Any Disturbance Makes You Think about New Opportunities
In his interview to Gazeta.Ru Vnesheconombank Deputy Chairman Alexandr Ivanov told how sanctions imposed by the US and the EU affect the Russian economy, where VEB intends to raise foreign funds and why Asian markets are not very suitable for it.
-The European Union and the US have by now imposed rather serious sanctions against the Russian Federation and Russian companies. In this connection, how are you going to go ahead with your export transactions and what resources are you going to use?Even before the sanctions were imposed, the government believed that export support had not been sufficient.
-We also believe that we should provide more support for exports. Now Russia is among the top 10 countries in terms of exports – something about $500 billion. Unfortunately, about half of this sum accounts for raw materials. As to high-technology exports: machinery, transport vehicles, power-engineering equipment, that is high-tech value-added products, the proportion of these exports does not exceed5%. As a development institution, VEB is interested in supporting such exports and we are funding the bulk of such exports. For example, we are responsible for fundingsupplies of Superjet 100 aircraft under fixed-term contracts as well as a lot of energy and transport equipment exports, we also participate in negotiations with our leading companies that manufacture locomotives. However, we do not limit our activities to extending limits to buyers. In the past years, the total volume of export-oriented projects supported by Vnesheconombank in Russia amounted to almost 3 trillion rubles.
-What other export-oriented projects does VEB support?
-For example, Tobolsk-Polymer is the first plant of such a type – it exports about 50% of its products to China and other countries, the Yaroslavl Engine Plant “Avtodiesel”. Two billion dollars were committed for Superjet 100 aircraft when it was only in a project stage to create a production facility. Only recently have we started to build up support for exports. A relevant department was set up in June of 2013. Unfortunately, the industrial production is poorly developed and it is obvious that the state should create a more favorable general production environment. Financial support that we provide is very important but there are also non-financial measures that should be taken, industrial production and investment climate as a whole should be supported throughtaxes and preferences
-You’re talking about creating a favorable environment by the state. However, now a new joke has emerged and it says that no sanctions can harm more than our own government does in terms of creating conditions for enhancing business.
-As compared with previous years, government support is being provided. As far as a number of positions are concerned we are improving in the Doing Business rating. Tax administration has been simplified. Before sanctions were imposed we had received major investments from sovereign funds, the investments had been made together with the Russian Direct Investment Fund. After the imposition of sanctions, the investment climate deteriorated substantially. Some measures are being taken but the task is so complex that Vnesheconombank is not capable of fulfilling it alone.
-Asia does not extend many non-tied loans.
-In view of threats from the EC and the US to impose new sanctions where are you going to raise credit facilities for high technology and export-oriented projects? On the one hand, Western borrowing markets are being closed and on the other hand,I’d like to hope that Russian politicians and financiers would be wise enough not to tie themselves tightly to Chinese capital markets. Finally, the Russian budget is not limitless. Where will you get money?
- You are right; this is a serious problem for all Russian banks. Western markets are now practically closed. So far, the local market is accessible but it is less liquid. Credit tenures are not long enough and credits amounts are not sufficient there. We are looking to Asia and specifically to China. There are huge resources there.But as a rule China extends credits tied to specific projects that have Chinese content. As a rule, China does not provide non-tied money. South Korea is still ready to invest actively in Russia. So, we’ll have to rely more on our domestic market and budget. A new “road map” has established a pretty ambitiousrequirement for supporting exports: by 2018 we are to extend credits for an amount of just about 45 billion dollars. Under the current conditions, we won’t be able to raise such a sum. I think that even in the best years it would be problematic to raise such a sum.
-Russia is preparing on a wide scale for President Putin’s visit to China in May. Do decision makers understand that that there is a threat of strategic as well as financial dependence on China for many years to come?
-I can speak for us. Vnesheconombank plans to sign a credit agreement with the Eximbank of China to fund the Elginsk deposit. It is a coal deposit in Yakutia. I can’t comment on the agreement’s terms and conditions.First, it’s a commercial secret, second, the Chinese side is still agreeing upon the documentation. As far as price parameters are concerned, the money is attractive for us. It is less expensive than on American and European markets.
The Chinese link their participation to their supplying a part of equipment for the project. I’d like to stress that their part is not large, we also receive equipment from other countries. I see nothing bad in it because the demand for coal isn’t great in Russia and in China it is very high, why shouldn’t we sell our products? Imposing sanctions, Europe and the US are not doing the right thing driving us out of Western markets. Our country should be present in both Europe and Asia.
