Text: Elena Shmelava
To enhance the development of PPP projects in our country we must make consistent efforts to promote them into the market.
The main problem of developing PPP projects market in our country is not associated with regulatory difficulties but with the absence of administrations’ project activities in this format believes acting Director General of the Federal Project Finance Center, Director of Vnesheconombank’s PPP Directorate Alexandr Bazhenov. He outlined his point of view to Russian Business Gazeta (RBG).
Do you think that PPP can improve the economic situation in the regions?
PPP is not a panacea and a goal in itself. It’s an instrument with the help of which regions and municipalities can address their objectives more efficiently or more qualitatively or more rapidly. Compared with Great Britain, France and Germany we are about five years behind in terms of institutional development. They were quicker to understand PPP’s role as a systematic instrument for performing the state’s duties to develop regions and cities with engaging private business as a partner. PPP projects’ volume as compared with budgetary government and municipal purchases of products and services accounts for 10-15% on average. In Britain for example it was 20%, now it’s about 10%, the largest proportion of more than 30% is in Italy. Russia has a great potential although PPP projects proportion amounted to 5% in individual years. Only few proposed PPP projects were implemented. At the same time regulations providing for the procedure of regions’ participation in forming and implementing PPP projects were approved in 64 regions. This made it possible to set goals and provide his instrument with necessary resources. But we have to learn to use this instrument. The fact that few PPP initiatives are converted into real results demonstrates that the main problem of developing PPP projects market in our country is not associated with regulatory difficulties but with the absence of administrations’ project activities in this format. PPP is regarded as a magic stick – you just announce a project and wait for private businessmen to come and do everything.
Why does this happen?
-There are two reasons for this. PPP is a very intensive, difficult and risky work. At the local level people run risks when they are putting a PPP initiative into effect. At an initial project stage there is an objective risk that a project won’t reach an implementation stage and this is a risk run by people who occupy high-ranking administrative positions and spend budgetary funds to prepare a project in such a format. They risk being punished in case of failure. And at the state administration level the use of this instrument is not really planned and this demonstrates that few financial resources are centrally invested in preparing PPP projects (except for transport sector) (the recent example is the development of the Far East) – not a penny is budgeted by federal and regional executive authorities for preparing projects and holding appropriate tenders for engaging private investors and for supporting municipal authorities for these purposes. And this process should be structured and managed.
How do projects come from regions?
-For our purpose we can divide them into two categories: projects for which we can raise private investments only through public tenders and projects that can be implemented as part of comprehensive development with private investors. In our aggregate portfolio a third of applications account for transport infrastructure projects. They include building by-pass highways, transport networks inside regions, bridges and airports. Comprehensive territory development projects account for 16% of our portfolio they include cluster industrial parks, agro-parks, projects of the Investment Fund, special economic zones, comprehensive development of tourism infrastructure. We believe that the PPP projects market will grow through the development of social infrastructure especially in the public health sector. Housing and communal services might become a major and important market forming projects in environment protection and energy efficiency but this sector is rather poorly regulated and capabilities of municipal budgets to assume risks are institutionally limited.
How long does it take to prepare an investment project?
-One-two years to organize a process of project preparation, the period to prepare a project and up to a year for financial closing. All in all from three to five years. During this period of time authorities, market and budgetary conditions might change and a cycle might be delayed. It also takes a lot of time to agree upon changes in budgetary and tariff policy, allocate and register plots of land and ensure property registration. If government and municipal authorities work like a clockwork, a period from a project conceptual stage to an implementation stage might be reduced to 1.5 years, that is, by two-three times.
What’s the mission and specifics of the Federal Project Finance Center (FPFC)?
