Vnesheconombank's Trust Management Department Director AlexandrPopov:“The more diversified your investments, the lower the risk to lose everything and the better the chance to increase your savings”

15 april 2014 года

Information and Analytical Portal
The Laboratory for Pension Reform

Vnesheconombank's Trust Management Department Director Alexandr Popov told in his interview to the Laboratory for Pension Reform about the results of 2013 and plans for 2014. He told the Portal’s readers about the role of the new pension system for Russia’s investment market and for ordinary citizensand advised would-be pensioners on how not to become solely dependent on the state.

At the end of the last year a new pension law was enacted in Russia, a mechanism of the third pension reform was launched. How do you size up this development?

First of all, in my opinion the development was not a pension reform, I would call it a counterreform – a move away from the changes made in 2002. At first, they reduced the age of citizens entitled to funded part of pensions and now a process of destroying the funded part of pensions is under way.

Do you believe that the funded part of pensions will be eliminated?

It’s hard to say but in my opinion this is most likely to happen. Given the current economic situation under the conditions of growing budgetary expenses, it is very tempting to freeze the funded part of pensions next year. By the way, they say in the press that the funded part of pensions is 240 billion rubles. I doubt this figure. Even in 2013, funded pension contributionsamounted to more than 400billion rubles. There are no signs that in 2014, they will be lesser, the more so, wages will grow in 2014 and therefore funded contributions will grow too.

In 2002, when the pension reform was being launched its authorsbelieved that it was necessary to introduce funded part of pensions for the following reasons. It was estimated then that as early as in the mid-twenties of the 21stcentury,a ratio between pensioners and the employed would be 1:1 and the funded part of pensions was supposed to significantly reduce the state’s financial burden. How? The funded component was supposed to increase and the distribution component – to diminish thus allowing to reduce the state’s role as a distributor of pension funds and the state’s responsibility to citizens.

Now representatives of the Russian Labor Ministry say that according to their estimates we’ll achieve a ratio of 1:1 only in the 40-ies or even in the 50-ies and therefore we’ll be able to rely on the distribution component for a long time. I do not challenge these estimates but they look a bit strange. The demographic situation has improved but not that much. I think that it is an attempt to improve the budget by way of using pension savings funds.

But this is a short-term assistance?

Yes, and the Finance Ministry is of the same opinion. The situation has not changed at all and is not going to change. Trillion-ruble transfers from the budget to the Russian Pension Fund have taken place, are taking place and will take place.

What are the consequences of the 2013 pension reform?

The timing was good. So far, not so many people have become aware of the need to form their future pensions. Most people used to rely on the state and are relying on it now without understanding that the amount of their future pension depends above all on them themselves. In the case that mandatory contributions to the funded part of pensions account for less than one third of all contributions to the Russian Pension Fund, they are not likely to form a good pension. The funded pension system launched in 2002was some kind of demonstration system. People were made to save e money for pension. And at firstwhen balances on their accounts were insignificant, most people didn’t care about them, they received happiness letters notifying them that they had only 500 rubles in their accounts. But when their balances increased to 20 or even 50 thousand rubles they became a lot more interested.

And under the conditions of total financial illiteracy of Russian people, mandatory funded savings were supposed to play an important educational role. People saw that the system was working and that their savingsdid not disappear but even increased. And later on this started to generate interest in voluntary pension savings. And if we had worked in this system for another five-six years this would have become a significant impetus for increased voluntary pension savings and a basis for life insurance. Now this factor has been removed.

I believe that for would-be pensioners who haven’t made any choice, the 2013 pension reform was an extremely negative development, which makes them totally dependent on the state. And the state – the government – makes decisions above all on the basis of government finances condition rather than personal finances of would-be pensioners.

What are potential consequences for the investment market?

As to the investment market, consequences will be a lot graver.

Pension savings funds have always been, are, and will be the only source of long-term investments, especially in Russia. As a result of the reform the long-term investment market will almost die.

