“Exports Support is a Top-Priority Line of Activity for us”

2 september 2013 года

The Russian authorities are fulfilling their promise to create conditions for promoting Russian high-technology products to foreign markets by minimizing risks of financial losses as well as by improving conditions for funding exports on the part of banks. The creation of a comprehensive system of the state’s credit, insurance and guarantee support for Russian industrial exports is nearing completion. A key role in this system is assigned to Vnesheconombank. Director of the Export Financing Department Daniil Algulyan told AviaPort Agency about basic elements, mechanisms and instruments of the system to insure exports against entrepreneurial and political risks as well as about VEB’s role in supporting exports.

-To what extent is an issue of exports support topical for Russia?

-Russia is an integral part of the world economy and is permanently among the ten largest exporter countries. In 2012, the volume of Russian exports reached 18.5 trillion rubles. Exports account for a significant part of GDP, create jobs and increase production output. Promoting Russian companies internationally is a major factor of the country’s development. Despite the impressive growth in overall volumes of exports, we still depend significantly on exporting raw materials. A key challenge to further development of not only exports but also Russia’s whole economy is to urgently increase a proportion of high-technology products and services. This is a very difficult challenge. Nowadays, we are facing fiercer competition from producers from other countries.

At the same time, in many countries they put in place government export support systems. These instruments create additional advantages for these contries’ producers. For example, OECD countries commit in total more than 100 billion dollars a year in the form of government support for export mid and long-term financing. In this situation many Russian companies have to operate on international markets in unequal conditions. We should create a Russian exports support system to change such a situation.

-What VEB’s subsidiary institutions can participate in using mechanisms for supporting exports?

-A universal exports support system is being set up as part of Vnesheconombank Group. It will be comprised of VEB itself (the Export Financing Department) as well as a number of subsidiary institutions: OJSC the Export Insurance Agency of Russia (EXIAR), the largest Russian leasing company OJSC VEB-leasing and Roseximbank – an agent bank for providing government guarantees. It is assumed that each component of the structure would perform its special complementary functions.

EXIAR for example has already provided support for some Russian exporter companies. At the beginning of this year, Russian company RUSELPROM agreed to supply equipment and spare parts for modernizing two Cuban thermal power stations. EXIAR provided insurance coverage against commercial and political risks for this transaction. In its turn, RUSELPROM received funding to supply equipment to at a Russian bank by presenting its insurance agreement with EXIAR as a security for the credit.

Moreover, in spring of 2013, Rostselmash agreed with Kazakh company KazAgroFinance to export several hundred vehicle sets of grain harvesters to be assembled and leased out to local agricultural companies. Russian Rosselkhozbank extended a five-year credit to KazAgroFinance to purchase the grain harvesters. EXIAR insured this credit and it became the first insured long-term credit in Russia’s history for the export of agricultural machinery.

-Vnesheconombank’s subsidiary banks, namely, Prominvestbank, OJS BelVEB are operating in Ukraine and Belarus. We rely on their support in terms of enhancing trade and economic ties with the corresponding partner states. So, almost a full range of export support financial instruments is being formed for Russian supporters. In order to boost the system’s efficiency we are now introducing a one-window principle which will make it possible to significantly speed up procedures for processing applications for funding.

-What export support instruments are being used by Vnesheconombank?

-These are traditional financial products including credits to foreign buyers (export finance) to purchase Russian products, works and services as well as credits to Russian exporters (pre-export finance) to cover expenses on manufacturing products to be further exported.

Vnesheconombank also extends guarantees (due performance guarantees, advance repayment guarantees and others), sureties and other instruments for securing Russian exporters’ obligations to foreign buyers. Vnesheconombank’s wide international cooperation as part of extending export support guarantees allows Russian companies to participate in export projects in countries with high political risks and with objective obstacles to implementing contracts as well as in the countries where Russian commercial banks are not present.

