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”
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
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.
January 14, 2014
A decision is to be made in January to additionally capitalize Vnesheconombank with 200 billion rubles through using monetary resources of the National Wealth Fund. This will make long money a lot more available for funding capital investments. The Bank’s Chairman Vladimir Dmitriev told the Russian Business Gazette about investment policy priorities of the Bank for Development and Foreign Economic Affairs.
-Vladimir Alexandrovich additional capitalization of Vnesheconombank generates interest both among professionals and a wide range of readers. Is this a matter of enhancing the Bank for Development?
-You are quite right. But let’s start from scratch. In terms of long-term credits volume in relation to its own capital VEB ranks first among Russian banks. VEB raises borrowed funds and organizes co-financing of projects jointly with other investors. This makes it possible to fund investments through the Bank for Development rather than through direct budgetary funding.
But at the start of the last year Vnesheconombank reached lending volumes scheduled under the current Strategy for the start of 2015. The loan portfolio of the Bank for Development (not included the funding of anti-crisis measures and rehabilitation projects) as of January 1, 2013 amounted to 720 billon rubles, with the target indicator being 531 billion rubles. The Bank reached its limit in terms of capital adequacy. Capital adequacy ratio was 10.9% as of July 1, with minimum permissible ratio being 10%.
And we should take into account the fact that VEB differs from many foreign banks for development. There are numerous examples when foreign banks for development were additionally capitalized through using government funds. For example, in 2010 capital of the Brazilian Development Bank BNDES was increased by 2.5 times through using government budgetary funds. In Germany the development bank’s borrowings are based on state guarantees but VEB relies on market funding including borrowings abroad.
And another principal factor. VEB is regularly engaged for supporting projects of national significance and these projects are not standard and typical for the Bank for Development. We get into situations when we have market liabilities and have to deal with non-market assets. Combining these functions led to the need to expand VEB’s funding base. Additional capitalization of the Bank for Development is a task that should be addressed promptly.
-What amounts of money do you mean?
-The Bank’s capital should be increased by hundreds of billions of rubles and this will make it possible to make long money more available for funding capital investments. On the other hand additional capitalization should be accompanied with improving the business model and changes in credit process. The Government is close to making a decision on this issue.
There is a proposal to divide investment projects to be accepted for funding by the Bank into two categories – typical and special projects. Typical projects are in line with our regulatory network, their risk levels and rates of return make it possible to increase loan portfolio without having negative influence on the Bank’s solvency.
Special projects are non-standard projects which are of top-priority importance for Russia’s economy and on the other hand are not in line with requirements for risks and profitability. Decisions on such projects are to be within the competence of the Bank’s Supervisory Board. It is the Bank’s Supervisory Board that will be responsible for approving objectives of VEB’s participation in a given project, limitations on the project management as well as sources of funding and compensation for the bank’s participation in the project.
-Initially, the Government proposed to transfer 500 billion rubles worth of the National Pension Fund’s new pension savings to Vnesheconombank (for temporary management). Was this initiative somehow connected with the plans to additionally capitalize the Bank for Development?
-VEB’s function as the state managing company is independent of its function as the Bank for Development. This function is separated by a Chinese wall from other lines of VEB’s activities.
-The Bank’s Strategy for 2011-2015 provides for supporting various economic sectors and regions, SMEs and national exports. What are the results of the Bank’s activity and what difficulties do you come up against?
-“Even if you have a brilliant strategy, from time to time you have to look at your performance”, Winston Churchill said. It’s true. But I’d like to say a few words about the Strategy.
Our main goal is to boost our national economy’s competitiveness and help to modernize it on an innovative basis. And in order to perform well here we have to create a favorable environment for development.
Annual labor productivity growth in Russia now is only 2-3% and this is a very serious problem. In industrialized economies labor productivity is more than two times higher than in Russia. At the same time, the Russian President has quite recently highlighted a number of regions where labor productivity growth is a lot higher than in Russia on average. The Kaluga region tops this list with 13%. As you can see the region does not live off raw materials. Its excellent performance is a result of favorable business climate and favorable conditions for raising investments and launching advanced production facilities. And our Bank, to be more precise,VEB Group is making its contribution to creating such environment.