-As an operator of Vnesheconombank’s program “Funding Assistance for Urban and Regional Development Projects” FPFC is designed to provide financial support for the most vulnerable stage of investment projects – a concept design stage. We should share risks of forming a project with regional and municipal authorities and be a systemic institution as the Bank for Development. Our mandate covers six sectors within the competence of government authorities: comprehensive development of territories, transport and social infrastructures, energy efficiency, state administration infrastructure. Factually, during the first year of the Program’s implementation our experience in working with regional and urban PPP projects was limited and therefore our capabilities of what risks we could assume were limited too. So, FPFC pursued an extremely conservative policy: it extended loans against security and formed a portfolio of projects to be financed against assignment of rights of claim to constituent entities of the Russian Federation and state corporations. But the main objective was to participate in preparing projects sharing risks with regional and municipal authorities. If a region wants to ensure more efficient, rapid and qualitative economic growth to be able to address social problems than we are supposed to be a welcome partner. For PPP projects to be successful we need expertise and this expertise does not accumulate inside a region. An administration takes a decision on a concession for the largest water channel once in 25 years. This sort of expertise accumulates from region to region within the whole market. So, we must such partners that assume risks associated with feasibility of decisions on addressing issues of regional and urban development. To assume this risk we need a developed market for investors that participate in a project. Now PPP projects categories of investors have formed only in road projects but this is not the case in the housing and communal services and social infrastructure: although many are interested in such projects there are no clear-cut business models that could be replicated from region to region.
There’s a lot of talk about PPP but there are few PPP projects themselves. I’m getting an impression that this mechanism is being imposed from above.
This mechanism is being offered to business but in a bad way. If a PPP project is offered, business can always assess its acceptability in terms of sharing risks and profitability. Business makes money and it has certain target profitability on invested capital. We rely on our expertise when we form and structure projects, optimize risks, chose an appropriate project funding model. And this plays a decisive role. Without addressing this matter we have a fork of the two wrong roads. If you follow the left path you’ll get a private partner without obligations, without competences and without non-budgetary and non-tariff investments. This is similar to the way concessions are developing – there are more than 800 projects but nobody knows who raised what. If you follow the right path you’ll get PPP in form but without obligations on the part of authorities, that is, imposing a burden of social obligations on business without any compensations and perspectives.
What should you do?
To enhance the development of PPP projects in our country we must make consistent efforts to promote them into the market. If a project is profitable investors will be interested to participate. And we should structure it in the right way for it not to prove to be too expensive. Studies show that in case of launching a stable proposal the cost of a risk of participating in funding projects starts to diminish in time. For example, in China development plans provide for putting 25-30 projects on the market per year in certain sectors. And expected profitability on invested capital is pretty high at the beginning, and then in the ensuing years it starts to go down. So, it’s not a matter of money and cost of resources it’s a matter of government infrastructure development policy duration.
The draft federal law on PPP is not clear-cut. Can it really change the situation?
-You might be right. I have a feeling that all separate parts are quite right but in its entirety it’s difficult to understand how it works. There is no doubt a law on PPP will be able to work if it will be based on a certain economic ideology. This law should be considered together with other initiatives of the Economic Development Ministry and Vnesheconombank in particular those on disseminating a model of payment for accessibility to all potential objects of concession agreements and on forming a budgetary source of this payment or payments under PPP agreement s as part of additional incomes of the budgetary system from comprehensive development of territories through a mechanism of the Investment Fund. Then both PPP (greenfield) and concession (brownfield) will be applicable both to commercial projects (with payments from commercial activities) to projects on ensuring universal access to infrastructure (with payments from the budget given linkage with projects on ensuring economic growth) as well as to pension funds and banks. The quality of this activity should be guaranteed by centralized expert examination of proposals made by regional and municipal authorities for justification of using PPP (concessions) compared with state purchases according to a budgetary efficiency criterion as well as proposals for selecting tender criteria to maximize budgetary effect and for justification that a project should be funded by institutional investors on the terms of sharing risks. Centralization of such expert examination should ensure risk management of the budgetary system’s uncontrolled off-balance obligations, given mass use of PPP. Expenses on such expert examination, its quality and mobile adaptation to new regulatory conditions should be jointly guaranteed by institutional investors as part of non-budgetary development of infrastructure.
Vnesheconombank Chairman Vladimir Dmitriev’s Interview to the TV Channel Russia 24 (the 12th International Investment Forum Sochi-2013)
HOST: Good evening Vladimir Alexandrovich.
