Expert №35 (912)
August 25, 00:00
|Photo by Viktor Zazhigin|
EgorGaidar’sclose associate Sergei Vasiliev believes that the Russian Central Bank’s issuing model should be radically changed: long-term investment projects should be funded by way of redeeming project bonds by the Central Bank.
A graduate of the Leningrad Finance and Economics Institute, an active participant of the Moscow-Leningrad School of Economics in discussions and workshops of which they formulated views of a team that was in charge of the market-oriented reforms in the early 1990s, Sergei Vasiliev is one of Russia’s most experienced practical economist.
Active, wiry and looking younger than his 57,Vasiliev speaks fast but he seems to think even faster. You can see some slight disappointment on his kind and intelligent face when you ask him to be more specific about the issues he mentioned earlier in passing.
In the turbulent 1991-1994, Vasiliev was in charge of the reformist “headquarters” – the Working Center for Economic Reforms, then he worked as the economics deputy minister in the Russian Government, in 2001-2007, he served as the Senator from the Leningrad region. In our opinion, his considerable and interesting experience would be sufficient to write a book of memoirs. Our guess proved to be right – Vasilievis working on a monograph but the work is coming slowly – he is too busy in his position as Vnesheconombank’s Deputy Chairman.
We asked Sergei Vasiliev to share his views with us about the key economic developments in the 1990s and 2000s but we predictably focused on the issues of the current economic agenda.
-On July 28, the Bank of Russia raised the base rate for the third time this year, three days later the EU announced a new package of sectoral sanctions against our country. Which of these decisions is more painful for the Russian economy?
-The question sounds somewhat provocative. In my opinion, the Russian Central Bank’s interest rate policy is rather procyclical,it hampers investments – the last resource of reviving the economy. The two previous sources of economic growth - exports and consumption have already been exhausted.
-What countercyclical measures of economic policy would be relevant now?
-The Central Bank should use its capabilities and start printing money to fund long-term investment projects with it.
-I’m quite surprised to hear you say such words as you are an old-timer of the Gaidar team whose priority was always considered to be macroeconomic stability.
-Now, a threat of recession is greater than that of inflation. Moreover, we have to develop infrastructure – motorways, railways, regional aviation. Without this base we won’t be able to achieve any sustainable economic growth.
-I can’t agree with you more. But the devil always lurks in details. There is no doubt that we need a high-speed motorway Moscow-Saint-Petersburg but the need for a railway Yakutsk-Magadan is much less obvious. We don’thave an institution of comprehensive expert examination of infrastructure projects and without it we risk pouring issued money down the drain.
-It is perfectly clear without any expert examination that a railway Yakutsk-Moscow is going to be very expensive and inefficient.
-But the Head of Russian Railways, Vladimir Yakunin does not think so. Moreover, this railway is included in the Strategy for the Development of Railway Transport for a Period of up to the Year 2030.
-Magadan is very well supplied by sea and the Kolyma population is not numerous and it can’t ensure any significant passenger traffic. I don’t foresee any significant growth of economic activity in this region.
-There are also less obvious examples of infrastructure projects, which require comprehensive expert examination.
-Yes, of course. For example, there is an alternative to a high-speed railway Moscow-Kazan - this is a high-speed railway Moscow-Krasnodar with potential destinations of Adler and Sevastopol. In my opinion, this southern railway is a lot more efficient than the Kazan railway. This railway would give a tremendous impetus for an economic growth of the Voronezh-Yelets and the Rostov-Krasnodar agglomerations. But there are no similar centers of economic activity between Nizhny Novgorod and Kazan and farther to Yekaterinburg.
-Can we reliably make forecasts passenger and freight traffic with regard to a new infrastructure?
Such forecasts do not often come true. When they were launching Sapsan between Moscow and Petersburg, they significantly underestimated passenger traffic. The fact is that a new infrastructure does not not only redistribute available flows of people and freights but also creates new ones, generates a new economic activity and increases mobility of population. Only highly professional economic geographers and sociologists can foresee and quantitatively estimate such effects.
-We have neither economic geographers nor economic activity between Nizhny Novgorod and Kazan.
-Without them, all our infrastructure decisions would be a sum of lobbyist efforts made by interested groups. For example, today, decisions on the reconstruction and construction of new airports are made or to be more exact, pushed through by governors depending on their lobbyist clout.
-Somehow, we can understand principles of conducting expert examination of infrastructure projects but in my opinion, it is a lot more difficult to organize money emission in the right way. For twenty years of monetary contraction policy, there are no specialists left.
There is an excellent macro-forecasting model at the Central |Bank and there are good specialists there, so it’s a purely technical issue. A channel for such monetary emission is for the Central Bank to purchase VEB’s bonds issued to fund specific projects. Inflationary effect from this is not going to be significant and this money is sure not to get into the money market.
-So, it’s only a matter of political will?
