Vnesheconombank Chairman Vladimir Dmitriev’s Interview to the TV Channel Russia 24
Vnesheconombank’s Conference “Sustainable Growth through Long-Term Investments” is taking place in Moscow. The Conference’s main theme will also top the agenda of a forthcoming G20 summit. My colleague Maria Efremova is present at the conference today. Hullo Maria! I’m giving the floor to you.
CORR: Hullo Kseniya. Today’s key theme is funding long-term investments. Vnesheconombank Chairman Vladimir Dmitriev is ready to answer our questions. Vladimir Alexandrovich, Good afternoon. Vnesheconombank is supposed to start participating in implementing major infrastructure projects. How much money in your opinion will be needed to fund these projects?
Vladimir DMITRIEV, Vnesheconombank Chairman: We are already actively involved in funding infrastructure projects and here I mean not only major projects being implemented by RZHD and the Federal Grid Company (FGC) but also projects in housing and communal services infrastructure, telecommunications and other economic sectors that form infrastructure. They include the construction of airports and toll motorways where we cooperate closely both with Russian and foreign financing institutions. As far as projects that are to be funded through using pension funds are concerned we intend to invest about 100-200 billion rubles by way of purchasing bonds to be issued by such companies as RZHD and FGC.
CORR: Vladimir Alexandrovich, some say that not only infrastructure projects are appropriate for long-term money. And what other alternative instruments are in your opinion also available?
Vladimir DMITRIEV: If we are talking about instruments and sources of funding long-term investments there is no doubt that pension money is not sufficient and we should involve both private investments and funds owned by the state and here I mean the National Wealth Fund. This issue is hotly debated now and we suggest that Vnesheconombank should act as an operator of the National Wealth Fund’s financial resources which could be used to fund various projects in the Russian economy. As far as private investments are concerned, I would like to highlight the Russian Direct Investment Fund which is now together with its partners and direct investment funds, private and sovereign funds creating appropriate infrastructure to make investments in the Russian economy. It has already closed transactions for a total amount of 2 billion dollars and reached a desired proportion between Russian money and raised foreign investments, which is now 1 to 5. This is a good indicator. And funds raised from private investors and sovereign funds are used to finance economic sectors attractive for foreign investors. They include medicine, public health care, the stock market, the timber processing industry, telecommunications and a number of other sectors of our economy.
CORR: The Conference’s participants are from many various countries. What Russian instruments and projects are they interested in?
Vladimir DMITRIEV: It’s important to keep in mind that as rule private investors seek to invest in reliable and highly profitable projects. But sometimes it’s not easy to achieve a combination of reliability and high profitability. So, we offer to share risks and co-invest Russian and foreign money in those projects that might be attractive for foreign investors and that are very important in terms of developing our economic sectors such as infrastructure and also those related to our growing middle class as well as public health care, medicine, the retail sector and a whole number of other sectors. By the way, social infrastructure is of interest too. And here I mean construction of pre-school child care institutions, fitness centers where a whole number of Russian investors are ready to cooperate with Vnesheconombank and regional authorities to invest their financial resources on a long-term basis.
CORR: And what can you say about projects that Vnesheconombank is implementing with other countries?
Vladimir DMITRIEV: So far, we have been working pretty successfully on a bilateral basis cooperating closely with national development banks and international financing institutions. For example, our cooperation with Germany’s development bank resulted in establishing several investment funds. Quite recently we have signed a declaration on establishing another investment fund. And we hope that his fund will amount to at least 500 billion dollars and will be used to provide support for Russian small and medium-sized enterprises. So, as opposed to our previous practices we are going not only to extend credits to small and medium-sized enterprises through our subsidiary bank but also invest funds of Russian and international investors in small and medium-sized enterprises to increase their capitalization and make them more attractive for financing institutions. I would also like to stress our cooperation with the World Bank and the European Bank for Reconstruction and Development. Together with the World Bank we set up a long-term investment fund to make investments in Russian regional banks and we put in place a similar scheme with the European Bank for Reconstruction and Development. This example shows clearly that Russia is open for foreign investments and that there are sectors in the Russian economy that are attractive for foreign investors.
CORR: And my last question is about a BRICS bank. Is it being established?