We can give up on VEB as a long-term investor. We haven’t been present in this market since 2014. As far as nongovernmental pension funds (NPFs) and private managing companies are concerned we have to monitor the situation here. Will they be able to become a source of long-term investments? So far I haven’t seen any economic conditions for this to happen. It’s common knowledge that the longer a bond’s duration the greater the influence of yield changes on a bond’s price. For example, if market yield growth is 1%, a ten-year bond’s price will fall a lot more than that of a three-year bond. Thus, the longer bonds’ duration the greater the risk of a negative bond revaluation. Earlier, NPFs were obliged to annually compensate to customers for losses from investing by way of using assets designed to ensure NPFs statutory activity but now, with the introduction of a system to guarantee funded contributions, NPFs are still obliged to compensate to customers for losses first through using their own funds and only then to have recourse to the guarantee fund. To tell the truth, this system is not applicable to all customers but only to those who decided to move to another fund or those entitled to the funded part of pensions. The year 2013 shows that risks of significant churn of customers are quite high and therefore risks of long-term investing are high too.

There is no doubt that government state companies are open to all kinds of changes in terms of market revaluation influence.But we have also non-revaluated instruments, for example, GSB (government savings bonds), which under bond issue terms are not subject to secondary circulation on the market. These instruments tend to somehow level market influence; they prevent yields from growing but also prevent them from falling through. The extended portfolio was quite big and sufficiently diversified, so we could afford to make long-term investments.

What’s VEB’s major risk in 2014?

As I have already mentioned we can give up on VEB as a long-term investor. We won’t have any inflow of pension savings funds. Of course, some people will choose our portfolios. But the amount of funds will not be as much as it was in the past. We received annually almost 300 billion rubles and now we’ll be receiving almost nothing. On the contrary, the amount of pension savings funds to be transferred to NPFs and managing companies according to the results of 2013 will amount to at least 200 billion rubles. This means that since 2014, there will be no inflow of pension savings and there will be a significant outflow of pension savings funds. This is the way things will be in the future. But it was new funds that allowed us to make long-term investments.

So, a main risk we’ll have to tackle this year is the liquidity risk. We are already involved in reducing our portfolios duration and we are moving to short-term investing and creating a liquidity safety net.

How can VEB’s investment portfolios change by this year-end? And are investment declarations likely to change?

The extended portfolio has already been diversified to a great extent and it is highly stress-resistant. There is no need to change anything so far. As to this portfolio, only limitations on a minimal share of government securities pose a serious threat in terms of liquidity. So far, we have been able to handle these limitations. Such regulators as the Russian Finance Ministry and the Bank of Russia are aware of this problem and we manage to resolve itthrough their helpand from now on it remains to be seen how the situation will develop.

Is VEB doing anything to make “undecideds” to choose VEB as a managing company?

VEB is severely limited by law in terms of disclosing information, in terms of selling itself, to say nothing of advertising itself. The more so, we have never competed with NPFs and private managing companies. We have different objectives and therefore different investment declarations, different capabilities. As opposed to nongovernmental managing companies or funds that are aimed at generating profits our aim is to protect pension savings funds. And here we do not compete. As opposed to NPFs, we don’t know our customers, we are not working with them, with their network of agents, advertising and etc. We are just one of the companies of the Russian Pension Fund, although our company is the largest one.

How would you assess VEB’s investment yields and average investment yields for the past three years”? Were they in general higher (or in line with inflation as they were last year). They say these were good years for the Russian economy. Was there a chance to achieve better results?

I think that 2013 was better than 2012, although in 2012 we had yields at a level of 9% and inflation was 6.2%. We showed results that were a lot higher than inflation but here we should understand the reasons for such results. It’s pretty easy to earn from the market growth. It’s more difficult to show good results when the market is falling (and in 2013 this was the case, bond prices stopped growing in the middle of the first quarter of 2013). We are happy most of all that we managed to post yields higher than inflation under such conditions.

In 2013, two thirds of private managing companies posted yields higher than VEB.

They did really well!But we should not forget we have different investment goals – VEB’s goal is to protect pension savings funds and NPFs’ and managing companies’ goal is to generate profits. But even in view of this, we achieved decent results.

I’m sure that we managed to achieve decent results in 2013 through investing funds in long-term bonds of so-called infrastructure companies (RZHD,FGC, Gazprom)and it’s unfortunate that we are losing this opportunity. These issuers have an international credit rating in line with Russia’s rating; their bond yields are undoubtedly higher than inflation, so such bonds are good instruments for investing pension funds long-term. In 2013, we invested about 280 billion rubles in such bonds and if nothing had changed we could have increased our investments in them to one trillion rubles.

