Infrastructure a priori is not very attractive for commercial banks as infrastructure development projects are riskier and designed for long periods. So, VEB expects that regulatory limitations on raising financial resources to fund infrastructure projects will be eased.
Vnesheconombank sets yield benchmarks for the first echelon of ruble denominated bond issues and it is among the ten largest Russian Eurobond issuers. Why are market bond issues so important for VEB, isn’t it too risky to expand non-residents’ presence on the government bond market and in capital of state-run banks and to what extent is interface of the Russian export support system user-friendly? We are talking about all this with Vnesheconombank Deputy Chairman Alexandr Ivanov.
- In late July, Vnesheconombank placed a debut stock market ruble-denominated bond issue. How did the placement go? Why did you choose this instrument?
- The placement was a success. Upon opening a bid book we planned to borrow 10 billion rubles for a period of three years but the demand exceeded 50 billion and we decided to double the placement volume. The borrowing cost also proved to be pretty favorable. Now, the bond issue is being traded at a yield rate of 7.7 percent per annum, with a premium of about 160 basis points in relation to MinFin bonds of similar maturity and this is a very good indicator – one of the best for corporate bonds of first echelon issuers.
These stock market bonds’ specific feature is that they have higher liquidity which is determined by a whole number of covenants (terms under which bondholders can start to negotiate early repayment with the issuer) attractive for investors and ensuring the bonds’ better protection. Moreover, we envisaged a whole number of additional obligations on information disclosure.
- Did non-residents show interest in the bond issue?
- Foreign investors’ aggregate demand was about 7 billion rubles. This is a good result as earlier investors used to enter into our ruble-denominated bonds in homeopathic quantities – as a rule through their subsidiary Russian banks just as part of treasury operations. There are plans that this year, non-residents will be able to purchase Russian issuers’ bonds through trade and settlement systems Clearstream and Euroclear. As a result the bond market liquidity in any case liquidity of first echelon bonds increased significantly - already on expectations of new investors. And we could feel it in the course of the bond placement.
- I have been recently struck by the Central Bank’s information: by mid-year a proportion of non-residents in MinFin ruble-denominated bonds reached 30 percent.
- Didn’t you expect this?
- Foreigners had a similar proportion in GKO in 1997 on the eve of the Asian crisis and the rapid shedding of bonds by non-residents was a trigger for a default on government bonds in August of 1998. Aren’t we making the same mistake now? Aren’t we excessively liberalizing access to our market?
- In fact, there are no grounds for panic. First, the scales of the markets are incomparable. GKO’s volume in circulation was 40 percent of GDP on the peak of the market, now, the OFZ portfolio is 3.3 trillion rubles and this is about 5 percent of GDP. Second, the state of the federal budget and government finances is significantly better today than in 1997 and especially in 1998.
- Doesn’t it embarrass you that 44 percent of Sberbank’s shares are in non-residents’ hands?
- No, it does not. Sberbank’s controlling stake is still in the Central Bank’s hands. Key decisions are taken with due regard to the principal shareholder’s opinion.
- VTB can boast of its anchor investors. By the way, its aggregate proportion of non-residents in the capital is very substantial – more than 30 percent.
- Long-term foreign investors are among shareholders both in Sberbank and VTB. But as you know market is market. Nowadays capital has no borders, it flows in and out. But I am sure that for the time being system-forming banks should be controlled by the state. And the fact that foreign investors enter into capital of our companies and our banks is linked not only to risks. As a rule they bring best practices of corporate governance and tend to discipline management.
- It’s interesting that the format of assuming Russian risks by foreigners is changing. The crisis reduced substantially the total number of banks and banks’ stakes controlled by foreigners on our market. At the same time, non-residents’ presence in capital of the largest state banks and in the aggregate portfolio of government bonds has increased dramatically. Instead of enjoying imperfections of the Russian market and business climate you can purchase a few OFZs of Sberbank and VTB by clicking mouse several times without leaving your office in Luxemburg or in London and live greatly.