Vladimir DMITRIEV: I’m not the right person for this question. But as there is an interbank consortium within BRICS, which is comprised of national development banks, we and our partners from BRICS believe that it’s better not to establish a new institution but to additionally capitalize national development banks for them to raise financial resources from capital markets and participate jointly in implementing projects that are of interest for BRICS member countries.
Vnesheconombank Chairman Vladimir Dmitriev’s Interview to the TV Channel Russia 24
HOST: Good afternoon.
Vladimir DMITRIEV, Vnesheconombank Chairman: Good afternoon.
HOST: I’m glad to greet you again at the Petersburg International Economic Forum. Vnesheconombank always comes to this Forum for real projects and real agreements. And I hope this time you have as many projects and agreements as usual
Vladimir DMIRIEV: You’re absolutely right. Actually, we view the Forum as a place and as an opportunity to sum up certain results of our work and at the same time look ahead among other things by way of signing agreements. We have already signed some agreements and we’ll also sign agreements today and tomorrow.
We’ve already signed an agreement with the Russian Railways. It provides for our joint efforts to promote RZHD to third countries’ markets. Naturally, we’ll use here a whole range of Vnesheconombank’s and its subsidiaries’ capabilities. These include funding and insurance through extending insurance policies to our export insurance agency; this is also the Direct Investment Fund which is also in a position to operate on third countries’ markets.
A quadruple agreement has just been signed by Vnesheconombank, the Administration of the Primorsky Territory, Changi Airport International and the Far East and the Baikal Region Development Fund. The agreement provides for Changi Airport International to increase passenger flow and boost the Vladivostok airport complex’s investment appeal.
We are also planning to sign a very specific agreement. Here I mean development of Yamal’s oil fields – the Yamal LNG project on the construction of a natural gas liquefaction plant. NOVATEK acts as an investor together with French company Total. The agreement will provide for offering financial services to Sovcomflot and Yamal LNG on manufacturing and leasing enhanced ice class vessels to transport liquefied natural gas to third countries’ markets.
Some agreements are basically memorandums of intentions or agreements on cooperation I’d like to single out agreements with the Leningrad region, the Kirov region and the Republic of Tatarstan. They provide for the comprehensive development of territories and Vnesheconombank’s participation in various investment projects in these regions.
HOST: Are you going to present the Development Award as part of this Forum?
Vladimir Dmitriev: Yes, we are, after a plenary session tomorrow. We made an arrangement for presenting this award with Head of the Presidential Administration Sergei Ivanov. A decision on the Development Award was taken last year and during the year we worked on announcing it and receiving applications. To this end, we set up Vnesheconombank’s Expert Council which evaluated applications objectively in four nominations: The Best Project in Industrial Sectors, the Best Infrastructure Project, the Best Project of Small and Medium-Sized Enterprises and the Best Project on the Comprehensive Development of Territories. For good reasons I won’t name the names of the winners. But I assure you these are the best projects in these nominations.
HOST: What do you mean by the best investment project? Is it the largest project, the most socially significant one or the most reliable one?
-In our case we evaluate a project not in terms of its size but in terms of its structure, investors’ and local authorities’ participation in it and raising investments from Vnesheconombank and foreign countries. Parameters include a whole number of key indicators of a project’s success.
HOST: Vladimir Alexandrovich if we regard the number and sizes of agreements concluded every year as part of the Petersburg forums as some sort of indicator for the state of economy, what does it show at the moment? Today, German Gref described investment climate as an incomprehensible beast about which nobody knows anything. What can you say about the current investment climate and about how it is changing?
Vladimir DMITRIEV: In this respect, I remember discussions that were held two years ago when a decision on establishing a Russian Direct Investment Fund was being taken. Many experts including well-known specialists tried to convince us that it made no sense to establish such a fund because the investment climate was unfavorable and all the efforts to set up investment funds in Russia together with foreign investment funds and investment banks had been a failure. They believed that our efforts wouldn’t be doomed to success.
A year and a half operation of the Russian Direct Investment Fund showed that foreign direct investment funds as well as sovereign funds are ready to make investments in efficient projects in Russia. And this means that we have such projects in our country. And we have them not only in Central or European part of Russia but also in the Far East. And a good evidence of this is not only the establishment of a Russian-Chinese Investment Fund but also the first transactions with its participation. The fact is that a whole number of regions are flagships in raising investments. Here I can cite Tatarstan, the Ulyanovsk region and the Kaluga region. And we are happy that Vnesheconombank is operating quite actively in the successful regions.