For example, since 2008 VEB has been funding the project to develop infrastructure of the Kaluga region’s industrial parks. The Bank’s total participation share in funding the project is 11.2 billion rubles. The project is designed to create conditions for investors to deploy their new production facilities in industrial parks of the Kaluga region including engineering development of industrial sites equipped with all required infrastructure as well as construction of manufacturing and storage facilities and multi modal logistics centers. As a result, 29 new production facilities were built as of today and 16 thousand jobs were created. The total amount of investments in the region’s economy is 143 billion rubles. You must admit that it’s a good result.
Now we are jointly working on the Kaluga region’s comprehensive development. Both VEB Group and the region’s government have prepared a relevant plan. The plan involves VEB and its subsidiaries: VEB Capital, VEB-Leasing, SME Bank GLOBEX and Svyaz-Bank, the Export Insurance Agency of Russia (EXIAR).
I’d like to give you two more examples.
The oil products transshipment terminal at the marine trade port of Ust-Luga is one of the Bank for Development’s largest infrastructure projects. Up to 30 million tons of oil products are to be transported through this terminal per year. In September of 2013, the Bank completed its participation in this project. Payment obligations of the project initiator and borrower – Rosneftbunker to Vnesheconombank were fully fulfilled. Now oil products are transshipped at the terminal.
This project is an obvious example of fruitful cooperation between the state and business in implementing major infrastructure projects. The state represented by Vnesheconombank in fact, not in word provided massive financial support for business. It goes without saying that such support should be provided only for well-structured and well-prepared projects and should be accompanied with frictionless cooperation between federal and regional authorities.
There is one more principal aspect. The port and the adjacent territory are scheduled to be developed comprehensively. A cluster approach is to be applied here with the use of public private partnership instruments. In fact, a new modern city is being built with a 30-thousand population. It will be a city with diversified economy, powerful industrial base and comfortable environment for its residents.
One more example is the first full- cycle automobile factory in the Far East. The project started almost from scratch. Moreover, the market was full of secondhand Japanese cars with steering wheels on the right. But the Bank’s experts viewed this project as a promising one. A decision was made to back Sollers company initiative to build auto production facilities in the Far East. As a result two automobile factories were built in Vladivostok in the form of joint ventures with the participation of Sollers company and the largest Japanese automakers where a line of Japanese and Korean automobiles of different makes and models and configurations are manufactured including Mazda, Toyota, SsangYong. It’s obvious that the factories galvanized allied sectors’ business from automobile show rooms to auto service stations as well as provided jobs for residents of the city. By the way a part of automobiles are sold in Russia’s European territory.
-Vnesheconombank Group has still a lot of work to do in the Far East. To this end the Bank’s subsidiary – the Far East and the Baikal Region Development Fund was established. But lately we have heard various proposals including the Fund’s additional capitalization and a transfer to a new model of its activity. What’s the reason for it?
First, the Far East and the Baikal region are one of our Group’s investment policy priorities. Vnesheconombank entered into agreements on long-term cooperation with the Khabarovsk and Primorsky Territories, with the Amur Sakhalin and Irkutsk regions and with the Republic of Sakha (Yakutia). And VEB’s subsidiaries – engineering, leasing and investment companies and the Export Insurance Agency of Russia are integrated in regional programs. As of December 1, 2013, the total value of projects (completed, being implemented or scheduled to be carried out) exceeded 616 billion rubles. The Bank’s participation amounted to 448 billion rubles. As a result about 21 thousand modern jobs are to be created in the region. Another seven projects for a total amount of 316.8 billion rubles with the Bank’s potential participation worth of 295 billion rubles are going through expert examination.
Second, the total value of projects approved by the Far East and Baikal Region Development Fund’s Board of Directors for comprehensive expert examination is 23 billion rubles. The largest projects are constructing a railway bridge across the Amur River to China, developing the Vladivostok international airport and creating a fishing industrial center on the Shikotan Island.