- There is such a tendency now. Nevertheless, a number of Central and Eastern European countries where all commanding heights had been in foreigners’ hands since the 1990s suffered a lot more in the crisis. They experienced a colossal capital outflow through banks into their maternal markets, lending and especially long-term lending imploded. So, I would describe the structure of our banking system as a balanced one. Foreigners have access to our capital markets through subsidiary banks and there are no limitations on their capital movements but at the same time, the state sector is playing a dominant role.
- Let’s move back to VEB. What’s your program of market borrowings in the current year?
-In the year 2013, a target volume of raising financial resources is to remain at last year’s level and is about 7-8 billion dollars. About a half of this sum is public debt: eurobonds and local bonds and the other part is comprised of non-public instruments such as syndicated loans, bilateral credits, trade and tied financing. Cost of raising resources plays a top-priority role for a bank for development that is why a choice of raising funds and their volume depends largely on market conditions.
Since the start of 2013, we have already raised funds in the amount of about of 3 billion dollars. We have recently registered two issues of domestic euro-denominated bonds at the Moscow Interbank Currency Exchange. This is a debut issue on the Russian market. We saw a pretty strong demand among domestic investors for such instruments. Now we are working actively with the Moscow Exchange on implementing this project and conducting consultations with market players. We hope to make a bond placement until the end of the year.
- What are VEB’s long-term target bond funding indicators?
- We plan to bring a share of market bond borrowings to one third of a total volume of resources to be raised. This objective is to be achieved in the longer term.
Regrettably, as opposed to many foreign development institutions, Vnesheconombank has to operate in a rather complicated situation. Under the Law on the Bank for Development, VEB does not have the state’s guarantees for its obligations. Moreover, VEB is not funded from the budget on a regular basis for corporate-wide purposes – there are only target deposits of the Central Bank, the Finance Ministry and the National Wealth Fund tied to a number of specific projects. VEB is also barred from raising deposits from natural persons and companies except those cases when this is done under investment projects. So, as far as raising funds are concerned, VEB has to operate on the market and compete for financial resources with other development institutions as well as with Russian banks and corporations.
- And with the Finance Ministry to some extent?
- Our Bank is a responsible borrower and so we coordinate our activity on the public debt market with the Finance Ministry.
- How do you do it?
- These are regular working consultations on the phone. There is no formal intervention by the Government in VEB’s operational activity.
- At the July conference organized by VEB in Moscow, head of Brazil’s Development Bank BNDES Luciano Coutinho said that in the current complicated global macroeconomic situation it was development banks’ bonds with government guarantees that were becoming the most important instruments for long-term funding.
- I’m glad that people from different countries think in the same way and say the same things being aware that in the period of crisis investments in infrastructure and their long-term funding are very important. These are taxes, employment. This is a quality of people’s life. This is caring for future generations.
- Absence of a sovereign guarantee for loans is really a serious limitation, isn’t it? If it was removed what would it change for you?
- All is pretty simple: we could increase borrowing volumes substantially and reduce borrowing costs. Although our Bank is a quasi-sovereign borrower without the state’s formal guarantees our bond placement costs are a lot more expensive than those of the Russian Finance Ministry.
- The QE-3 program is expected to be phased out in the U.S. How will it influence the international bond borrowing market?
- These expectations are already exerting pressure on US treasuries quotes. Ten-year treasuries’ yields have increased by more than 40 percent from 1.8 to 2.8 percent per annum from May till now. Increased yields of American government bonds lead to increased yields of dollar denominated eurobonds of other market players on international debt markets.
The factual phase-out of the QE-3 program might have a short-term negative effect in capital markets and market for divestiture of risky assets including Russian debt instruments and, above all, of second and third echelon issuers. We haven’t seen so far any significant direct threats to Vnesheconombank’s borrowing costs.
Moreover, it should be noted that the reason for discussing phase-out dates of the stimulus program was a gradual recovery of the U.S. economy including labor and real estate markets. In the future positive macroeconomic data from the U.S. could provide support for capital markets. Moreover U.S. FRS basis rates will remain at previous historical minimal rates (0.0-0.25 per annum until unemployment rate in the country goes down to 6.5% (the current rate is 7.6 percent) thus limiting further growth in debt instruments’ yields.