HOST: What can you tell us about events accompanying the investment environment? Here I mean for example reports about forthcoming ruble devaluation. What effects will it have? Might it help domestic producers by improving their export capabilities? Will it encourage economic growth, which is a matter of serious concern now?
Vladimir DMITRIEV: The talk about devaluation is taking place against the backdrop of Russian exporters’ old-time complaints that if you restrain the ruble you restrain Russia’s export potential. But we are not talking about some sort mandatory, compulsory devaluation but about the Central Bank’s commitment to greater liberalization and market fluctuations of the ruble exchange rate without a constraining influence of the Central Bank. And this is not a purely Russian phenomenon. Freeing the ruble exchange rate and its controlled devaluation will play into the hands of Russian exporters and not only those operating in the raw materials sector but also those that can compete on the world’s markets taking advantage of pricing policy. It is important that this free or controlled devaluation should not result in increased inflation rate and other circumstances that in total might have more serious implications on the country’s economy than stimulating export potential.
HOST: And now my last question. There will be a meeting of development institutions of the Group of Twenty. What do you expect of this Forum?
Vladimir DMITRIEV: I’d like to say a few words about the preparatory work done before this coming meeting. This work was carried out by national and regional development institutions, such our partners as Germany’s Bank for Development, the China State Development Bank, our friends from Italy and France, our partners from the European Bank for Reconstruction and Development and the Asia-Pacific region. We all arrived at a consensus that we can develop both national economies and regional projects only by way of combining development institutions’ global efforts.
Last year, we got together in Luxemburg where we were received by the European Investment Bank. I should say that by that time both the Long-Term Investors Club and the International Development Finance Club were already in place. We offered to hold regular meetings of development institutions as part of the Group of Twenty and invite international financing institutions to attend these meeting in order to work out a common policy and make concerted efforts to develop economies of our countries.
We’ll hold a meeting of leading Development Institutions of the Group of Twenty and financing institutions this July in parallel with a meeting of Group of Twenty finance ministers in a situation when Russia chairs the Group of Twenty and a role of development institutions in the global economy is substantially increasing and everybody is now aware that long-term investments are guarantees for suitable growth. We agreed upon a draft declaration with our Finance Ministry. Our financial officials believe that it is in line with the agenda to be discussed by Group of Twenty finance ministers. So, we’ll be able to help our governments’ to promote sustainable development of our economies.
HOST: I wish you every success. Thank you for your interview.
Vladimir Dmitriev: Thank you.
These are really the best projects in Russia’s modern-day economy
Vnesheconombank Chairman Vladimir Dmitriev about the Development Award contest
-In a day or two Vnesheconombank will for the first present the Development Award to Russia’s best investors. What sort of award is it?
-It might seem that this is a brand new project but we have already been working on it for a year and a half. Vladimir Putin – the then Prime Minister and the Chairman of VEB’s Supervisory Board backed the idea of instituting the Development Award to be presented for the best investment projects in the Russian economy.
-How did this idea come into being?
-As a Bank for Development VEB is assigned a complicated task of developing and supporting industrial, infrastructure and innovation projects. It’s very difficult to be involved in the comprehensive development of economy even in a stable situation on the world’s markets and the more so at times of global crises. We keep on working, investing, building and there is always talk around that the Russian economy is skidding, stagnating and the investment climate is getting worse year by year. And we on our part can see quite a different situation – we receive applications for credits to fund new projects almost on a daily basis.
Under these circumstances an idea of instituting the Development Award came into being.
-Is this award intended for VEB’s borrowers.
-Not at all. If it was intended for our borrowers a picture would be unobjective and incomplete. We decided not to limit anybody. Any legal entity could submit an application for the award.
-Did you receive many applications?
We had been receiving applications for several months and we didn’t expect that there would be so many applicants. All in all we received 221 applicant projects so our contest committee had to work very hard to make a short list. It was extremely difficult to make a choice – a lot of projects proved to be top-quality.
-How many nominations does the award have? And what criteria did you use to identify them?
- We decided to identify them on the basis of Vnesheconombank’s Memorandum on Financial Policies. We have our top-priority lines of activity and we have been operating in accordance with them for already six years. We have chosen four nominations of the Development Award out of them: “the Best Infrastructure Project”, “the Best Project in Industrial Sectors”, “the Best Project on the Comprehensive Development of Territories”, “the Best Project of Small and Medium-Sized Enterprises (SMEs)”.