-What percentage of funds did you raise earlier on European and American markets?
-If we mean non-tied credit facilities, that is, Eurobonds, syndicated and bilateral credits on VEB’s balance, the percentage is about 80%. China and other Asian countries extend non-tied credit facilities in small amounts. They prefer to extend funds for specific projects or for equipment supplies.
-If we look at percentages of state funds and raised credit facilities, to what extent does VEB depend on the European money market?
-We have 40% of state funds and 60% of funds raised from the market. Out of them up to half accounts for capital markets, the second half is tied funding against coverage of export and insurance agencies. As far as non-tied funding is concerned, we depend for 80% on European and American investors. For example, Americans and Europeans account for 70% of our Eurobonds. And these are long-term funds, especially US funds – more than 10 years. In Europe, periods are shorter but it was the main source of capital. In China, the market is evolving seriously. We are looking to new opportunities but so far they have both different liquidity and different amounts of borrowing.
You support buyers rather than sellers
-On what terms does VEB extend credits to exporters? Are there any preferences for them as compared with other borrowers?
-For the most part, buyers of our products are from CIS countries, Latin America and in part South-East Asia. Their country rating is lower than that of Russia. Therefore, VEB can offer terms and conditions that are suitable for borrowers. There is an individual program of subsidizing interest rateson credits for buyers of our products. For example, a deal with Mexican Interjet.Mexico’s rating is comparable with Russia’s so, we applied a mechanism for subsidizinga short-falling delta between the cost of our funding and the cost of credit for the end borrower. As a result, we were able to participate in the syndicated loan together with Deutsche Bank and IntesaSanpaolo.
You are talking about buyers and what about exporters themselves?
-As a rule we do not fund exporters- we extend credits to buyers. We have a portfolio of pre-export financing but it’s rather small.It’s quite obvious that the exporter does not want to incur an additional debt on its account. It’s better for it when the buyer is funded. And then the buyer makes payments to us.
-As far as the subsidizing program is concerned, the terms of extending such credits are a bit lower than the market ones. Isn’t it a violation of WTO rules?
-No, it is this kind of subsidizing that is permitted.There is a special rule, under which government export promotion institutions can receive this sort of subsidizing.
Is Superjet 100 after all flying
As to Superjet 100, an emerging picture does not look very good. Providing support for high technologies is a good thing but the reality is as follows: you are asking people in Latin America to take your plane saying that it might fly sometime.
-First, it is after all flying. I agree that there are problems there for example with slats. By the way, they are not Russian made; it is a leading European supplier. Each time when Sukhoi sells its aircraft and receives sales proceeds it invests money in improving the product. Second, they have Embraeraircraft in Brazil. The Brazilian Development Bank funded it for about 40 years as well as extended credits to buyers. And today, every second regional aircraft in the world is Embraer.
-As far as I remember,everything got moving when Americans became interested in Brazilian aircraft construction and got involved in it with their money, technologies and production engineering. As a result, Brazil has become the world’s leader in aircraft construction.
-You may be right. But I still insist that Superjet 100 is our high-tech. They haven’t manufactured new aircraft in Russia since Soviet times.
-Almost 90% percent of its parts are foreign made.
-Foreign parts account for 60% in this aircraft. 30 and 30 percent - France and Italy. But basic airplane is ours.At first, we bought a part of equipment in Europe and now production is being increasingly localized. Engines are manufactured both in Russia and abroad. There were a number of problems with engines but they were resolved. We supported the manufacturer together with other banks by providing 2 billion dollars at the product development stage. We also supported such projects as Tobolsk-Polymer and the Yaroslavl Engine Plant. A lot of projects are being funded inside the country. But we are now convinced that under the conditions of globalization you find it difficult to sell even a good product because competitors are sure to offer their products as well as a financial package.
-And aftersales service.
-You are quite right. And it is very important. Superjet 100 is a new product and it has no secondary market. If you take Boeing as a collateral and your credit is not repaid you can sell the collateral on the secondary market in a week or two. This is not so far the case with Superjet 100. An issue of guarantees forfor residual cost has not been addressed and it is a very important issue in funding aviation industry. The Government is considering this issue now. But in my opinion if we do nothing, we are sure to lose what we have. Moreover, Superjet 100 provides jobs.