Third, the number of applications we received with regard to the Far East and the Baikal region is impressive although to put it mildly the quality of many projects’ preparation is quite low. Unfortunately, we don’t have a list of top-priority projects structured for non-budgetary investments in the region to say nothing about approved ones.
There is no doubt that the Far East needs large-scale investments. But the region should be ready for investors to come. Infrastructure (transport, energy, industrial infrastructure) is not an end in itself it is created to engage investors in those sectors that can’t develop without this infrastructure. Everything should operate as an integrated whole.
Although today the Fund has no authority to organize territories comprehensive development projects. In my opinion it makes sense to discuss an issue of giving such authority to the Fund as part of individual resolutions of the Russian Government. This will be a positive step forward.
-They have been talking about structural reforms needed to restart economic growth for a long time. But at the same time it’s clear that structural reforms won’t yield results immediately. What instruments in your opinion can contribute to economic growth as early as next year?
-Russia’s economy needs long money more than ever before and development institutions are so far the main source of this money and in particular Vnesheconombank and its subsidiaries. The Russian Direct Investment Fund (RDIF) proved itself to be an effective mechanism for raising financial resources of the largest foreign funds. When RDIF was being established a number of meetings were held with the management of the world’s largest investment institutions: sovereign funds and direct investment funds which manage funds worth trillions of US dollars. Now we can have a look at some results of the Fund’s activity.
Since its foundation RDIF has invested more than 3.5 billion dollars out which 850 million dollars are owned by the Fund and 2.8 billion dollars were invested by international investors. Thus, for each dollar invested, RDIF raised more than 3 dollars worth of foreign investments. During two years of its operation RDIF raised a total of 9 billion US dollars worth of foreign capital for the Russian economy through establishing long-term strategic partnerships (with China, Abu-Dhabi, Japan, Korea, Kuwait, France and Italy).
Another line of activity is to set up a national industrial exports support system. I’d like to stress that I mean industrial exports rather than oil and gas exports. VEB’s Export Financing Department, EXIAR, VEB-Leasing company and Roseximbank – an agent bank responsible for extending government guarantees are involved in this line of activity. This activity is designed to make it possible for any exporter irrespective of its size and products it exports to gain access to a range of the state’s support products. As of late December of 2013, VEB’s exports funding portfolio was more than 120 billion rubles. In the last year, the amount of export financing increased by almost 2.5 times and the loan portfolio increased by almost 6 times, the guarantee portfolio increased by almost 2.3 times.
Services offered by the Export Insurance Agency of Russia are really needed by our enterprises. A range of sectors is expanding and now it includes agricultural, energy and transport mechanical engineering, metals industry, aircraft construction, automotive industry, instrument building industry, chemical industry. A list of countries is also growing.
I give credit to EXIAR’s management for their work with banks, regulatory authorities and for their efforts to get legislation changed to make it easier to use it for exporters themselves. In fact, an environment for development is being created in the Russian products exports sector. Quite recently EXIAR that worked primarily with large companies has prepared an individual product for small and medium-sized enterprises.
-And how is the guarantee mechanism for supporting SMEs operating? This mechanism was developed by Vnesheconombank in accordance with the Russian President’s decree?
VEB’s Supervisory Board made a decision to assign this job to its subsidiary –SME Bank.
A medium-sized company which meets certain requirements and is short of collateral can turn to SME Bank to obtain banking guarantee. And all SME Bank’s guarantees are secured by Vnesheconombank’s banking guarantee the amount of which is 40 billion rubles. As SME Bank is to guarantee 50% of credits to be extended, guarantee support worth 40 billion rubles would allow commercial banks to extend credits for an amount of 80 billion rubles.
Here I mean companies operating in non-raw materials and non-trade sectors. A project’s value is to range from 100 million to 2 billion rubles. At least 20% is to be company’s own funds. A credit tenure is 2 from 10 years. Cost of guarantees will be in the range of 1.4%-1.8% per annum (for innovation projects - at a lower limit of the cost range).
In August of 2013, SME Bank extended the first guarantee in favor of Renaissance Bank to secure an investment credit for an enterprise in the Moscow region to expand its printing production.