-I’m sure that small and medium-sized enterprises submitted the least number of applications.
-You would be surprised but out of 221 applications 78 were submitted by SMEs. This is evidence that all the talk about an unfavorable investment climate in Russia and the actual absence of small and medium-sized enterprises is no more than a banal stereotype.
-Who evaluated the applications received?
-Our contest committee was comprised of Russia’s best economic experts. These are employees from the RF Government Office, heads of line ministries and members of VEB’s Expert Council as well as our colleagues from other state corporations. All in all there are 28 people. And only ten members are from our Bank’s management. (see the detailed information about the contest committee’s composition on the Bank’s site http://www.veb.ru/ ).
-Who are the winners of the contest?
-We’ll reveal their names at an awarding ceremony at the Petersburg International Economic Forum. The Award’s status is very high. I can say now that our Supervisory Board has already approved the winners. The level of all four projects is very high. And although it might seem immodest I should say that these are really the best projects in Russia’s modern-day economy. I hope that in the future investors of such a high level of competence will contend for the Development Award.
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.
Vladimir Dmitriev tells us why the economy does not have enough long-term money, how to reduce credit rates and what new types of cooperation VEB’s subsidiaries are ready to offer to investors
Almost two years ago in his interview to Vedomosti Vladimir Dmitriev said that VEB was ceasing to tackle the crisis and starting to operate on its own as a development institution. He expected that the state corporation would be able to triple its loan portfolio without being funded from the budget. Eventually, the loan portfolio grows at required rates but VEB is again in need of budgetary support “There are grounds for being moody because VEB is being used as a quasi-budgetary instrument”, says Dmitriev and tells what he likes and what he does not like in the way his Bank operates and is being used by the state.
- VEB’s strategy until the year 2015 was approved and provides for its loan portfolio to grow ambitiously. Will you be able to implement these plans and aren’t you going to adjust them, given the current economic situation?
Born in 1953. Graduated from the Moscow Finance Institute, specialty – “International Economic Relations”.
Second, first secretary, Embassy of the USSR, Russia in Sweden.
Deputy Chief Executive Officer, Russian Finance Ministry Department of Credits and Foreign Debt.
Bank for Foreign Trade of the USSR. Deputy Chairman of the Board. In 2002, was appointed as Board Chairman of the Russian Commercial Bank (Cyprus), Vneshtorgbank’s subsidiary bank.
Bank for Foreign Economic Affairs of the USSR, Chairman.
“We didn’t find all its skeletons right away.”
VEB has a bank in Ukraine - Ukraine’s Prominvestbank. According to Dmitriev within a month they’ll additionally capitalize it for an amount of 350 million dollars. The bank needs additional resources to address the problem of bad credits it received from the former management. “The situation in Ukraine is pretty unfavorable including problems with repayment of debts but they manage to get some debts repaid,” says Dmitriev. “Some fail to repay a credit referring to personal connections; others just don’t want to pay. And then some say they are ready to take debts through paying 10% of their par value.” According to Dmitriev a decision to purchase the bank in Ukraine was “political”. “At that time the bank was on its way to bankruptcy, its potential was strong. But unfortunately we didn’t find all its skeletons right away and it proved to have more closets than we thought. In principle we bought this bank to work with major customers that had links with Russia”. Dmitriev says that the bank didn’t participate in making payments for gas. “The fact is that main contracting parties of Russian companies were served in this bank. Moreover deposits started to outflow from the bank, the situation posed a threat to the whole Ukrainian banking system and Russian banks operate there. By the way we bought the bank for 250 million dollars in November of 2008 and as early as in April Italians offered to the bank’s owners to buy it for 2.5 billion dollars. They refused because they thought it cost at least 4 billion dollars. The bank was controlled at the time by the former Chairman of Ukraine’s National Bank who privatized it out of hours”.
Founder – the Government of the Russian Federation.
Financial Indicators (IRFS, 2012):
Assets - 2.9 trillion rubles
Capital – 531.9 billion rubles
Net profit – 17.5 billion rubles
- Yes, we are. But before talking about our strategy we should talk about alarming signals in the economy. The President and the Prime Minister held several meetings on this issue. Key signals are reduction in economic growth rates. A real slump in production in some sectors, reduction in investments in fixed capital make us think hard about what additional measures VEB and its subsidiaries could take to support the state’s efforts to counter such negative trends.