-In a situation when Russian banks and companies have sharply limited access to foreign capital markets, we are forced into making such a decision. An alternative to this is falling into a full-scale recession, that is, a self-sustaining contraction of economic activity. I believe that a political decision on a fundamental change in the monetary policy paradigm will be made.
-It might be far from it. Even the 2009 crisis didn’t change the monetary policy at all. To be exact, it changed the policy: instead of monetary emission to buy foreign currency, the Central Bank adopted an inflation-targeting concept under which both exchange rate and money supply are not targeted but incidental internal variables.
-The 2009 crisiswas in fact a sort of slight fright. By the time when decision makers had been ready to see the need to change the paradigm everything was sorted out.
Do you think that we’ll get a different situation now?
-Absolutely different. Life under sanctions will require nonstandard solutions.There is a fine question here. Should the Central Bank use its reserves to refinance foreign debts of our banks and corporations as it was done in autumn of 2008? I believe that if there is any need for assistance, let the Central Bank provide rubles and companies decide if they need to buy foreign currency on the market to repay their debts. We should not spend our foreign currency reserves to stop the gaps.
-Six years ago a decision to refinance foreign debts of market players with foreign currency reserves was motivated by the desire not to cede control over major corporations and banks to foreigners. Today this risk seems to be insignificant.
-The fact is that today assets won’t go anywhere. Foreign debts are not so much encumbered with shares as they were in the past. The ruble devaluation and the economic slump improved the balance of payments greatly, so our banks and companies can buy foreign currency to service their debts.
-It makes sense in terms of macro economy. But lobbyist forces could bring about the repeat of the 2008 situation.
-We should handle accumulated reserves with great care. Oil prices are not likely to increase manifold in the coming decade as they did in 2004-2008.
-What’s your attitude in general to budgetary funds?
-I am quite positive about them. My only rebuke is that we should have used accumulated monetary resources of the National Wealth Fund to capitalize the pension system. Today the future of our pension system looks quite unenviable. We are going to repeat the situation of the 1990s: pensions will shrink to a level close to a cost of living; there will be no real differentiation of pensions. The current situation is not favorable: if a person didn’t work much his pension is four thousandand if he worked a lot his pension is 12 thousand. Neither the first nor the second sum is in line with principles of social equity.
Twists and turns of the past years
-In one of his summer interviews to the Echo of Moscow Radio Station your associate in the Moscow-Leningrad School of Economics Andrei Illarionov boasted that it was he who had put forward an idea of creating a stabilization fund. The then Prime Minister Kasyanov as well as economics and finance ministers Gref and Kudrin were categorically against the idea but according to Illarionov, President Putin welcomed the idea warmly, and in 2003 made Kudrin take a decision to establish the Fund on January 1, 2014. Was this really the case?
-Illarionov lobbied the idea to establish a stabilization fund actively, but it was Alexei Kudrin who did the most to establish the fund.
-Do you somehow communicate now with Illarionov?
-I don’t see him often. And Andrei is not often seen in Russia. We used to get along well. But after hehad leveled his criticism against Gaidar I changed my attitude to him. He could have criticized EgorGidar while he was alive. Now his fierce and not always fair attacks on his former colleague and close associate go beyond the bounds of decency.
-There is an interesting episodein your tasty memorial article devoted to the history of the Moscow-Leningrad School of Economics. At a workshop of the School in 1987,VitalyNaishulpresented a concept of voucher privatization which caused a negative reaction of Mr. Chubais. Do you remember why Anatoly Chubais responded negatively?
-I don’t remember anything about Chubais. But I remember very well that Gaidar responded to the idea negatively. Egor said that it was naive to believe that the financial market could serve as a guidance for making decisions on the lines of investment. Even in his first program of 1991,Gaidar opposed voucher privatization. It became politically necessaryafter the Law “On Registered Privatization Accounts and Deposits” was passed in 1991 when Mikhail Malei headed the State Property Committee. The only thing that we managed to do was toreplace registered accounts with vouchers but this replacement might have beena mistake. A system of registered accounts like in the Czech Republic is substantially more transparent. I do not rule out that there was some sort of craftiness there: we needed to have liquid vouchers to be able to create voucher investment funds.
-Nevertheless, the Czech model did not prevent foreigners from concentrating assets in their hands through non-government pension funds, which were responsible for keeping those registered accounts.
-Our reformers refused to conduct monetary privatization because they were aware that monetary privatization would be in favor foreigners who would somehow come to Russia. No domestic players had enough funds to purchase state assets at fair prices. Nevertheless, if we had sold assets to foreigners at open auctionswith the exception of the limited number of strategic oneswe might have a more efficient economy now.
-What key measures were taken in Russia’s economic policy of the past two decades?