-At the start of the last year, there was a lot of talk about the credit agreement between Vnesheconombank and Germany’s state bank KfW on providing support for innovation projects of small and medium-sized enterprises. Is this money already available for our business?
-You’re talking about the credit agreement worth 110 million dollars for a tenure of 5 years to fund SME companies implementing projects in innovations, modernization of production facilities and energy efficiency.
Projects are funded by SME Bank through its partner banks in the regions. One of the conditions is that a project is to be implemented in the Baltic region – in Saint Petersburg, the Leningrad, Kaliningrad, Pskov and Novgorod regions. In order to implement the credit agreement SME Bank developed a line of credit products under the general brand SME-Baltica. Among the first recipients are light-industry companies that introduce innovative developments related to manufacturing working clothes and individual protective gear.
-Vnesheconombank as the state managing company invests pension savings of “undecideds” in bonds of major infrastructure companies. In view of a decision to nullify the funded portion of “undecideds” pensions in 2014 and transfer the funds to the distrib- utive system what are the prospects for buying out new issues of infrastructure bonds?
Basic parameters of transactions on investing pension savings funds in bonds were approved by VEB’s Supervisory Board. A decision was made that a total volume of infrastructure companies’ bonds to be purchased in 2013 would amount to 280 billion rubles (including bonds of OJSC RZHD in the amount of 150 billion rubles, bonds of OJSC FGC UES in the amount of 100 billion rubles and bonds of OJSC Gazprom in the amount of 30 billion rubles), with a maximum share of the state managing company being 100% of one issue volume.
Today, all the bonds worth 280 billion rubles have been already purchased. Thus, all the decisions on funding infrastructure projects through using pension savings funds have been carried out promptly and to the full. These projects are being implemented by OJSC RZHD, OJSC FGC UES and OJSC Gazprom.
You know well that new laws on the pension system provide for nullifying the funded portion of “undecideds” pensions. This means that pension savings funds won’t be transferred to us for trust management. This will not only limit the state managing company’s investment capabilities but will also substantially increase liquidity risks of the expanded investment portfolio. So, funds from redeeming bonds in this portfolio and coupon payments on them will be used only for fulfilling contractual obligations to the trust management founder – the Russian National Pension Fund.
-Vladimir Alexandrovich let’s get back to the so-called special projects of the Bank for Development , on the Government’s instructions Vnesheconombank is the major creditor of the Sochi Olympics.
-It’s quite obvious that preparations for the Olympics are quite cost and labor intensive. But it’s also obvious that the Krasnodar Territory will bridge a huge technological gap and receive advanced infrastructure that will allow it to be on a par with the world’s recreation centers.
A principal issue (in terms of return of investments) now is the post Olympic use of the Olympic sports facilities. At present, for the most part demand is generated by government organizations and institutions. It is for this reason we and investors of the Olympic projects are working actively with the Russian Government on searching for ways to maximally utilize the Olympic facilities in the period after the Olympics.
On the other hand I know that many athletes who went abroad in the past to prepare for competitions plan to do it in Sochi. And we hope that the Olympics would help to develop mass sports in the region and create a favorable development environment for people, sports, the region and the country.
During a period of 6 years Vnesheconombank has been participating in funding 289 projects worth 3.9 trillion rubles, with its participation share being 2.4 trillion rubles. Out of them the Bank has already fully funded 63 projects worth 233.8 billion rubles, VEB provided 106.3 billion rubles. Today, 168 projects worth 2.4 trillion rubles are being funded, the Bank has already provided 1 trillion rubles to fund them. For the most part these are infrastructure projects and projects that are of strategic significance for Russia. A third of them are innovation projects.
Long-term credits form the basis of the Bank’s loan portfolio. In a number of cases credit tenure periods are 10-15 years. Today, more than 100 projects worth 2.9 trillion rubles are going through expert examination (VEB’s expected participation share is 1.4 trillion rubles). A third of these projects are infrastructure ones.
The number of applications we received with regard to the Far East and the Baikal region is impressive. Although to put it mildly the quality of many projects’ preparation is quite low. So far we don’t have a list of top-priority projects structured for non-budgetary investments in the region.