- Have you drawn appropriate conclusions?
- We can see that VEB is not a panacea and the only development institution in the country but the Bank could play a crucial role in breakthrough sectors through its investments in the real economy. I’d like to highlight the following point: economists say that the growth in banks’ loan portfolios is enough to get the economy functioning normally. But if we open these portfolios, we’ll come up against a very interesting circumstance. In 2012, 1.5 trillion rubles were spent on M&A transactions with Russian assets. This is twice the amount of commercial banks’ credits for fixed capital renovation. This means that capital flows from one pocket to the other and investments are not made in the real economy. The economy does not get enough long-term money and this is a problem the state should concentrate on using VEB’s capabilities.
- We’ve just got back to the loan portfolio…
- We hope to bring it to 800 billion rubles by the end of the year and under our strategy it is to amount to 850 billion rubles by 2015. In 2012, our loan portfolio increased by 42%, I believe we’d be able to exceed the target of 850 billion rubles. To tell you the truth, there are two constraining factors in increasing our loan portfolio. The first is capital adequacy ratio of 10%, the second – borrowing limits. To be within the set limits we should either increase our loan portfolio or increase our capital base. As far as our capital base is concerned we are unfortunately limited by our profits. Budgetary funds are used in a targeted way to fund specific programs although we understand that this is caused by budgetary constraints.
- It appears that a question of the Bank’s capitalization will arise soon?
- Sooner or later. We haven’t brought it up so far but it will arise when we come up against the need to meet capital adequacy requirements.
- When might this happen and how much money might you need? And what do you hope for, given substantial budgetary constraints?
- We are working on this issue with the Finance Ministry but it’s too early now to give any specific figures.
- If you don’t give figures one might think that you are asking for a lot of money.
- We have some time till August when we’ll get to know about amendments to the budget. We are sure to discuss them.
- Are you happy with your loan portfolio composition? There are different opinions on this account including those that there are many projects in it which are not closely related to VEB’s objectives?
- There are grounds here for being moody because VEB is being used as a quasi-budgetary instrument.
- As a rescue team?
- In a way, as an emergencies ministry. In the case that something can’t be funded from the budget or problems emerge in some sectors, there is VEB that has to come to the rescue. I’m not naming any names. Commercial banks and other innovation institutions invested in innovative production facilities but their products proved to be in no demand, the global market moved in a different direction. And they are asking the Government to get VEB to replace their investments with its own. We also receive letters from regional leaders: there is a very good project, very important for the region’s development but VEB does not take a positive decision. We offer them to fund an engineering stage, make a model and conduct a feasibility study. They want us to provide them with money. I’m sure that given such an approach any commercial bank wouldn’t agree to fund their projects including banks with state participation.
- How often do you receive such requests?
- We receive them quite often. And those who turn to VEB for money often stress the importance of social issues. For example, a head of a region comes and says, “I have an election coming up and a new plant will employ 1000 people, do you care about national interests? I’ll file complaints against you”. Thankfully, we, the RF government office and the presidential Administration think in the same way, they explain to those who ask for money for what purpose VEB was established.
- Can you name the governors who visit you?
- There aren’t many of them and I’m not going to give their names.
- What do you think should be done to change this sort of approach? Maybe it makes sense to change your organizational and legal form and dilute state capital?
- The only thing we can do here is to educate them in the proper way. Nobody is going to change the Bank’s organizational and legal form. And the world practice shows that the state should be the sole owner of the Bank for Development. But we also should operate in accordance with our Memorandum without expanding our functions endlessly and without having to perform functions that prevent us from carrying out our development mission.
- The Chairman of the Central Bank is to be replaced soon, should a regulator stimulate economic growth and how? What’s your opinion?
- It should and the Central Bank does it but within its powers and competence, that is, through monetary policy. We can feel the effects of its policy, here I mean lending against pledge mechanisms. We are worried a lot about credit rates. They depend not only on the Central Bank although the regulator could influence them in a more active way through inflationary expectations. Elvira Nabiulina also understands this, but I don’t think that she will bring revolutionary changes to the Central Bank’s policy. And do we need them at all?
- Don’t you recommend to change basic rates including refinancing ones?
