VEB’s department head: there is no alternative to pension savings on the long-term investment market
INTERFAX.RU – The pension savings market, the amount of which exceeds 3 trillion rubles, faces a new round of changes after the latest complicatedreform. The changes have not been formally approved but they are being actively discussed at the Russian White House. In its capacity of a state managing company (SMC), Vnesheconombank is a major participant in the pension savings market by managing pension funds of “undecideds”. Director of VEB’s Trust Management DepartmentAlexandr Popov told us about the future of the State Management Company (SMC) and the long-term investment market in case of freezing the funded portion of pensions or scraping it altogether.
-How is SMC (VEB) is going to operate under the conditions of freezing the funded portion of pensions for 2015?
-Of course, freezing for the year 2015 is not a very good signal. As to VEB in its capacity of a state managing company, almost nothing is changing because for the most part our Bank is responsible for managing funds of “undecided”. Only 280 thousand people have chosen an extended portfolio knowingly so contributions to the extended portfolio have been frozen for us since 2014. And freezing for 2015 and even for 2016 won’t change anything. Under applicable legislation we are to transfer funds upon applications of citizens filed in 2013and 2014about selecting a non-government pension fund.
-Is this a big sum?
-It will depend on the number of non-government pension funds that will be able to actually transform into joint stock companies and enter into a guarantee system. According to an estimate by the Russian Pension Fund on the basis of applications filed in 2013, it is about 327 billion rubles.
-Is VEB going to change its strategy for investing pension savings under the conditions of sanctions and volatile markets?
-Factually, sanctions do not have any impact on us but we might come up against difficulties with bond issues ratings. So far, rating agencies have refused to assign ratings only to new bond issues of state-run banks, which came under sanctions. As far as other banks are concerned, we don’t have any information.
-So, VEB is not in a position to redeem mortgage bonds of VTB 24, Gazprombank and Sberbank?
-Our investment declaration stipulates that as far as mortgage bonds are concerned ratingsare to be assigned only to bond issues. For all remaining bonds – corporate and sub-federal ones ratingscan be assigned either to an issuer or to a bond issue. This was not an obstacle for us before because if an issuer had a rating, a rating agency used to assign this rating to a bond issue automatically. We turned to the Finance Ministry for it toadjust our investment declaration to set conditions for mortgage bonds which are identical to those for other bonds. I hope that the Finance Ministry will help us.
-Aren’t you going to invest in other types of bonds?
-We don’t see it fit to do it now. Results of investing funds depend exclusively on the Bank of Russia’s key rate, which determines yield of bonds. Sharp and significant increases in a key rate do not go away without a trace.
-Will VEB be able by your estimates to generate yields higher or at least at inflation level, given the falling market.
-I find it very difficult to make any projections and we have no right to make them. In the current situation, a lot depends on the Bank of Russia’s actions, which in their turn hinge upon inflation trends, inflow or outflow of foreign investments and so on. This February, before the key rate was increased, yields on OFZs were about 8-8.5% per annum and after the key rate was increased, the yields exceeded 9.5%. Then in the summer everything started to steady and yields on long-term bonds started to go down. Now yields on OFZs are about 10% and we can see double digits with regard to corporate bonds including short-term ones.
-What can replace pension savings on the long-term investment market?
-Nothing, there is no alternative. By scrapping obligatory pension savings, we are in fact scrapping the emerging long-term funding market. By way of entering into a guarantee system, non-government pension funds would also be able to become long-term investors. Now they invest short-term as a rule for periods of no more than two-three years. The system is not stable and if there is no stability, long-term investments are out of question. Under such conditions, neither life insurance nor voluntary pension systems are going to develop rapidly.
-And what about irrevocable deposits?
-Who will bring oneself to make an irrevocable deposit for a period of five years? Nobody is likely to deposit money irrevocably for a period of more than one year. You need to be confident about your future. Nowadays everything is changing very fast and we don’t know what’s going to happen tomorrow. You should be a very courageous and confident person to put money into a bank irrevocably for more than a year.
-Or a very rich person?
-Or a very rich person, although in my opinion such people are not interested in irrevocable deposits very much. So, there are no other sources of money and we will not have them for a long time.
- Given the current situation, how is the bond market going to develop? Who is for example going to buy infrastructure bonds? There were several bond issues.And now that’s over and done with?