-The introduction of VAT was one of the key measures. The idea to introduce VATwas initiated by Sergei Shatalov and AlexandrPochinok.Gaidar supported and implemented the idea in November of 1991 as he knew that we would come up against a period of high inflation and V AT is resistant to inflation. Marek Dombrovsky, a well-known economist said then: “You are just heroes because you are introducing VAT. But if you don’t introduce it now, you’ll never introduce it.
The next measure was loans for shares auctions of 1994-1995. Initially they planned to conduct monetary privatization with the participation of foreign investors. But the concept changed with the only goal to make oligarchs loyal to the existing authorities for them not tosupport Gennady Zyganov at the 1996 presidential elections. There were no urgent budgetary reasons for the operation. The GKO pyramid was a reliable source of money and the money received from the auctions was ridiculous.
The pension reform was the last major decision in the economic policy. Itwas started in 2002 and it is being soft-pedalled today. The reform itself was conceived in the right way but the financial gap inevitable in a period of transition from a distributive pension system to a funded one was not closed. As I have already mentioned, the National Wealth Fund would have come in handy here. But now it’s too late to use the Fund – the pension gap grew so much that it can’t be closed with the financial resources of the Fund.
In my opinion, no major measureswere taken later on. After the year 2003, when oil prices soared and oil money increased greatly, the public demand for reform vanished. Why to reform if everything is OK? The only thing they did was to monetize benefits.
-Nevertheless, they established a stabilization fund, pushed through reforms in power engineering and railway transport. How would you assess the results of the reforms?
-Very positively. Both power engineering and railways became more market-oriented, more efficient.
-One more measure is the chosen model of crisis management policy of 2009. The emphasis was placedon social expenditures rather than investments in infrastructure like for example in China.
-I don’t support this sort of policy.We have eaten up all the budgetary money intended for infrastructure.
-Advocates of this decision, in particular, Vladimir Mau say that social expenditures are transparent and do not incur corruption risks.
-This is a common point of view. The logic behind it is as follows: if I give a ruble to a physician or a teacher, they will get this ruble but if I give a ruble to fund a construction project of the century, I don’t know how much money this construction project will get. There might be some truth in it.Neverhteless, we have to straighten things out in the investment sector after all. There are schemes including those within PPP mechanisms, which make it possible to make investment process more transparent.
Brazil as food for thought
-You are reputed for being an expert of Brazil, its history, socio-economic model. Why did you fall for Brazil? Why Brazil rather than Chili for example?
-Big countries are much similar to one another and the same is true for small countries. So, you should not compare a big country with a smallone. One of the reasons for my interest in Brazil is to learn lessons applicable to Russia. Brazil has much in common with us – it is a big country with federal government and a comparable level of development.
-What modernization breakthroughs in Brazil impressed you the most?
-For a period of ten years the state managed to transform the underdeveloped, poor north east of the country into a fast-growing region with a noticeable middle class.
-How did they manage to create so many high-quality jobs?-Several factors were responsible for this. The first factor was the export boom in the first half of the 2000s. The second factor was social programs to help the poor. There was a program for a example to help schoolchildren - benefits were given only to children who attended schools and school attendance was strictly controlled. Large-scale social programs increased growth dynamics.
Today when the cream has been skimmed off the export boom in Brazil, economic growth rates declined drastically. Where should they place their bets on now? They should focus on high-tech, small and medium-sized enterprises, innovation firms – potential points of economic growth. And this is quite a different format in economy and in economic policy. How are they supposed to transfer to this format? It’s an open question for Russia too. It’s easier for Brazil than for Russia: as opposed to us,this country does not have labor force shortages.
BRICS Forum and its Institutions
-At the BRICS Summit in Brazil in late July, BRICS member countries announced the creation of two new multilateral institutions within this alliance: a New Bank for Development and the so-called foreign currency pool to support short-term liquidity. What sort of institutions are they? And what was the reason for creating them?
-Generally speaking, they are duplicates of the World Bank and the International Monetary Fund operating within the framework of BRICS.
-There is one fine point. A foreign currency pool to be established does not provide for any initial allocations of member countries, it is just an agreement on supporting pool member countries’ currencies if they are pressed for their own reserves of hard currencies. A similar system of multilateral swap agreements the so called Chiang Mai Initiative was created by ASEAN central banks, Japan, China, and Korea in 2010 now it’s worth 240 billion dollars.A BRICS pool is being formed in the amount of 100 billion dollars, with China’s contribution being 41 billion, Russia, Brazil and India are to contribute 18 billion each and the Republic of South Africa – 5 billion.
-Yes, it is a softer scheme with the same essence.
-What can you say about the New Bank for Development’s lines of investment activity?
-The Bank’s authorized capital is to be formed during seven years. It’s the right period to start up a large international bureaucratic institution. Then the Bank will be able to raise funds on international markets. For the most part, the funds will be used to fund development projects in member countries.But I think that in the long run it would expand its activity beyond their bounds. In my opinion, projects in Africa will be one of the Bank’s obvious investment priorities.