- Refinancing rates are not main benchmarks for banks. Repo rates are more important for them. On the other hand, bank margins amount to tens of percentage points in consumer lending. Even if we take large banks including those with state participation, their net percentage margin amounts to 7%. This is a problem we have to think over. Any large foreign bank could envy such a margin, with its profits being a lot higher than those in Russian banks. Our margin is about 2%.
- And how does it change from project to project?
- It doesn’t change from 1.5% in one project to 10% in the other, it is about 2% and it changes within this range. As far as Olympic projects are concerned our benchmark is refinancing rate plus 0.4-1.6%.
- What projects are you interested in? What are your priorities now? For example, the Far East?
- In terms of development of territories there are three lines of activity: the Far East, the North Caucasus and Kaliningrad. And we are also going to go ahead vigorously with our core projects, which can bring about a technological breakthrough. These projects are in such sectors as space, information technologies, biomedicine and aviation industry.
- The Government places great hopes on TIF investment mechanism which provides for a return of investments through future taxes. What role will VEB play in this mechanism?
- The idea is that a private investor creating infrastructure synchronizes its action with an industrial investor which builds a production facility on this infrastructure. Additional taxes received from the project and comprehensive development of territories are to be then returned to investors. Here VEB can act as an investment consultant, prepare documents for lenders, raise funds to finance a project and help pay for pre-project work. There are many options for participating in such projects but it’s important to analyze and assess them properly.
- What projects are they? And why is it important to analyze them properly?
- The problem is that sometimes they tell us about projects worth 10 trillion rubles and 90% of them are not even applications but just ideas. And this is not the only problem. So far we have failed to understand how to synchronize functioning of local, regional and federal budgets with regard to TIF. For example, a comprehensive housing development project in the city of Kirov: 80% of expenses on infrastructure is incurred by the municipality but the local budget and the region receive only 20% of new tax revenues. So, as Alexandr Livshits said, the federal budget here should share taxes with local budget and regions.
- I know that another new investment mechanism is under discussion. Under this mechanism an investor entering into a complicated project together with the Russian Direct Investment Fund can receive debt financing from VEB to pay its share.
- So far the Russian Direct Investment Fund (RDIF) have participated in implementing projects with financial investors, for example, in the field of medicine, they took part in the “Mother and Baby” project. If RDIF comes to us and says it has an industrial investor in the greenfield, let’s work out a scheme together to provide a project both with share and borrowed capital and this doesn’t run counter to our Memorandum at all. I know that RDIF has several such greenfield investors in its pipeline and we’ll work together on searching attractive transactions for them.
- VEB is a main creditor of Olympic facilities construction. Will they be built in due time? Do you expect credits to be repaid?
- We have already extended credits worth 110 billion rubles till the end of the year the amount of credits will be about 220 billion rubles. As far as construction periods are concerned construction schedules are realistic, the construction will be completed by the Olympics. It’s also no secret that according to our estimates a significant part of projects is estimated to be unprofitable. Given the current model and market conditions we have serious problems with recoupment of investments. For example, in the Imereti Lowland one million square meters of hotels are being built. When the hotels are put on the market after the Olympics, it will be difficult to bring occupancy rate even to 60%. Many projects got a lot more expensive in the course of their implementation because of technological changes or strict environmental standards. We have no full project documentation on many projects, there are no confirmed cost estimates – all this confirms our doubts.
- Are there any projects that pose no problems?
- We have no doubts about the future of the Sochi thermal power station; the airport doesn’t pose any serious problems. But the situation is pretty tense with sports projects. As far as repayment of credits is concerned we received guarantees from all investors that in the case that problems emerged after the Olympics they would resolve them using their own funds. We have received guarantees from Olympstroy but these are budgetary funds and we really care about their future.
- You are the Board Chairman of the United Aircraft Construction Corporation (UACC), how do you size up the Corporation development strategy?
- At our last meeting of the Board of Directors we discussed the management’s report on the Corporation’s performance for 2012, the dynamics is positive. We – I mean the Board of Directors expect the Corporation to operate on a breakeven basis by 2015. Of course here government defense orders and advance payments on supplies play a very important role but not only they play such a role. The proportion of civil aircraft in UACC total sales in 2012 tripled and amounted for the first time to 10%. Governance of the Corporation’s structures is consolidated according to “one window” principle. This is not the case now when individual plants took unsecured credits at enormous interest rates from poorly known banks. And the strategy remains the same – it is aimed at creating a range of aircraft that are competitive not only in Russia but also abroad, above all in the countries where we haven’t lost our positions.