Vladimir DMITRIEV, Vnesheconombank Chairman: Good evening Alexei.
HOST: I’d like to start with a theme that is being discussed here extensively. Naturally, it is being discussed in the context of Prime Minister Dmitry Medvedev’s address at plenary session and before that he had written an article in a central Russian business newspaper. Discussing economic issues in this article he suggested a measure in which Vnesheconombank should participate, that is, to support small and medium-sized enterprises using financial resources of the National Wealth Fund. What sort of scheme is it? What kind of mechanism is it? What are the terms and conditions? Would you tell us about it, please?
Vladimir DMITRIEV: We are really happy that Vnesheconombank is still regarded by the Government as an enforcer of the government’s policy of supporting small and medium-sized enterprises. And in this sense the Prime Minister’s article was not an exception. Dmitry Medvedev has touched on the theme that we are discussing and we are also discussing various approaches to and various models of supporting small and medium-sized enterprises. Vnesheconombank is included in this system on its own and through its subsidiary bank – SME Bank. We have fully implemented a program of supporting small and medium-sized enterprises through a mechanism for funding regional banks which in their turn provide support for SMEs. And this takes place in combination with the preferential funding of small and medium-sized enterprises involved in the innovation sector.
A guarantee mechanism has started to operate: guarantees are extended from the federal budget to Vnesheconombank and it in its turn extends guarantees to SME Bank and then SME Bank puts together a pool of banks that receive our support. And we are entitled to refinance credits through the refinancing system of the Central Bank. A Federal Guarantee Fund is being established now. So, small and medium-sized enterprises are provided with significant funds. And now the Government has proposed to use financial resources of the National Wealth Fund. These funds in the amount of 100 billion rubles are to be extended to Vnesheconombank at an inflation rate plus one percentage point. Vnesheconombank works with major banks above all banks with state participation that have extensive branch networks for supporting above all medium-sized entrepreneurs. This theme was discussed at today’s plenary session and at other forums as well as at a meeting between the Prime Minister and the business community. There are problems associated with the fact that SME Bank does not reach medium-sized enterprises through its support programs. Vnesheconombank has lower limits with regard to funding a project – its value is to be no less than 2 billion rubles and the Bank’s participation is to be no less than one billion rubles. This prevents medium-sized enterprises from receiving preferential funding. We believe that by launching this new program using financial resources of the National Wealth Fund we are sure to reach medium-sized enterprises and provide them with significant financial resources and above all by focusing on their innovation lines of activities.
HOST: The second theme at issue here is a possible additional capitalization of the Bank for an amount of 1.1 trillion rubles. Naturally, we should keep in mind that Vnesheconombank is not a typical commercial bank but a bank with a significant social component, you have already mentioned it. But I’d like you to elucidate this mechanism. Why is this additional capitalization needed?
Vladimir DMITRIEV: Those who’ve been following the theme and Vnesheconombank’s activity attentively sometimes do not really differentiate between Vnesheconombank as a development institution which operates on the basis of a special law “On the Bank for Development” and standard commercial banks and banks where the state represented by the Central Bank or the Federal Property Management Agency is a core shareholder. Vnesheconombank like any other development institution has certain limitations on lines of activity. As our Bank is not a joint stock company we are not entitled to place additional share issues, engage a strategic investor or place shares on open, public markets. Financial contributions of the Russian Federation are the only base for our capitalization.
Moreover, we are not entitled to raise cheap liabilities in the form of legal and natural persons’ deposits. But it is more important that Vnesheconombank as a development institution should be highly instrumental in funding major investment projects and developing the economy. And when we raised a question of the current status and an adequate role of Vnesheconombank in the development of the Russian economy in the future we compared it with such leading national development institutions as Germany’s Bank For Development (KfW), the China Development Bank and the Development Bank of Brazil. These banks’ share in aggregate investments in core capital ranges from 5 and more percent. And our share is less than 2%. So, we say that Vnesheconombank’s influence on our country’s economic development should be increased and our potential is great. We have arrived at the following conclusion: our Bank is in need of support for it to increase funding of major investment projects.