-Taking into account China’s interest in this continent’s resources?
-Not only China’s. Brazilians are also very active to say nothing about the Republic of South Africa. Both Russia and India are not going to remain uninvolved.
-On the eve of the summit in Fortaleza President Putin saidthat in its current form the internationalmonetary and financial system was not fair to BRICS countries and as a whole to new economies. What do you think the President meant?
-I think he meant that the voting power of India and China in the World Bank and the IMF was not in line with their current weight in the world economy. Redistribution of quotas and votes at these institutions’ governing bodies is taking place extremely slowly and painfully and lagging behind shifts in member countries’ GDPs. Russia was lucky to join the IMF in 1992 because they used the 1990 data and we received almost a three percent quota, which allows a country to have its own directorate. Otherwise we would have share a representative office with some other country, like for example at the European Bank for Reconstruction and Development where we have a mixed delegation - the head is Russian and the deputy head is Belorussian.
-Nevertheless, principles of expert examination and developing credit programs of the New Development Bank and the World Bank will be similar?
-I think they will. The only difference is that lately the World Bank has been focusing on addressing social programs: war on poverty, environmental protection and sustainable development. Initial priorities, specifically, investments in infrastructure projectstook a back seat. And the New Bank for Development will place much emphasis on infrastructure projects as infrastructure is substantially underdeveloped in all BRICS countries.
-How would you characterize BRICS today? Is it a bloc or alliance?
Vnesheconombank is actively involved in developing forms of assisting Russian high-technology exports
Interest rate support programs for export credits are being applied now in a number of foreign countries, specifically, in France, Italy, Spain, Japan, Germany, Finland, the Czech Republic, Belgium, Brazil, South Korea and Belarus. As a rule, this subsidy is allocated through a major state-run bank extending export credits on preferential (non-commercial) terms.
In this respect, they started a process of developing regulatory and methodological framework for operating a similar mechanism to compensate interest rates for export credits from late 2012 to 2013.
Taking into account Vnesheconombank’s considerable experience in organizing export financing and its special importance as a basic institution responsible for supporting exports in the Russian Federation, VEB was appointed as the sole recipient of subsidies to compensate for interest rates for export credits.
A full text (rus) of the article is published in “Industrial Weekly” as of 11.08.2014
Vladimir Dmitriev: “Creation of such production facilities guarantees food security and food independence for Russians”.
HOST: My colleague Sergei Batischev is going to tell us about import substitution with domestic products, he is now on the direct communications link from the Yaroslavl region. Good afternoon Sergei, we‘re listening to you.
CORR.: Hullo Olga. In fact, the decisions taken by the Russian Government won’t make it possible to keep Russian citizens on a starvation diet. We are now at one of the largest milk production complexes in Europe. It was built here from scratch in the open field for a period of 4 yearspartially with the money provided partially by Vnesheconombank.And Vnesheconombank Chairman Vladimir Dmitriev is now with us on the direct communications link. Good afternoon Vladimir Alexandrovich.
Vladimir DMITRIEV, Vnesheconombank Chairman: Good afternoon.
CORR.: Vladimir Alexandrovich, would you tell us about what has been built here with the money provided by your Bank?
Vladimir DMITRIEV: Now we are at the first milk production complex. In total, we have funded two such complexes, with their total value being about 6 billion rubles. Two more complexes were laid down. All in all, there will be 8 complexes. Besides milk production facilities, there will be a feed-processing plant and a milk-processing factory. We are happy that here milk production per cow indicators are in line with the world’s standards – here an average daily milk production per cow is about 32 liters and some top-performing cows produce more than 60 liters per day. Basically, it is a unique milk production facility. The director of this complex said that in 2008, when they started to build the complex there was an old farm with 120 cows and the daily milk production per cow were at most 6-7 liters. It is important that this is a vertically integrated production facility. There are many complexes of this kind across the country including those funded by Vnesheconombank. So,creation of such production facilities guarantees food security and food independence for Russians”.
CORR.: Vladimir Alexandrovichlet’s talk about financial security because this security is very important especially for those who invest in such complexes. To what extent is it easy to invest in such complexes in Russia using among other things Vnesheconombank’s funds?
Vladimir DMITRIEV: This task remains as difficult now as it was in the past. First, the task is above all is to analyze a project’s economics and develop a sustainable financial model together with the project’s initiators. Second, an important task is that such projects require long-term money and favorable terms and conditions so that a product’s value at the time of production could compete with that of a similar product imported from abroad. There is no doubt that in the current situation, when Western countries have imposed embargo on long-term lending to key Russian banks with state participation we have to raise domestic loan facilities. And in this respect, we are working with the Government,the Finance Ministry, the Economic Development Ministry and with the Central Bank, they can understand our problems and are ready to provide us and other banks with state participation with long-term ruble facilities.