Vnesheconombank Chairman Vladimir Dmitriev’s Interview to the TV Channel Russia 24
TV Channel Russia 24
HOST: You’ll hear an interview with Vnesheconombank Chairman Vladimir Dmitriev on our channel. My colleague Maria Bondareva asked him about cooperation between Russia and Ukraine in the banking sector on implementing investment projects and about the future of these lines of activity.
CORR: Good afternoon Vladimir Alexandrovich.
Vladimir DMITRIEV, Vnesheconombank Chairman: Good afternoon.
CORR: Vladimir Alexandrovich, Vladimir Putin has said recently that the amount of Russia’s investments in the Ukrainian economy is about 30 billion dollars. What’s VEB’s share in this sum?
Vladimir DMITRIEV: VEB invested about 500 million dollars in Ukraine’s banking sector. In 2008, we factually rescued one of system-forming banks preventing it from going bankrupt and helped Ukraine to avoid serious implications for its banking business and for banking sector as whole. Now the bank is one of the largest banks in Ukraine. And if we talk about Russia’s presence in Ukraine’s banking sector we should mention Sberbank, Bank VTB, Alfa Bank and of course Vnesheconombank’s Ukrainian subsidiary bank. These banks form the basis of the Ukrainian banking system, at least if we mean non-government banks. Moreover, Vnesheconombank helped a number of Russian investors to purchase one of the largest metals company in Ukraine, namely, the Industrial Union of Donbass. In this case we made an investment of about 8 billion dollars. And it was not only a matter of purchase. Vnesheconombank supported this large metals company and it provided support not only for its products but also for about 40 thousand workers. And here I mean not only the Industrial Union of Donbass but also Zaporozhstal where we are responsible for managing this integrated iron & steel works together with one of the biggest Ukrainian businessmen Renat Akhmetov.
CORR: You’ve told us about your subsidiary bank in Ukraine which is one of the largest banks in the country. Generally speaking, how is the bank doing? What are your plans to upgrade it?
Vladimir DMITRIEV: When we purchased the bank by way of investing pretty large funds we didn’t expect that we would come up against a lot of problems from the previous management and previous owners. We acted on the assumption that the bank’s credit history was favorable and it had a solid loan portfolio. But as credit repayment dates came due we could see that borrowers failed to meet Prominvestbank’s requirements. In fact, we inherited bad loans worth up to a billion dollars. But we have to state that most borrowers are in a position to repay credits but use various mechanisms for evading their obligations. And now we face the need to additionally capitalize the bank and take tough legal action against mala fide borrowers. Nevertheless, the bank is actively operating in various sectors of Ukraine’s economy. And it seeks to bring the amount of credits to enterprises which are tied by integration relations with Russian enterprises to 20%. I believe that this is a realistic target figure.
CORR: What can you tell us about the amount of Ukrainian residents’ enterprises’ and banks’ credits to Russian banks?
Vladimir DMITRIEV: I can say that Russian banks and our Bank are actively involved in retail lending. It is safe to say that the amount of retail credits is constantly on the rise. I know that Sberbank is now implementing a serious program aimed at developing a branch network and retail lending in Ukraine catching up with the largest Ukrainian non-government banks in terms of its scale and potential nearing other Russian banks that have been operating on the Ukrainian market for a long time. I’ve already said about a task we are setting before our Bank as our Bank is a shareholder after all and a state corporation whose mission is to strengthen integration ties with adjoining states and CIS countries. For this reason, other banks also seek to seriously influence various sectors of the Ukrainian economy and above all those that are tied by cooperation relations with Russian enterprises. And it is quite natural because big business has been cooperating traditionally with Russian partners in various sectors and here I mean nuclear power engineering, mechanical engineering, transport and space industries and the military industrial complex. We have partner relations with Russian enterprises in the sectors that are of great importance for Ukraine’s economy.
CORR: This means that VEB is actively involved in funding the Ukrainian economy.
Vladimir DMITRIEV: Yes, it is. We fund Russian enterprises working with their Ukrainian partners and we also fund various sectors of Ukraine’s economy through our subsidiary bank.