By the way, when we are talking about some sort of benchmark for the investment market for pension funds, we can regard our extended portfolio as a benchmark. As a rule professional managing companies post yield better than ours because their investment declarations are more flexible than ours.

Could you forecast average pension funds’ investment yields for the current year?

We can’t forecast such indicators here, VEB is limited by terms of disclosing information. But I think we won’t be able to find an expert in the market who would give such a forecast. It’s almost impossible now.

As far as the first quarter is concerned, I’m afraid that given the current market conditions and the significant market fall in March, nobody will achieve good results.Furthermore, inflation rate started to grow, so in the first quarter our yield rates will be a lot lower than inflation. These are objective, outside circumstances beyond our control.

Some experts believe that yields that are regularly made public byVEB and other managing companies are not net yields because NPF customers’percentage yields transferred into their accounts are lower than those made public by managing companies for the accounting period. How would comment on this situation?

There are yields from investing funds and they are relative, average indicators calculated in percentage terms per annumthat reflect efficiency. An d there is a calculated growth coefficient which is used to determine the sum in rubles (that is, an absolute value) transferred to personal account of an insured citizen. Insurance contributions go to the Russian Pension Fund and it transfers them for management within a whole year. If a main sum of contributions of a concrete individual is transferred to a managing company in the fourth quarter, the managing company has few chances to manage them and in this case, a growth coefficient, which is seen by a customer, might be very small. And it won’t have any tangible effect on the managing company’s annual mean profitability. So, yields and growth coefficients are absolutely different things and you can’t determine your personal income on the basis of yield rates.

Since 2012, VEB has been forming “payment portfolios” to invest those funds which the Russian Pension Fund transfers for management for persons who have retired on a pension.Year after year, these funds will grow significantly. How would you describe the State Managing Company’s investment strategy with regard to these funds? Are you satisfied with the results already achieved?

We have been managing payment portfolios for already a year and a half. And now we know the extent of their liquidity. These portfolios volumes are rather small and they do not influence the market as much as trillion portfolios of pension savings funds do. They are a lot easier and simpler to manage. One portfolio of time payments is 160 million rubles; the second one is 1.7 billion rubles. In order to ensure real protection of these payment portfolios’ funds we have to manage them in a very active way

But so far investment declarations of these portfolios are almost identical with the declaration of the extended portfolio and the share of government bonds is limitedas well as the share of corporate bonds.Jointly both payment portfolios account for only 0.1% of the extended portfolio.

So, VEB proposed to change investment declarations of the payment portfolios in order to eliminate a minimal share of government bonds and increase the share of corporate bonds. Specifically, we have sent relevant proposals to the Russian Finance Ministry together with calculations. This issue is under consideration now. We hope to receive regulators’ approval by mid-year.

We are not of course satisfied with the results of managing the payment portfolios. But we understand that the results are objective. When we started to work with them nobody could forecast liquidity and we had to maintain it at an instant level. For this reason, yields were petty low. In fact, we started to work with them more efficiently only in the second half of 2013 but we failed to reach inflation rate. The payment reserve portfolio’s yields were 5.52% and the time pension payments portfolio’s yields – 5.51%.

How do you feel about the Central Bank’s idea to create different portfolios for citizens of different age?

Ideologically, it’s a right idea, but each person should make a decision on which portfolio is better fit for him.It’s easy to understand that when you are young and have many years ahead of you and your savings are so far rather small it’s better to choose a risky investment strategy and if you are nearing retirement age it is better not to risk.

Everybody should make decisions on his own. If someone decides to rely on government bonds why should we make him run risks, if someone lost some of his savings because of the crisis just several years before going on a pension – why should he be denied a chance to win back what he lost?

I think that the best option is for each fund including the Russian Pension Fund to offer three-four investment strategies on a mandatory basis from a maximally conservative to aggressive one.And one-two managing companies will be responsible for implementing each strategy. In this case a citizen will able to choose a strategy to invest his pension saving and not only NPF or a managing company of the Russian Pension Fund.

There are many would-be pensioners among readers of the Laboratory for Pension Reform. What would you as a specialist of investment market recommend them to do to receive a larger pension?

There is no universal strategy –largely it depends on the amount of would-be pensioners’ incomes. I think that in our country with low personal incomes mandatory pension savings model would be of overriding importance.