CORR.: Have any decisions been made in this respect?
Vladimir DMITRIEV: It’s important for us that a decision has been made to additionally capitalize Vnesheconombank. We hope that basic technical tasks will be addressed in the near future. This will enable us to ensure further sustainable development and maintain required capital adequacy ratio. Now we are also discussing with the Government other measures of the state’s support.So, we don’t have to worry about Vnesheconombank’s finances and its readiness to fund this kind of projects as well as about the stability of the financial system as a whole. Although there is a certain tension, we’ll be able to defuse it.
CORR.: Vladimir Alexandrovich, Could you be more specific about an additional capitalization because the question was raised last autumn and there were plans to use monetary resources of the National Wealth Fund. Was a decision made to go ahead in this way?
Vladimir DMITRIEV: Yes, it was. They enacted appropriate amendments to the law. Certain decisions are to be made now by the Government. We hope that in autumn deposits of the National Wealth Fund will be converted into tier 2 capital.
CORR.: Very well. Thank you very much Vladimir Alexandrovich.
Vnesheconombank Chairman V.A. Dmitriev’s Interview to the TV Channel Russia 24
Host Marat Kashin
HOST: Vnesheconombank Chairman Vladimir Dmitriev is convinced that in order to transfer to full-scale payments in national currencies they should be stable. In his interview to our channel, he also voiced the Bank’s position on Mechel and Inter RAO.
-If anything, the main events at the Forum and here at the BRICS Summit are to create a New Bank for Development and a pool of reserve currencies. Do you believe that this will change in general the balance of forces in the world’s financial arena?
Vladimir DMITRIEV, Chairman of State Corporation ‘Bank for Development and Foreign Economics Affairs (Vnesheconombank)’: If we mean the Bank I think it would be wrong to talk about the global change in the balance of forces in the world’s arena because our Bank is designed to address localbut at the same time large-scale objectives. The Bank was assigned to fund infrastructure as its priority. The needs for infrastructure are overwhelming. According to the World Bank, developing countries will need 15 trillion dollars to fund infrastructure until 2030. So, an idea to create a bank for development was put on the agenda of the BRICS Summit several years ago and the bank is designed to fund infrastructure.
It’s a good thing that the banks have agreed upon volumes and technical issues related to a location of headquarters as well as upon a composition of the Board of Directors. In my opinion, there is every reason to believe thatexecutives of finance ministries responsible for creating this bank would favor a proposal made by BRICS countries national development banks to form key personnel of a New Bank through engaging employees from BRICS countries banks for development. The New Bank is also to be provided with technical equipment and its employees are to undergo training courses in national development banks. These are rational proposals and I think they will be backed.
Who is going to be responsible for making decisions on extending credits and their terms and conditions?
Vladimir DMITRIEV:Decisions are to be made by a Board of Governors and a Board of Directors. The bank is to adopt the world’s best practices, which are common in such international financing development institutions as the World Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the Asian Development Bank. Therefore, corporate governance bodies will make relevant decisions based on the best practices.
The most important thing is that the countries have agreed upon volumes of funds, which each of them is to contribute to charter capital on a parity basis. Stated capital is to amount to 100 billion dollars to be paid in tranches of 50 billion dollars.
At least, this fund would provide support for both national currencies and national budgets. There is no doubt that transactions to be conducted within the fund would to a certain extent help national currencies to become settlement currencies in trade and investments of BRICS member countries.
-Nevertheless, as far as the idea of creating a new bank is concerned, a number of experts say that it is necessary to stop using the dollar and try to make payments in national currencies. But contributions to the bank’s capital are made in dollars.
Vladimir DMITRIEV: We have to do a lot in order to transfer to full-scale payments in national currencies. First, currencies should be stable. Second, we have to develop a scheme for swapping national currencies. But there are enough examples that national currencies are already used in mutual trade and in international payments. We have to recall China’s recent initiative on creating a major Asian bankto use yuan as a settlement currency at least in investments.
As far as our relations with China are concerned, the ruble and the yuanare already used in making payments inthe cross-border trade. The yuan is trading on the Moscow Interbank Currency Exchange. So, we are making a steady headway. It goes without saying that we have to overcome a lot technical, systemic difficulties to stop using the dollar.
-There is another important question. Experts say that the International Monetary extends credits on rather hard terms. In the sense that it requires countries to make changes in their economies. Will the two new financial institutions require BRICS countries to do the similar thing? Do you think that it should be done?