CORR: You’ve also said that you maintain contacts with representatives of Ukrainian business. How do they size up heir integration partnership with Russia and friendly relations with it?
Vladimir DMITRIEV: As Russia is Ukraine’s main trade partner it goes without saying that Ukrainian business is interested in enhancing trade and economic ties with Russia. And it is also interested in investing in the Russian economy, so we have a two-way street – on the one hand Russian business invests in the Ukrainian economy and on the other hand a lot of Ukrainian businessmen work actively in Russia. Moreover, given the current situation in Ukraine, a difficult budget and income situations, Russian business hopes that in the course of forthcoming privatization of large-scale Ukrainian enterprises with a serious state participation it will be actively involved in privatization deals building up its investment presence and in fact strengthening integration ties that I have already mentioned.
CORR: I also know that VEB supported strongly Ukrainian enterprises during the crisis.
Vladimir DMITRIEV: You’re quite right. In a certain sense we rescued some sectors of the Ukrainian economy. I’ve already mentioned the metals industry which employs about 40 thousand workers at the Industrial Union of Donbass and the Zaporozhstal integrated iron & steel works. And our investors are still interested in modernizing these enterprises. Suffice it to say that the Alchevsk integrated iron & steel works is in fact the most advanced metals enterprise on the territory of CIS countries. They modernized the steel-making unit and commissioned an electric power station which is a non-waste production facility. It supplies electricity to the city of Alchevsk. It should be also stressed that having financed Russian investors we helped Ukrainian metals enterprises to come out of a very difficult economic situation that was caused in the past by the fact credits for modernization had been taken abroad. None of foreign creditors funded these enterprises. And Vnesheconombank is the only source of financial resources including current assets. There are some bottle necks in this situation caused by the fact that our enterprises have problems in their relations with the tax authorities – non-refunded VAT to our enterprise is about 400 million dollars and this is a minimum balance.
CORR: Is VEB going to compensate for these funds?
Vladimir DMITRIEV: We extend credits to Russian investors on a constant basis, factually substituting these funds which the state is not able to compensate for to our enterprises due to serious problems.
CORR: Let’s sum up our Ukrainian theme and imagine possible scenarios for Ukraine’s future: integration with the EU, absence of integration, association with the EU.
Vladimir DMITRIEV: I’d like to focus on the current situation. The association agreement was not signed. Future developments would of course depend entirely on the Ukrainian authorities’ actions, on their desire and readiness to join the Customs Union. Recent dynamics of business and political contacts shows that by expanding its trade-economic and investment cooperation with Russia Ukraine will benefit significantly from joining the Customs Union. We are holding an active dialogue about our joint infrastructure projects. Specifically, Vnesheconombank is a serious player in this discussion. We started discussing the construction of the Kerch Strait Bridge. This is a very important infrastructure project which will give powerful impetus for the development of a whole number of Ukrainian and Russian economic sectors. Here I mean large-scale infrastructure projects in transport and power engineering sectors. If Ukraine joins the Customs Union, Ukraine is sure to win in terms of energy prices like Belarus. This is clear to everybody. And in terms of power engineering and other economic sectors it’s a real benefit for Ukraine to strengthen its ties with Russia.
CORR: My last question to you deals with the Russian banking sector. We can see such troubled banks as Bank Pushkino and Master Bank. What do you think about the Central Bank’s tougher financial control over Russian banks and is there a risk of a credibility gap developing between people and banks after such situations?
Vladimir DMITRIEV: I’m convinced that the Central Bank does what it is supposed to do. Dishonest people and swindlers have not disappeared yet, the more so in the banking sector. So, the Bank of Russia’s actions are for the god of the banking sector and people rather than some kind of threats. It’s important to have in mind that sometimes people take irrational decisions putting their money in the banks that promise them high interest rates. As the saying goes there is no such thing as a free lunch. This case is a good lesson for those who put their money in unreliable banks and our people should be well-educated in a financial sense to put their money in reliable banks. I’d like to say it once more that the Central Bank doe what it is supposed to do and acts prudently.
CORR: Vladimir Alexandrovich thank you very much for your interview.
Vladimir DMITRIEV: Thank you.