There aren’t any plans to suspend anything
-There is a team of optimists in the Government who say that sanctions play into our hands. Reduced incomes will force us to not only spend funds from oil and gas but deal at last with our own economy through increasing its efficiency. How do you size up the situation from a major financial institution?
-From my point of view, sanctions are more detrimental than useful. If financial markets are closed there are no investments and this affects Europe’s business adversely but our economy suffers too. Factually, any disturbance makes you think about new opportunities. In any case, Russia won’t stop producing raw materials. The raw materials export model will be in place for many years to come. There is nothing bad in it. For example, Norway exports a lot of gas. And under the current conditions there is no possibility and need to produce everything and on the Russian territory. We are not the Soviet Union and in the global world, there should be cooperation. It’s counterproductive to rely only on your own forces.
-Despite the fact that you are trying to tap Asian financial markets, you are now sure to come up against serious problems with funding. Are there any projects that are likely to be scrappedin case of fund shortage?
-At the end of the last year VEB’s supervisory Board approved a new concept of the Bank’s operation. Our entire portfolio is divided into two types of projects. The first group of project are the so-called market ones; we can see that they are profitable,high pay-back projects and you can easily raise money for them. The second group is comprised of the so-called directive projects that are submitted to consideration on the instructions of the Government and our Supervisory Board. The Bank might conclude for example that they are unprofitable or that money proceeds from them will be insufficient. In this case we request the Supervisory Board to provide us with special funding to implement such projects.As far as our current portfolio is concerned, we don’t have any plans to suspend any projects. Projects approved for funding will be funded. But we are also aware that sources of funding are becoming limited. Our balance will be additionally burdened. Liquidity gaps are already emerging. Like commercial banks, we are thinking about the possibility of limiting our loan portfolio growth. We might as well discuss new increased rates with borrowers as Sberbank and VTB do. Frankly speaking, the situation is tense now and we are preparing crisis plans at the Bank.
-When are you going to discuss them? At the next meeting of your Supervisory Board?
-We are holding a dialogue with our Supervisory Board, the Government and the Russian Finance Ministry. Moreover, we have to link everything to the dates of our capitalization. It was planned originally that the Bank would receive capital at the end of the first –at the beginning of the second quarter. Now we are talking about the third quarter. We should know for sure when additional capital will come because we are supposed to meet capital adequacy standard, which is higher than 10%. If we build up our loan portfolio actively, and there will be a delay in receiving capital for some reasons, we risk coming close to the standard’s critical value.
-Besides your efforts to raise capital on Asian markets, can you see any other sources of borrowings? Will you be able to raise funds, for example, from the budget?
-Besides Asian markets, we can see no alternatives except for the budget and the Central Bank. VEB has a limited mandate and we are not entitled to raise deposits from natural entities. Now we are working with our colleagues from the Central Bank in order to refinance our credits, for example, those credits that are extended for implementing investment projects against guarantees. Our proposal is to refinance credits to be extended for supporting exports.
-You mean not only credits that were extended for construction in Sochi?
-Yes, I do. By analogy with the way commercial banks do it. But VEB can’t use this mechanism because it is not a bank in the classical sense of the word. So, we are holding a dialogue with the Central Bank for us to be connected to a mechanism of refinancing.
How do you think major investment projects will be funded in Russia in the near future? Through bond issues or other mechanisms?
-I think that above all they will be funded by way of using financial resources of the National Wealth Fund. Then,don’t forget about such mechanisms as the Russian Direct Investment Fund (RDIF). There is a resolution by the Russian Government under which funds intended for government programs that have not been used until a certain point are to be transferred to RDIF. And RDIF is working not only with Western investment funds but also with Asian funds and funds from the Persian Gulf. They are still ready toinvest in Russia.
Software and Hardware for Export
-You’ve said that industrial production is not at a very high level in Russia. Do we have any new projects to be exported?
-We can see a rather great demand for assistance in supplies of software. Our companies are active in IT sector and we are already working on a number of transactions to fund supplies of software or hardware to third countries’ markets.
-What sort of software and hardware?
-For example, one of our leading companies on the market plans to supply dactylographic equipment designed to scan fingerprints, retina for access control and people movement control. And this equipment is widely used, for example, in airports.
