparations for the World Cup and haven’t considered any projects.