- To what extent is it true that you can surrender your position as Board Director to Sergei Chemezov and that Mikhail Pogosyan might resign?
- There is much talk. Sergei Chemezov and I as an independent director were nominated by the state to the Board of Directors, voting is to be held at the upcoming shareholders’ meeting. As to a position of director general a decision on it is to be taken in a collegial way. I for one and I think my colleagues have no reasons to question Mikhail Pogosyan competence. I haven’t heard about other candidates for a position of director general.
- The crisis left VEB with three banks. Are you going to sell or develop them?
- We are just finishing work on formulating a strategy, above all, with regard to Globex and Svyaz-Bank. 80% of work has been already done. A sale of banks to a strategic partner or through IPO is a distant prospect. We should prepare the banks’ assets for sale as we took the banks on our balance sheet. They have god assets for example Globex has Novinsky Passage and a shopping center in Novosibirsk.
- So, you are going to develop them?
- Yes, we are. In terms of strategy these banks are universal but each with its niche. Globex gives high priority to corporate customers although it also works with natural entities and is even involved in mortgage lending. Svyaz-Bank works with communications companies and with the Post of Russia on pension accounts. It’s also involved in military mortgage lending which is in the focus of our attention. The Bank accounts for the fourth of military mortgage lending market and is going to retain its position. We’ll capitalize both banks through entering into their capital directly and subordinated loans.
- We’ve just moved to the post. What happened to the idea of establishing a Postal Bank? They say that Alexandr Kiselev was against the idea but he’s left now.
- I don’t know to what extent he was against the idea. But necessary conditions for establishing a Postal Bank have not been created. They include transforming the Post of Russia into a joint stock company and agreeing upon a question of how the Post of Russia should be funded to purchase shares of a new bank.
- What stake can be sold to the Post of Russia?
- It’s a matter of independent valuation that nobody hasn’t made yet. The Post of Russia has made its own valuation and announced an unacceptably high price. And in the course of the discussion the Post of Russia stepped up its financial activity and entered into agreements with almost 30 banks. And it became possible to offer credit services to people through post offices. The idea is now put in cold storage. I don’t think that it is dead but there are no necessary conditions for pushing it forward and such investors as Nomos-Bank and Russky Standard appear to have become indifferent to the idea.
- Do you personally support the idea?
- I don’t see anything bad in pushing it forward.
- Alexandr Lebedev told you that he could buy out real property of Globex. Do you favor his proposal?
- We have never considered it seriously. We do not regard newspaper publications as offers. Lebedev has never made a real proposal.
- There is another “crisis bank” – Ukraine’s Prominvestbank. What do you plan to do with it?
- We plan to further develop it. Within a month we’ll additionally capitalize it for an amount of 350 million dollars. The bank needs additional resources to address the problem of bad credits it received from the former management. The situation in Ukraine is pretty unfavorable including problems with repayment of debts but we manage to get some debts repaid. Some fail to repay credits referring to personal connections; others just don’t want to pay. And then some say they are ready to take debts through paying 10% of their par value. The bank is among the largest six banks in Ukraine and is one of the most reliable banks. We have no complaints against its management. Now we are developing a mechanism for transferring to making regional payments in rubles.
- What did you purchase this bank for?
- A political decision was made. At that time the bank was on its way to bankruptcy, its potential was strong. But unfortunately we didn’t find all its skeletons right away and it proved to have more closets than we thought. In principle we bought this bank to work with major customers that had links with Russia.
- Some say the bank participated in making payments for gas.
- This is not the case. The fact is that main contracting parties of Russian companies were served in this bank. Moreover, deposits started to outflow from the bank, the situation posed a threat to the whole Ukrainian banking system and Russian banks operate there. By the way we bought the bank for 250 million dollars in November of 2008 and as early as in April Italians offered to the bank’s owners to buy it for 2.5 billion dollars. They refused because they thought it cost at least 4 billion dollars. The bank was controlled at the time by the former Chairman of Ukraine’s National Bank who privatized it out of hours.
- Did you discuss an idea that VEB would take Rosselkhozbank’s problem assets worth 150 billion rubles on its balance sheet? Are you still discussing this idea?
- No, we are not.
- In 2010-2011, VEB bought from E.On ADR 2.7% of Gazprom’s capital for an amount of more than 100 billion rubles. Now the stake got a lot cheaper. What do you propose to the Government to do with it?