-Is there a need for legislative changes to support exports? The committee headed by First Vive Premier Igor Shuvalov is now involved in working on such proposals. What are legislative barriers that stand in the way of exports?
-As to VEB, we have already submitted some of our proposals to our Supervisory Board. For example, we want VEB to be given the right to issue customs guarantees and VAT refund guarantees. We were not allowed to do it but exporters we are working with need such guarantees. The proposals are ata final stage of consideration in ministries. As far as the committee on exports and foreign economic strategy under VEB’s Supervisory Board headed by Igor Shuvalov is concerned we believe that such issues will be discussed there on a wider scale because besides VEB there are other participants in the Group such as EXIAR, Roseximbank, VEB-Leasing. We have also to address issues associated with non-financial support for exports; for example, customs administration. Some issues to be addressed will be associated with small and medium-sized enterprises, as they do not receive sufficient support.
-How did the events in Crimea influenceVEB’s activities in international institutions?
-If you mean our relations with international financing institutions we in fact didn’t feel any influence. The 37th session of theAssociation of Development Financing Institutions in Asia and the Pacific (ADFIAP)was held in late April in Moscow. This year, the session is chaired by VEB. Undoubtedly, the events in Crimea and Ukraine affected us. We have a subsidiary in Ukraine, namely, Prominvestbank, which operates in Kiev. Like other subsidiary banks with Russian capital, we can see there a certain outflow of depositors’ funds and this of course requires our support. As shareholders,we’ll provide such support.
-Will you tell us about your successes in your current position? Did you start last spring?
-Yes, I did if you mean exports. Because I’m also responsible for raising financial resources. I can say that we are proud that VEB has significantly intensified its activity on supporting exports for less than a year. The amount of our export-financing portfolio is about 160 billion rubles for the first quarter of 2014. Using various instruments, we provide financial support for export contracts of our domestic enterprises for a total amount of 710 billion rubles. Only in the course of the first quarter of this year, we extended credits worth 31 billion rubles to fund exports.As to the number of credits, we extended 18 export credits in the first quarter. I think that under the conditions when foreign markets are factually closed this is a good result.
Exports without risk
Moscow, April 23, 2014
The number of financial instruments to support high-technology companies is on the rise.
Since the second half of 2013, Vnesheconombank has significantly increased its financial support for exports. For example, from the start of 2013to March of 2014, VEB has increased export financing by 3.2 times to 160 billion rubles, the amount of its loan portfolio has increased by more than 8.5 times and the guarantee portfolio – by almost three times. The Bank supported export contracts of Russian enterprises in the total amount of 728.3 billion rubles. At present, the Bank is considering several dozens of large and medium export projects, with the Bank’s expected participation share totaling more than 300 billion rubles. The Bank’s plans for 2014 are more ambitious – VEB Group hopes to increase its portfolio of export contracts to a trillion rubles. Director of Vnesheconombank’s Export Financing Department DaniilAlgulyan toldRG how they were going to achieve this goal.
Is a trillion rubles a realistic figure in the current economic situation?
DaniilAlgulyan: Of course, a lot will depend on the general economic situation both in Russia and on foreign markets. But it’s not only a matter of the number of contracts. We are seeking to substantially increase the number of exporters and export transactions being supported. At the same time, export financing geographical coverage is increasing. Nowadays, projects with our assistance are being implemented in 40 countries. Our key regions are CIS, Latin America, South-East Asia and Africa.
Last year, the national Russian industrial exports support system started to operate in full swing: it includes VEB, Roseximbank, the Export Insurance Agency of Russia (EXIAR), VEB-Leasing. Will any additional mechanisms be launched this year? It’s not a secret that demand for export support on the part of business is a lot greater than the state can provide.
DaniilAlgulyan: You’re absolutely right mentioning the export support system. As part of this system, we can offer exporters a whole range of financing instruments: from credits, guarantees, insurance to leasing structures. Being a parent company,VEB performs functions of a coordinator and a single window. VEB Group’s total export support portfolio exceeded 210 billion rubles out of which 160 billion rubles account for export credits (they are extended to foreign buyers of Russian export products) and guarantees extended by VEB itself. As a development institution, VEB participates in funding a number of major investment projects in such top-priority industrial sectors as oil and gas chemistry, smelting industry, construction materials manufacturing, timber processing, transport mechanical engineering, aviation. The portfolio of Russian export-oriented projects is more than 250 billion rubles. Here I mean funding of Russian enterprises whose products are to be exported.