My only advice is to leave mandatory funded part of pensions intact. We can compare two systems and prove their correctness or incorrectness but both of them should be in place. There is one principle above all else: diversification. The more diversified your investments, the lower the risk to lose everything and the better the chance to increase your savings.


In the First Half-Year VEB is to Present its Loan Portfolio Divided into Two Parts - Vladimir Dmitriev

24 january 2014 года

January 24. INTERFAX-AFI – At the end of the last year VEB’s Supervisory Board considered criteria for dividing the Bank’s loan portfolio into projects of the Bank for Development and special projects. In his interview to Interfax VEB Chairman Vladimir Dmitriev told about how the portfolio would be divided as well as about the Bank’s performance for the last year and plans for 2014 and the progress of implementing a number of concrete projects.

-What does the portfolio division mean? Is this VEB’s balance division into two parts or a special mechanism for approving non-market projects?

-There are a number of parameters including those related to funding and if a project is not in line with one of these parameters, it falls into a category of special projects. And in this case without going beyond the framework or the format of the current balance we’ll raise the question of creating special conditions for funding such no-market projects. Criteria for dividing the portfolio were approved by our Supervisory Board and in the near future and here I mean the first-second quarter of this year we’ll present an already formed portfolio divided into two parts in accordance with these criteria.

-In view of potential additional capitalization through deposits of the National Wealth Fund, aren’t you planning to reduce your activity on raising foreign funds?

-Basically, our capital won’t be increased because it’s not a matter of any new money. These are the deposits placed in Vnesheconombank and they were used to fund certain projects. So, our borrowings program both inside Russia and abroad will remain almost intact. We are not going to reduce our activity both on eurobonds markets and in terms of raising tied credits or syndicated loans. The basket of currencies is likely to remain the way I was. So, answering your question I can say we won’t reduce our activity.

-Aren’t you going to use in your borrowings program any hybrid instruments, specifically, subordinated bonds that can be included in the Bank’s capital?

-The fact is that our Bank is not a commercial one and it is not a joint stock company so we are not going to offer convertible bonds to the market because they are applicable to commercial banks but are not applicable to us. So, we are not keen on exotics. In the world’s practice there are absolutely proven ways of capitalizing and supporting development banks on the part of the state, we have already discussed them at our Supervisory Board’s meetings and we’ll use them. The Bank’s Supervisory Board and the Russian Government are fully aware of the ways to ensure Vnesheconombank’s dynamic development and enhance its role in funding the Russian economy.

-VEB’s net profit for nine months proved to be a lot higher than expected. Was it for the most part the result of selling EADS shares?

-Yes, it was for the most part. Moreover, we have reviewed our attitude to several projects that attained a good payback level.

-What projects do you mean?

-I can’t just say. I haven’t seen the latest data. And we are now talking about preliminary figures. We’ll get audited financial statements in the second quarter.

-Have you sold EADS shares in full? Was it a strictly market sale? Or were there any major investors-buyers?

-Yes, in full. It was an absolutely market sale and we looked at similar transactions at the same period and the price at which we sold EADS stake was higher than the price at which transactions were conducted by other shareholders who wanted to withdraw from the capital. So, strenuous efforts by a whole number of brokers during this year to offer relevant services to Vnesheconombank for a significant commission fee failed because of actions taken by our professional managers who sold them at a good profit without negative implications for the price movement of EADS shares.

-So, investment banks offered you their services wishing to make money on this transaction?

-Yes, they did. But we demonstrated once again that Vnesheconombank had a professional team and that we were competent enough to conduct transactions without moving the market significantly on the most favorable for VEB terms.

-As far Gazprom’s block of shares (MOEX: GAZP) owned by VEB is concerned you said repeatedly that a criterion for making a decision to sell it is a break-even condition for VEB. But you also mentioned such factor as state control which is guaranteed due to abovementioned VEB’s block of shares. Which factor is primary here? For example, if you see that the market allows you to sell Gazprom’s block of shares at a significant profit will you be free to act on your own or state control will come to the fore?

-A decision to purchase Gazprom’s block of shares from a German company was taken by the Bank’s Supervisory Board and a part of the block of shares was purchased as part of managing Vnesheconombank’s liquidity. So, a decision on selling the block of shares should be also taken by the Supervisory Board.