Vladimir DMITRIEV: I don‘t think a BRICS Bank for Development will deal with such issues. Credits extended to fund infrastructure, support private business as well as support the banking system above all medium-sized banks are not granted on such tough terms as is the case in the World Bank and the European Bank for Reconstruction and Development. On the contrary, these credits are designed to support private business, developing private enterprise and freeing private initiative. In this case,I’m talking about Russia because I know how it happens. As far as the new bank is concerned I have no grounds to believe that it will be involved in supporting macroeconomic stability in these countries although by supporting infrastructure we create conditions for macroeconomic stability. But high priority is to be given to funding infrastructure because it is our common goal. This goal will be to overcome economic growth restrictions as well as create new jobs and develop industrial sector. This is a common interest of all BRICS countries. In addressing infrastructure objectives on the basis of mutual interest nobody is going to set tough terms.
-The need for investments in infrastructure is great in all BRICS countries. How are they going to prioritize and select projects upon considering applications?
Vladimir DMITRIEV: I wouldn’t like to assume the role of oracle who knows answers to all questions related to this bank’s activity. I think that even the bank’s founders – finance ministries do not have a clear idea of how various decisions will be made and what objectives in a country plan will be given top priority.
These objectives will be addressed in the course of creating a new bank itself. We should above all create a bank, employ personnel, provide it with equipment, we should also adopt appropriate corporate procedures,regulations. This is sure to take some time. But we should immediately start to analyze projects that could be funded jointly and make final decisions on the basis of common interests and priorities of various countries. These decisions will require a lot of time, certain efforts and expertiseThese countries’ territories and population account for a significant part of the global world. In my opinion, this bank won’t come up against big problems because leaders of our countries made strenuous efforts to make a decision on creating this bank.
Do you think that the creation of this Bank and a pool of conventional reserve currencies would somehow prompt to carry out a reform of the International Monetary Fund, which ground to a haltbecause of the US Congress decision to impose a veto.
Vladimir DMITRIEV:If there was no veto, we could expect certain changes. But as it is in place we have to adapt to the current situation. But the creation of this pool of reserve currencies would prompt to reconsider the realities we used to live in beforeand think over the need to create a more flexible system based not on one or two currencies but on the interests of global players.
-I have another several questions, which are a lot closer to the situation in Russia. There is much talking now aboutMechel. And the latest news is that the company was able to arrange for a rollover of credits with VTB Bank for an amount of almost 15 billion rubles. Are you ready to consider possible options or compromise in this situation?
Vladimir DMITRIEV:After I made a public statement,it was followed by the industry minister’s statement relating to Mechel’s future and the need to decide it in a different format rather than giving it a hand without thinking about consequences for Vnesheconombank, Mechel’s officials started to talk about a potential debt restructuring and a sale of non-core assets. Somehow, they started to think in a different way. In fact, I like this approach. Our position remains unchanged. This is not only my position, Our Board formed a consolidated opinion and I voiced it. We haven’t considered any other options. They are moving in a different direction now – commercial banks seem to be ready to discuss potential ways of debt restructuring with Mechel. We, of course welcome such steps.
-Are you going to discuss this situation at the next meeting of your Supervisory Board?
Vladimir DMITRIEV: It isn’t on the agenda.
-There is another Russian story. VEB calls Inter RAO to exercise redemption option for bonds. If my memory serves me right, the price is about 31 billion rubles. The market price now is about five billion. They say in Inter RAO that they don’t have money. What are you going to do?
Vladimir DMITRIEV:I think that legal wrangling with Inter RAO is the worst thing to do. But in the current situation we have no right to write off debts as a loss because the option provided for quite a definite price which differs significantly from the current market price.I’d like to remind you that we entered into Inter RAO’s capital only in order not to increase Inter RAO’s debt burden but to enable it to build its core facilities, specifically, power plants. We are going to talk with Inter Rao. So far we have made our first steps towards exercising our right. But if the situation develops in a different way rather than it was stipulated in our agreement, we are ready to compromise. But I’d like to stress it once more that we won’t accept any price that is different from the one specified in the option agreement.
-Some experts believe that VEB calls Inter RAO to exercise redemption option because it is pressed for available funds.
Vladimir DMITRIEV: You mean VEB?
-Yes, I do.
Vladimir DMITRIEV: The reason was quite different. We were guided by our right and the fact that the option had expired. I can assure you that we do not need money desperately and unconditionally to take such tough and unfriendly measuresagainst our partner Inter RAO. We have our representatives in Inter RAO’s Board of Directors, so we value our relations and we are not going to press then using all possible means to exercise our right. In fact, it’s a commercial dispute and we are going to settle it as it is standard in a civilized world.
-And now my last question. I can’t help asking you about VEB’s additional capitalization. A decision was made. The State Duma passed a draft law in the third reading. Have you received enough money?