We are actively involved in working on the further institutional development of the export support system and on boosting synergy from its operational components. Here I mean Reximbank, EXIAR, VEB-Leasing,transport mechanical engineering’s foreign subsidiary banks and financial companies. Our main objective is to provide Russian producers with both individual financing solutionsin implementing complex structured projects and with mass batch credit products above all in the SME sector. Now, new joint products of EXIAR and Roseximbankare being developed to support the exports of small and medium-sized enterprises.
Having joined the WTO, Russia refused all measures to financially support exports with the exception of those allowed withinOECD. As a result, in 2013 exporters were left without such type of support as subsidizing of interest rates under targeted credits. Now the process of Russia’s joining OECD has been suspended. Could export support measures be reviewed in this context?
DaniilAlgulyan: There is a whole range of government export financial support measures including certain types of subsidies that do not run counter to Russia’s international commitments and that are successfully used to support Russian exporters. In the last months alone, we have approved more than 20 credits for foreign buyers of Russia’s high-technology products with the use of such instruments. And our task is not a price damping but creating a level playing field for Russian exporters with their foreign competitors in credit financing.
How did sanctions against Russia affect export support? Did you suspend the implementation of any export projects, specifically, in Europe?
DaniilAlgulyan: The deterioration of the international situation did not stop the implementation of export projects we are working on now including those in Europe. But the main markets of Russia’s non-raw materials exports are CIS, Asia, Africa and Latin America.
In what sectors do export contracts predominate (aircraft construction, rocket-space industry, power engineering, mechanical engineering, defense industrial complex)?
DaniilAlgulyan: In the last year, our key export sectors were aircraft construction, mechanical engineering and power engineering. As far as supporting exports of Russian aircraft are concerned,we’ll continue to fund export supplies of SukhoiSuperjet 100 aircraft. We have made a decision to fund the supplies of 26 SukhoiSuperjet -100 aircraft to various airlines in Latin America and South-East Asia. In fact, a national aviation export financing competency center is being established on the basis of VEB. We are working with all segments of non-raw materials market and we can see a huge yet unrealized potential in most of them. We are actively involved in a number of projects in engine building, railway and automotive mechanical engineering and information technologies.
How is VEB going to increase the number of producers-exporters and credit transactions that it will support?
DaniilAlgulyan: Above all, we are trying to significantly boost producers’ awareness of our support system and existing financial instruments. Unfortunately, Russian producers are often unaware of the current export support opportunities. This poses a serious problem for us and shows us that we have to step up our efforts in boosting producers’ information awareness. We should hold workshops, conferences, especially in the regions, and work with mass media. Moreover, we attach much importance to offering consulting services. We are also making strenuous efforts to improve our decision-making processes. We are developing new financial products to adequately respond to Russian exporters’ needs.Over the last months, we have significantly reduced an average time of handling applications and increased the number of transactions being handled and approved. We are pursuing flexible policy with regard to projects we support andwe also fund a wide range of non-raw materials supplies the value of which ranges from several hundred thousand dollars to billions of dollars.
What new products to financially support export transactions in view of Russian exports needs will be developed in the n ear future?
DaniilAlgulyan: We are giving top priority to developing standardized products and financing programs, which will make it possible to significantly boost accessibility and efficiency of export support for Russian producers. As an example, we can give a system of framework agreements with foreign banks on target funding of Russian exports, which we are trying to create now. Such financing structures reduce the time of handling applications substantially.
Under the draft law of the Economic Development Ministry, VEB is to be given the right to extend guarantees for paying taxes for taxpayers.What should be done to exercise the right to extend guarantees for paying VAT?
DaniilAlgulyan: Now, the Russian legislation does not provide for an opportunity for VEB to extend guarantees for refunding compensated VAT in favor of tax authorities and guarantees in favorcustoms agencies. These guarantees are used by Russian taxpayers to reduce time periods to compensate for VAT from the federal budget as well as to secure their obligations on paying customs duties. We have prepared a package of amendments to the federal legislation providing for giving banks the right to issue guarantees for refunding compensated VAT and guarantees in favor of Russian customs agencies. Granting powers to issue such guarantees will make it possible to boost efficiency of the comprehensive export support system, reduce customers’ expenses and help to implement new projects needed for the Russian economy.