-VEB and Roseximbank are responsible for extending export guarantees. In what way do their corresponding instruments differ? Why is it necessary to receive an export guarantee from VEB and export insurance from EXIAR? What risks do these instruments cover?

-Export guarantee and insurance products offered by Vnesheconombank, Roseximbank and EXIAR are designed to produce a synergetic effect. Vnesheconombank’s guarantees (for example, advance repayment guarantees, tender guarantees and due performance guarantees) are extended to secure Russian exporters’ obligations to foreign buyers. EXIAR’s insurance policies are designed to insure risks of foreign buyers of Russian products from exporters and creditors, for example, from Vnesheconombank. Roseximbank’s key function is to act as the agent bank for government guarantees. So, there are three various financial instruments each of which is important for supporting exports of Russian companies.

To what extent is the Bank geared to use best practices of leading foreign development institutions?

-In the course of setting up an exports support system we thoroughly study and analyze international best practices of both economically developed countries and growth-leading economies. In the last decades, they have put in place efficient exports support models in many leading exporter countries. Many foreign best practices prove to be useful for us. Nevertheless, we should not carbon copy foreign models but form an efficient Russian exports support system. Government exports support is regulated internationally that is why Vnesheconombank takes into account WTO and OECD rules upon developing new products.

-What was the reason for establishing an export financing department ?

-Non-raw materials exports are potential growth point and an important factor of diversifying the Russian economy. So, it’s not surprising that this line of activity became important for our development institution. In 2007, industrial exports support was included in Vnesheconombank’s main lines of activity. We have done a lot in the past years. The Bank participated in implementing major export projects, above all, in power engineering industry, aerospace sector and defense industrial complex. The Bank’s export finance portfolio amounted to 83 billion rubles as of late July 2013. From 2007 to July of 2013, the Bank has extended guarantees worth 164 billion rubles in favor of foreign purchasers of Russian high technology products. Nevertheless, we hope that in the coming years we’ll be able to significantly increase funding volumes.

Our own and foreign business experience shows that export finance is a very specific line of banking acclivity. So, the establishment of a separate export support department is designed to concentrate sectoral, country and financial competence on efficient comprehensive support for Russian exports.

-Could you tell us in more detail about the department’s mission and objectives?

-Vnesheconombank’s new special structural subdivision, namely, the Export Financing Department was established only in May of 2013. Its main functions are above all to extend export credits and guarantees and secure Vnesheconombank’s participation in projects implemented by Russian companies abroad. The Department is also responsible for exports support activities in Vnesheconombank Group. We are developing a range of financial products that are supposed to provide efficient support and level playing field in funding Russian exporters on highly competitive foreign markets.

-One of the Department’s main objectives is to support aviation industry’s exports. What sort of support mechanism is it? How is it going to be applied?

A key instrument is target funding of foreign purchasers of Russian aircraft. We often use credit-leasing schemes as a structural financing instrument.

Vnesheconombank’s important advantage in this sort of projects is its  capability to extend long-term credits as well as its competence and experience in financing exports in various parts of the world. All these factors allow us to be a reliable and long-term partner for Russian exporters.

-Would you tell us about supporting Russian aviation industry’s exports? Are other foreign and Russian banks going to participate in funding supplies of Russian aircraft?

-At present, Vnesheconombank is considering a whole number of applications for funding export supplies of aircraft to Latin American, African and Asian countries. I’m sure that in the near future I’ll be able to tell you about new specific transactions.

In a number of cases we work together with other leading Russian and foreign financing institutions as part of participating in implementing some planned projects.

Providing support for Russian aviation industry’s exports is one of our top-priority lines of activity. A whole number of promising and ambitious projects are being implemented in this sector. We are actively cooperating with Russia’s aviation industry in securing reliable and stable funding of Russian exports and we’ll be happy to expand the cooperation.


It’s Time to Ease Limitations

19 august 2013 года

Alexandr Ivanter

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.


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