Vladimir DMITRIEV: We have received enough money to ensure sustainable financial development and sustainable financial position. I mean above all capital adequacy ratio. This money is enough to form required reserves. Now we are in a difficult situation because with the liquidation of Olmpstroi, we are left on our own as we didn’t form reserves for Olympic credits relying on Olympstroi’s surety. And even if some corporate decisions are made rather than forming reserves both our auditors and our creditors that have Vnesheconombank’s bonds are well-informed about the current situation and will ask us questions we’ll have to answer in a proper way. We were capitalized with Tier 2 capital and now we have enough resources to form required reserves and ensure stability
We have a strategy and we are updating it now. The strategy provides for increased loan portfolio, increased volume of active transactions and a certain package of investment obligations. Given limited capabilities to raise funds on foreign markets to finance our operations, we should look for other alternative measures for providing government support. We do not mean now additional capitalization alone, we mean other measures of government support that would enable the Bank to carry out its mission of a Bank for Development and support Russian industrial exports without doing things we are not supposed to do.
-Thank you very much for your interview.
Vladimir DMITRIEV: Thank you.
Vnesheconombank Chairman Vladimir Dmitriev’s Interview to the TV Channel Russia 24
HOST: A meeting of G20 countries development banks, the so-called D20, was held in Rome. Vnesheconombank Chairman Vladimir Dmitriev in his interview to our channel told about themes of discussionб Olympic facilities as well as prospects for Russian aircraft exports.
Maria BONDAREVA: Good afternoon Vladimir Alexandrovich.
Vladimir DMITRIEV, Chairman of State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’: Good afternoon.
Maria BONDAREVA: We can see here new aircraft - a sort of joint venture between Russia and Italy. VEB also participates in this project. Are you happy about cooperation with Italians?
Vladimir DMITRIEV: I can’t help being happy about cooperation with Italians because a part of my working and sometimes personal time is devoted to performing my functions as a Co-Chairman of the Russian-Italian Forum-Dialogue within the Framework of Civil Societies which is designed to enhance contacts and cooperation in various sectors including economy. This of course expands my mission as the Chairman of Vnesheconombank whose objectives include providing support for Russian industrial exports as well as enhancing international investment cooperation. In this respect, I am happy about the way our relations are developing with our Italian partners.
Maria BONDAREVA: Let’s get back to the aircraft as we are standing against the backdrop of them. Vnesheconombank lends to Mexican Interjet for it to purchase our Superjets and engages to this end other foreign creditors. To what extent is it difficult to do itunder the conditions when economic sanctions against Russia might be expanded?
Vladimir DMITRIEV: It is always difficult to maintain effective financial and banking cooperation because we should offer our customers the most favorable terms and conditions. Competition is fierce. But in terms of promoting SukhoiSuperjet 100 to international markets we are glad that we are cooperating with foreign banks and above all with Italian and French banks. The SukhoiSuperjet 100 is a product of cooperation between three countries: Russia, France and Italy. And we also happy about the relations we are developing with such state insurance agencies as Italian SACE and French COFACE.
I would also like to thank our Russian partners, which are involved in the scheme for promoting SukhoiSuperjet 100 to international markets. They include such members of Vnesheconombank Group as the Export Insurance Agency of Russia (EXIAR) and VEB-Leasing – a company that offers leasing services to foreign buyers of these planes.And as of today, three aircraft are ready to be supplied – the first two aircraft are practically complete and the third one is being completed.
Maria BONDAREVA: Eight are already flying.
Vladimir DMITRIEV: Eight are already flying in Mexico. It is here where the whole aircraft’s interior is completed. About 200 job were created in the facilities that had been used earlier for other purposes but as a result of the phase-out people lost jobs.And by means of our SukhoiSuperjet 100 we create additional jobs both here and in Russia as well because some production facilities are located in Russia.
So, we are certainly happy about the way we are cooperating with our Italian and French partners. And I’d like to stress it once more that this is a result not only of Vnesheconombank’s efforts but also of its subsidiaries.
Maria BONDAREVA: Vladimir Alexandrovich, how much money is Vnesheconombank ready now to lend to foreign buyers?
Vladimir DMITRIEV: It’s a matter of hundreds of millions of dollars. In this respect, I’d like to stress that supplies of SukhoiSuperjet 100 for Interjet – the second largest Mexican carrier are being made on the basis of comprehensive support for Russian industrial exports where as I said Vnesheconombank’s subsidiary institutions are involved as well as a mechanism for subsidizing interest rates which made it possible for us to offer the Mexican company terms and conditions that are rather market-oriented and competitive.And as you have said as many as eight aircraft are flying in Mexico.And the daily mileage is about 8 hours. The planes do not stand idle; they are always in the air. Customers are happy. And it is for this reason we hope that besides 20 aircraft that are firmly contracted, another 10 aircraft might be purchased by our Mexican partners.
Maria BONDAREVA: Mexico buys, Italy equips and Russia manufactures and extends credits. And as a whole is this scheme affected by notorious economic sanctions the United States and Western partners are constantly talking about?