As VEB’s Supervisory Board is in fact the government – it is headed by the Prime Minister, state control factor will be taken into account upon making a decision.

This means that given the most favorable market conditions, you won’t automatically raise a question of selling the block of shares and generating profit as it is up to the government to make such a decision?

-Why not? We’ll raise this question before our Supervisory Board to generate profit to fund transactions of the Bank for Development.

-To what extent did VEB’s loan portfolio grow last year?

-Our loan portfolio grew significantly. It is safe to say that it increased by about 30 percent. Our loan portfolio and guarantee support for industrial exports increased significantly by 120 billion rubles. And credits to support exports increased by six times. And as a whole credit and guarantee support increased by about three times.

And I’d like to stress that due to our credits and guarantees worth 120 billion rubles Russian industrial exports amounted to about 700 billion rubles. Here I mean guarantees for advance payments, advance repayment guarantees, due performance guarantees, tender guarantees, that is, all those mechanisms that made it possible for Russian enterprises to compete on a par with foreign suppliers and increase Russian industrial exports.

-What portfolio growth do you look to in 2014?

-Approximately at a level seen in 2013.

-It means about 30%?

-According to our strategic benchmarks we are supposed to increase our portfolio to 3 trillion rubles till the year 2020.

-What was its amount in 2013?

Now it’s about 1.5 trillion rubles.

-During the 2008-2009 crisis VEB extended subordinated credits to banks for them to maintain comfortable level of capital. Given that since then inflation slowed down and lending terms changed, didn’t the banks turn to you with proposals for prior repayment of credits?

-No, they didn’t. Our portfolio remains unchanged with the exception of Gazprombank (MOEX:GZPR) where the credit was converted into capital. As far as other banks are concerned grace period is applicable to them during which they don’t make interest payments and do not repay principal. I have no information that somebody wanted to early repay the loan.

-What’s going to happen to infrastructure bonds of large companies, given the changes in VEB’s activity as a state managing company caused by the pension reform?

-We informed the Government that we would not have free financial resources to buy out infrastructure bonds. We fulfilled our conditions; we placed 280 billion rubles in bonds of RZHD (MOEX: RZHD), Rosseti( MOEX: MRKH) and several more issuers, but we can’t count on substantial amounts next year. The only possibility is that if the government considers some options to replace funds invested in government bonds or bonds backed by state guarantees we’ll use received funds to buy out infrastructure bonds or bonds of Russian natural monopolies. But so far we have to follow the rule in accordance with which our extended portfolio is to be composed of at least 50% of government securities or those backed by state guarantees.

-Is there any progress on the issue of project financing of Yamal SPG with potential participation of VEB and the Russian Direct Investment Fund (RDIF)?

-In accordance with its declaration and its mission RDIF can participate in funding projects only on the basis of co-financing with other investors. This means that the project should be attractive for Russian or foreign investors. So far, RDIF has been exploring the possibility of participating in a joint venture which will be involved in transporting liquefied gas, constructing and operating vessel fleet. This JV might be for example created by Sovcomflot and RDIF. NOVATEK (MOEX: NVTK) might be responsible for transporting liquefied gas using outsourcing alone. Other potential investors might also join the JV.

In this case, it is important to ensure guarantees of sustainable supplies at a fixed price as this gives RDIF a reliable guarantee mechanism for return on capital.

As to funding Yamal SPG project itself we have been actively discussing this issue with NOVATEK. We assume that a syndicate of banks will be created because it is a large-scale project. For us it is in line with criteria for a development project.

Moreover, we have been working with a team of NOVATEK’s beneficiaries on a whole number of other projects: they include Rosneftbunker (Ust-Luga)and Tobolsk-Polymer. RDIF is closely cooperating with them. We are happy to work with them and they are well aware of requirements they have to meet to turn to Vnesheconombank or its subsidiaries for funding.

-How are Globex developer projects going and in particular Slava project.

-The project is agreed upon with Moscow’s government. Last year we raised 800 million dollars from the China Development Bank to fund a project on the construction of a polyfunctional complex on the territory of the Slava plant. We don’t rule out the possibility of engaging well-known Chinese companies for contract and construction work as it is one of the conditions (a preferential but not mandatory one) for extending a credit to us by the China Development Bank.


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