- Despite this positive information, Russian banks might use the tightening of monetary policy in the U.S. as an excuse for increasing credit rates for corporate borrowers?
- We shouldn’t rule out this scenario. To a certain degree this will be a natural selection however cruel it might sound. In the situation of more limited access to financial resources only competitive projects and borrowers will survive. Financial discipline, balance quality and quality of corporate governance will come to the forefront.
But I’d like to stress that we shouldn’t approach infrastructure projects with standard market requirements. Infrastructure a priori is not very attractive for commercial banks as infrastructure development projects are riskier and designed for long periods. So, we hope that in the situation of hardening access to liquidity the state and regulators would step up national development institutions’’ activity. As to VEB we hope that our regulatory resource limitations will be eased.
- Let me ask you a question in the fantasy genre. You tend to place bonds; they are normal quasi-sovereign instruments even without formal government guarantees. Why don’t you use pension funds of the so-called “undecideds”? VEB is responsible for managing these funds as a state trust management company. These funds are reliable instruments; they are no less reliable than for example RZHD infrastructure bonds in which VEB has recently started to invest pension funds.
- In principle, I see no problems here. I asked my colleague this question. It would be logical for VEB as a main bank responsible for funding infrastructure in Russia to use pension funds to this end on the terms of recoverability and serviceability. But this issue is in the legal domain. We’ll have to deal with a classical conflict of interests – one and the same institution will combine functions of issuer and investor.
Nevertheless, the Bank’s investment declaration as a state trust management company is being expanded. Today we are allowed to invest not only in government bonds but also in corporate bonds.
Moreover, President Putin said that up to a half of the National Wealth Fund’s financial resources (the amount of funds in it was 86.9 billion dollars as of early August) could be used to fund infrastructure projects inside the country. VEB jointly with its subsidiary Russian Direct Investment Fund and the Economic Development Ministry is developing a mechanism that would make it possible to use financial resources of the National Wealth Fund to finance these projects with minimal risks.
- Last year the Export Insurance Agency of Russia (EXIAR) incorporated in Vnesheconombank Group started to operate. What results has it achieved as of today?
-The Agency was established in 2011. Since it was established the Agency was designed to create a special regulatory framework to insure export credits against political and commercial risks and to operate in the interests of domestic exporters.
In late December of 2012, Russia’s state guarantee for EXIAR’s obligations was registered with the support of Vnesheconombank for a period of twenty years. Factually, it was at the time when EXIAR became a full-fledged state export credit agency of Russia.
As of today, export support has been provided for more than 30 projects and contracts for a total amount of more than 16 billion rubles and detailed preparatory work is being performed with regard to 20 projects worth about 70 billion rubles.
In the current year EXIAR has supported a transaction on supplying sections of steam turbine condensers to Ukraine. Moreover, the Agency covered risks under an export credit to fund supplies of Rostselmash products to Kazakhstan. I’d also like to highlight a project to insure supplies of equipment and spare parts manufactured by concern Ruselprom and intended for modernizing Cuban thermal power stations.
- Can we talk about synergy of EXIAR, Roseximbank and Vnesheconombank itself in supporting Russian non-raw materials exports? Are there all necessary export promotion institutions in Russia?
- In my opinion we have now created all necessary components of the export support system. Vnesheconombank is responsible for extending export credits and guarantees. We have recently established a special export funding department which is fully involved in performing this function. We have EXIAR responsible for issuing insurance policies for export credits. And guarantees not only for VEB’s credits but also for credits of all Russian and foreign banks which are ready to fund Russian exports. There is Roseximbank responsible for extending government export guarantees as the agent for the Finance Ministry. There is VEB-leasing, a leading leasing company in Russia owned by Vnesheconombank. It participates in a number of major international leasing transactions.
But there is a problem that we are addressing now. Here I mean segmentation of export promotion institutions, and the absence of a clear-cut interface for domestic export companies. We decided to create an interface in the format of “one window” for any exporter irrespective of its size and range of export products to be able to turn to Vnesheconombank’s specially established department. Then its application will be directed for its intended purpose depending on the exporter’s needs and specific activity and the exporer will be able to gain access to a whole range of export support products we have at our disposal now.
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.