- Since its purchase its price fell 30%. So, we didn’t make any proposals leading to losses (that is about a sale) to the Government. We’ll wait until its price grows. But it’s not only a matter of price. VEB’s 3.6% stake allows the state to control the company.
- At some point the stake’s price was higher, were you offered to sell it then?
- Yes, we were. If we had sold the stake in April of 2012, we would have made a profit of 30 billion rubles. But at that time VEB’s Supervisory Board believed that it made no sense to lose the asset.
- Are you interested in buying the BAT-Yava factory? If you are, what are your plans for the plant?
- Yes, we are but only in connection with Slava facility which we received in the course of rehabilitating Globex. BAT-Yava is next door to Slava. We are going to build hotel-office buildings there including living apartments and there is a tobacco factory nearby and it smokes. So, it’s easier to buy out the asset and develop the territory in a comprehensive way.
- How much are you ready to pay? Have you already made a proposal?
- I for one haven’t discussed this issue with BAT-Yava’s owners.
- VEB approved a credit worth 60 billion rubles up to the year 2020 to AvtoVAZ. Has the plant started to use the funds and what projects are they going to fund with them?
- So far, we have a decision concerning limits. Now we are examining individual projects comprehensively, these are modernization designed to produce a new rage of cars, expansion of production including a purchase of equipment and retooling of shops.
- What other projects do you have in the automotive industry, are you to extend credits to other players?
- We have quite a few projects in the automotive sector. To some extent we cooperate with Russian key players. Our key partner is FordSollers and Sollers’ projects in the Far East. As to them we are funding three production facilities including assembly, manufacturing of engines and components. We are also working with GAZ Group specifically on a project in Yaroslavl (the Yaroslavl engine plant). But these are not new credits, all the decisions were already made.
- Did the crisis in Cyprus affect VEB or your customers?
- It didn’t affect our bank at all, we are not working with the Bank of Cyprus and Laiki. We make interbank payments with the Russian Commercial Bank, we didn’t have any problems with it. Now we are conducting inventory auditing to see how the Cypriot crisis affected our customers. We haven’t seen any worrying signals so far.
- How do you feel about accusations against Anatoly Ballo over the alleged abuse of office in connection with a 14 million dollar credit to Eurasian?
- Recently the Presidium of the Moscow City Court made a ruling that a criminal case against Anatoly Ballo had been opened illegally and sent the case materials for a new consideration. This says a lot about the case. No damage was caused to the Bank, the credit was repaid. Criminal cases were closed with regard to two suspects.
- Can you comment the situation with Zarechye-2?
- In 2006, Vnesheconombank extended a credit to LLC Zarechye-2 for the construction of a residential compound in the Odintsovo district of the Moscow region. At present, the project has not been carried out and there is a threat that the credit will not be repaid. Vnesheconombank informed LLC Zarechye-2 repeatedly that it must fulfill its obligations under the credit agreement. Considering that the borrower failed to fulfill a number of obligations under the credit agreement Vnesheconombank demanded the borrower to repay the credit worth 170 million dollars. Later on Vnesheconombank appealed to an arbitration court to protect its interests. Moreover, as a result of conducting construction and financial-accounting examinations on the Bank’s initiative, facts of credit funds embezzlement were revealed. In relation to this Vnesheconombank appealed to law enforcement authorities requesting them to check if the credit was used properly and open a criminal case against officials of Zarechye-2 and its beneficiaries over the facts of monetary funds embezzlement. The State Corporation intends to take all legal actions to protect its interests.
- Why did you decide to rebrand VEB?
- We decided to rebrand not only Vnesheconombank but also the whole of Vnesheconombank Group being aware that we’ll be together for a long time. So, visual representation should not be associated with old symbols and be in line with an image of the National Bank for Development. The current brand is outdated. Moreover, Vnesheconombank Group is composed of various companies; they have different stylistics and position themselves differently. All this creates obstacles to communication and makes it difficult to get a realistic picture about VEB Group’s activity as a whole and opportunities our subsidiaries open up for Russian business. We hope to use synergy of all participants in Vnesheconombank Group in order to create strong brand – VEB. As to transferring to laconic abbreviation – VEB, its new graphic presentation and its new company style will be recognizable, modern and dynamic. And abbreviation VEB has been used for many years by us and the mass media.