-I think so, if the funded pension system is closed. We won’t have any new funds in our portfolio. And. then we’ll have to address an issue of what should we do with the money already under management of VEB and non-government pension funds. So far, those responsible for social policy in the Government say that the money will stay put. Anyway, the amount of our extended portfolio is big – with all outflows it will be 1.5 trillion rubles (now it’s 1.9 trillion rubles). And this portfolio itself might become a generator of cash. If things shape up in our favor our coupon yields will be about 100 billion rubles per year plus redemption of bond issues. These are all sources of investing but we won’t be able to invest this money for very long periods of time because pension payments are to start from the year 2022. So a maximum investment horizon for these 100 billion rubles is about 10 years. Non-government pension funds are in the same situation. It’s clear that they won’t have a big stake in buying infrastructure bonds.
- Did VEB purchase all bond issues placed by RZHD and UES FGC?
-Almost all final bond issues were purchased by the State Managing Company because nobody had money until 2035.
-If hey for example make a decision on scrapping the funded portion what will happen to pension savings under VEB’s management?
-As I have already said our portfolios and those of non-government pension funds might stay put. We could also try to withdraw these funds but it will be very difficult to do technically. There’s no way of selling the assets in the current situation without crashing the market. We can fix the current structure and the composition of portfolios and withdraw funds into the budget gradually from redeeming instruments and coupon yields. In our case,the final redemption date is 2048.
-Did VEB make any proposals for reforming the pension system? Did the mechanism that operated two years ago before the first “freeze suit you?
-In principle, the system was good enough for us. In our opinion, after our State Managing Company’s investment declaration had been expanded an adequate and efficient system came into being. It is transparent and easy to understand. After the crisis,the real value of money became positive in the long run, that is, bond yields exceeded inflation. After all, a normal investment environment came into being in Russia and it became possible to ensure real profitability for people. The problem was that non-government pension funds were not controlled adequately. There was nothing bad in the system of non-government pension funds and the ones that disappeared were small and not numerous. The problem was that they were not controlled in the right way. And if a system is not controlled there are always swindlers who want to steal money. But the problem is being rectified now.
-Maybe it makes sense to encourage a voluntary pension program?
-We studied pretty carefully the current pension systems in Europe and the United States. In the US, they have a system of voluntary pension savings, which has been in existence since the fifties. There an employer is obliged to offer an employee to transfer some money together with the employer into his pension savings account. And the employee can manage this money himself through brokers. An employee has the right to say yes or no – it’s his private matter. We have been discussing a similar system in our country. We visited an office of a well-known company where 85% of employees are university graduates with higher than average incomes. Nevertheless, only 45% of employees participate in this system. This is the way things are in the United States where the system has been functioning for 50 years, given their developed financial market, their financial literacy and their active involvement in the financial market and what could we expect in this case in our country? If our obligatory pension system could operate until the start of significant pension payments, I’m sure, it would be able to prove its efficiency. This would give impetus for voluntary pension savings and we would be able to gradually replace obligatory savings with voluntary ones.
-This year the state program to support mortgage lending is ending. Is everything going according to the plan?
-VEB’s program ended last year. We are completing the redemption of bondsfrom the program’s participants. We’ve got some problems associated with ratings of mortgage bonds. Other banks which were not affected by sanctions have not had any problems with rating agencies so far.
-All the banks that participated in this program said that they would issue mortgage bonds until the end of the year?
-All agreementshave been signed. Pools of credits have been accumulated. Some are working with rating agencies and some are obtaining sureties from the Agency for Housing Mortgage Lending. I’m sure we’ll resolve all emerging problems with the help of the Government, the Finance Ministry and the Bank of Russia.
-Are you discussing an issue of launching a new mortgage-lending program?
-We need money to launch a new program. Banks benefited from having a rate of 7%. We had never had such a low rate on mortgage bonds. So the banks were keenly interested in this program. The rate was reduced through VEB’s investing its own funds at a rate of 3% per annum but now Vnesheconombank does not have privileged money and it can’t borrow it anywhere. And in my opinion,we should think hard if it makes sense to stimulate a system that is expanding and developing successfully. VEB’s mortgage program was approved after the crisis when we had to reduce rates on credits. An the program achieved its goal. From 2009 to 2012 the rates were reduced from 15-16% to 12% per annum on the whole market – not only on the primary market for which the program was designed. And now as long as banks do not increase mortgage rates substantially everybody including us expects the market conditions to improve soon.
Life under sanctions will require nonstandard solutions
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?
-Neither. BRICS is a forum to share different views. By creating new joint institutions five member countries are entering into a qualitatively new, more advanced stage of its development.