Vladimir DMITRIEV: As far as this project is concerned, we are not feeling any pressureor negative attitudes of our foreign partners. Ingeneral, I should say that the sanction regime, more specifically, the reaction by a whole number of foreign banks to the global situation and above all the pressure from the American Administration is tangible. Many Russian banks failed to refinance their credits and had to search for special resources to settle with their creditors. But on the other hand, recent placements in Eurocurrencies by Gazprombank, Alfa-Bank and Sberbank show that the market is open for us. Evidently, Russian banks do not make borrowings in dollars they make placements on European markets and feel rather comfortable.
In this sense, I go along with Economic Development Minister Alexei Ulyukayev who said that we were ready for various turns of fortune. And you know that in the near futurewe’ll launch a new scheme for funding through the Central Bank to extend long-term investment credits for economic development of Russia. In this sense, our domestic resources are being mobilized so that economic development does not stop.
Maria BONDAREVA: Are you somehow getting ready for a further expansion of sanctions? There appeared some information that your Export Insurance Agency might be indirectly hitif a third package of sanctions is imposed.
Vladimir DMITRIEV: You know if sanctions are imposed and Vnesheconombank is among companies to be hit by them, it goes without saying, that all our subsidiary institutions will be influenced by this sanction regime. It remains to be seen… It is important to continue funding the Russian economy. And to this end, as I have said the Central Bank, the Government and ministries are ready to counter the expansion of sanction regime.
Maria BONDAREVA: You are going from here to Rome to participate in D20. What issues are you going to discuss there and what agreement are you going to sign?
Vladimir DMITRIEV: In fact, we’ll hold a regular meeting of Group of Twenty countries’ development institutions. It was Vnesheconombank’s initiative to hold such meetings. We held such a meeting last year in Moscow. The meeting showed that development institutions had a high stake in discussing issues in the G20 format, which are of interest for development institutions. And these are issues of searching for long-term credit facilities, providing support for small and medium-sized enterprises and regulatory rules because development institutions are specialized institutions – they differ from commercial banks. So, we want regulators to treat us in a different way because our objective is to raise long-term credit facilities to extend credits on preferential terms.
Maria BONDAREVA: Are you succeeding with it?
Vladimir DMITRIEV: Yes, we are. And it is important that as part of this dialogue we are moving to discuss joint projects. In the past, our Western partners – development banks of France, Italy and Germany placed main emphasis on searching for joint credit facilities to fund infrastructure projects in Europe. Now they are open for discussing issues associated with long-term funding of various projects in Russia. This is of great interest for us.
So, tomorrow’s meeting is sure to be very interesting. It will be held under the auspices of our partners from Australia.But the European Investment Bank acted as an organizer. We hope that this meeting would be highly instrumental in reaching further agreements.
We are not planning to sign any agreements as part of D20 except for a communique setting forth our common objectives of funding infrastructure, providing support for small and medium-sized enterprises and offering regulators conditions for treating development banks in a special way. But outside of this meeting we hope to sign several agreementswith our Italian partners that are determined to raise credit facilities from Italian banks to implement joint projects in Russia.
Marina BONDAREVA: Vladimir Alexandrovich I wish you a good trip. Finally I’d like to ask you one more question. There appeared information that Vnesheconombank which had extended credits worth 248 billion rubles to fund the construction of Olympic facilitieshoped for government compensation in case of its borrowers’ bankruptcy. Allegedly, VEB requested the Government to allow for a limit in the budgets for 2015 and 2017. Is this true?
Vladimir DMITRIEV:We are not departing from terms and conditions agreed upon with the Government and investors. The moratorium on debt repayment is in force until 2015. So, we do not insist on interest and principal repayment with regard to projects that were funded through using Vnesheconombank’s funds.
With the liquidation of Olympstroy, there arises a question of how we are going to address this problem because Olympstroy’s surety is still valid. Given its liquidation, Vnesheconombank is not capable of compensating for potential losses.
So, we do not require the state to compensate us for something in full right away. Our Bank the state and investors should look for ways of addressing this problem. As it is known that some projects are planned loss-making ones. We took time intentionally and imposed moratorium in order to see how in a period of two years apartments and hotels will be operated and sold and if a cash flow will be sufficient to settle with Vnesheconombank. This work is underway.
Maria BONDAREVA: How do you size up the situation?
Vladimir DMITRIEV: So far, with a cautious optimism, because some private individuals, a number of companies and ministries became interested in purchasing certain facilities. But I’d like to say it once more that our optimism is cautious. The year 2015 is not far off (time flies) and in any case we should be ready for various scenarios. But I’d like to stress it once more that Vnesheconombank, investors and the Government should work together. In my letter to our Prime Minister I proposed to consider various options ranging from providing direct support for Vnesheconombank to subsidizing investors’ interest rates for us to be able to restructure debts to reduce their debt burden. I think that in the long runwe’ll be able to find an optimal solution which is acceptable for the state, investors and Vnesheconombank.
Maria BONDAREVA: Thank you very much for your interview.