We have to meet terms and conditions determined by our financial declaration and covenants in our credit agreements and upon placing bonds on the markets we have to meet capital adequacy ratio of 10%. From the start of the year it has gone down from18% to a little less than 11%. So, if we are to meet this critical ratio and at the same time expand our loan portfolio and investment activity we are convinced that we need various forms of the state’s support and not only a new financial contribution.
Various measures of the state’s support include guarantee mechanisms, potential commitment of financial resources from the National Wealth Fund and finally applying special approaches to development institutions supported by the state in terms of their financial activity key indicators and above all capital adequacy ratio.
There is no doubt that we rely on the state’s support but this support should not be limited to the Bank’s capitalization through additional financial contributions.
HOST: It has become known recently that financial resources of nongovernmental pension funds will be transferred for management to Vnesheconombank until these nongovernmental pension funds acquire a status that will allow them to operate in a new situation on this market. How is Vnesheconombank going to manage this money? What investment yields can you guarantee?
Vladimir DMITRIEV: There is no link between these two themes. But we are involved in this process. We are aware that these are short-term financial resources that are placed in our Bank on a temporary basis. We’ll hold these funds until nongovernmental pension funds are licensed, transformed into joint stock companies to be able to achieve goals set before them. We’ll place these funds on deposits of reliable banks. There is no doubt that these funds can’t be placed in long-term bonds of our natural monopolies. (By the way we have already invested about 100 billion rubles in the bonds of infrastructure monopolies for them to fund their investment programs).
HOST: Could you be more specific about how you are going to manage this money?
Vladimir DMITRIEV: We believe that a special decision will be taken in this respect. Maybe the investment declaration of our managing company will be brought in line with this new objective. No regulatory documents have been approved in this respect so far. Only a principal decision to place these funds in Vnesheconombank has been taken.
I’d like to stress it once more that it would more correct to say “not in Vnesheconombank” but in the state managing company because there is a Chinese Wall between Vnesheconombank’s balance and funds managed by the state managing company. And the only thing that the state managing company uses is Vnesheconombank’s infrastructure but not its balance.
HOST: As we are in Sochi…We should of course talk about the Olympics. The more so, Vnesheconombank participates in the construction of the Sochi Olympic facilities. It has been mentioned in the course of the Sochi economic forum that we have to think not only about social responsibility but also about commercial aspects. You are in charge of the socially-oriented bank. Do you have to think about social aspect sand to what extent? Let’s talk about it.
Vladimir DMITRIEV: Of course we have. First of all, this is the state’s project and we are happy that private investors participate in it. In terms of its scope the Olympic project is unique in Russia. And it should be noted that while implementing this project the state business and our bank as a development institution did a lot of practice gaining positive experience. We applied brand new banking technologies as well as technologies dealing with relationship between the state, business and such financing institution as Vnesheconombank. There’s no doubt that the projects are complicated and we believe that even now we have to think about our post Olympic legacy. Now business and investors involved in implementing the Olympic projects say that investors should not be left alone face to face with these projects after the Olympics and the authorities understand their anxiety. They should decide together how to jointly manage these projects and how to make investments profitable and efficient. Of course, the worst thing is to bankrupt borrowers. We should find appropriate solutions. But even now I can see that upon implementing this unprecedented Olympic project we are developing an appropriate system of relationship on the basis of public private partnership between authorities represented by the government and tax bodies and business. It would be very difficult to manage these projects in the future - especially sports ones because it will be more difficult to pay them back compared with for example hotel complexes.
It will be also a challenge to manage projects that are to be put on sale after the Olympics. Here I mean housing projects. We have to work out special mortgage lending mechanisms for those who will live here and work at huge hotel or entertainment complexes such as Formula-1, EuroPark and so on.
HOST: Vladimir Alexandrovich thank you very much for finding time and answering our questions. We wish you every success.
Vladimir DMITRIEV: Thank you.
“Exports Support is a Top-Priority Line of Activity for us”
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.
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.