Vladimir Dmitriev: VEB will develop in a stable way despite sanctions
HOST: We are again getting back to Sochi where the 13th International Investment is undeway. Now it’s my colleague Alexei Bobrovsky’s turn to speak.
Alexei BOBROVSKYlexeiBOBROVSKYhis cooperation task.s stable is advancing rapidly.tegyecte raised billions o dollars cludes Vnesheconombank an: I’m glad to welcome in our studio Vnesheconombank Chairman Vladimir Dmitriev. Vladimir Alexandrovich thank you for finding time to visit us. I’d like to start with the news that is being discussed by very many people but not so many understand why it is so important. It became known that VEB hoped for an additional capitalization worth 100 billion rubles in 2015and everybody started to talk that VEB had some problems. But not all know that VEB is not a purely commercial bank, it is above all a development institution which is forced to operate in line with commercial banks’ principles. What’s the reason for it? Maybe, you’llexplain it clearly?
Vladimir DMITRIEV, Vnesheconombank Chairman: You’ve got to the heart of the matter right away. We are not a commercial bank and we are not a public company, which places its shares on the markets and increases its capital. Sources of our capitalization are budgetary funds as we are a state corporation and we are owned by the state. In our capacity of a bank for development, we must rebuild our capital base for us to be in line with Basel standards and those of the Central Bank. A key standard for us now is capital adequacy ratio, which is supposed to be at least 10%. So, when we are speaking about our new strategy, about our increased loan portfolio and expanded investment activity we naturally raise the question of increasing our capital for us to follow required sustainability standards.
Alexei BOBROVSKY: You don’t have to do it in 2014, you need to do it in 2015.
Vladimir DMITRIEV: Thankfully, we have addressed this problem in 2014 by way of converting deposits of the National Wealth Fund into tier 2 capital. This transaction will be closed in a day or two. As a whole, we are grateful both to the Government and the Finance Ministry for their assistance in resolving this problem. Despite the difficult global situation, we set ourselves ambitious tasks of increasing our influence on the country’s economy and its development.There is no doubt that an issue of our capitalization is of overriding importance.
Alexei BOBROVSKY: Is VEB going to change its strategy in the situation of sanctions? It goes withoutsaying, that a development institution should above all invest in the projects that are needed by the state and should not focus on return on investment. Nevertheless, my understanding is that Western markets are closed and you have to think how to earn money – even on a small scale. Do you have to think about changing your strategy?
Vladimir DMITRIEV: We are submitting a new strategy to our Supervisory Board because our former strategy until the year 2015has been already fulfilled this year. So, we raise the question of approving a new strategy. But despite the worsening of the geopolitical and economic situation we deem it necessary to develop in a sustainable way. So, we propose to approve a new strategy which provides for increasing our loan portfolio to 2.5-3 trillion rubles until the year 2020 as well as for increasing our participation in providing support for industrial exports to 550 billion rubles. This support includes guarantee assistance as well as support by way of providing credit facilities and support for small and medium-sized enterprises – Vnesheconombank’s key lines of activity.
Alexei BOBROVSKY: And not only such economically profitable projects. For example providing support for mono-cities, which might be discussed at a meeting of VEB’s Supervisory Board next week, this is a very grave problem for the Russian economy.
Vladimir DMITRIEV: It’s really a very grave problem. But I think a lot has been done recently to improve the the situation. You know that Vnesheconombank Deputy Chairman Irina Makieva isin charge of the interdepartment group. We are closely cooperating with the Economic Development Ministry. As part of our President’s instructions, a decision was made to establish a fund to support mono-cities. At a meeting of VEB’s Supervisory Board we’ll agree upon a candidature of this fund’s head. The fund will be substantially capitalized. And these funds will be used not only to finance infrastructure but also pre-project work and training courses designed to train regional authorities and professional investors to be able to enter the market with good high-quality projects.
Alexei BOBROVSKY: You provide support for new good projects, for example new projects of the Sukhoi Civil Aircraft Corporation. VEB purchased the Corporation’s shares worth 25 billion rubles. This is in general a strategic investment.
Vladimir DMITRIEV: There is no doubt about it. One of VEB’s top-priority lines of activity is to support high-technology production facilities. But in case of “Sukhoi”, it’s not only support for production facilities but also support for exports. We can see the geography of these aircraft’s supplies expanding – now we are supplying them to Mexico. Quite recently we have shown a picture from Venicewhere the planes are assembled for foreign customers at an assembly plant. This is not just an assembly of aircraftthis is cooperation with foreign producers – in this case with our Italian partners.
A transaction we have conducted recently with the United Aircraft Corporation - we purchased a block of shares, by the way, through using profit we received from selling EADS stake- is a part of our work on supporting our domestic aviation industry and promoting its products to foreign markets by using a comprehensive exports support system which includes Vnesheconombank and EXIAR (the Export Insurance Agency of Russia) and of course our foreign partners.
Alexei BOBROVSKY: It is quite clear that it’s difficult now to deal with Western partners, and what sort of strategy do you pursue in your relations with Eastern partners? Heads of major commercial banks have different opinions on this issue. As a whole, there are two opinions on this issue. The first one is that they want to lend money only to fund specific projects that are beneficial for the East. The second opinion is that we should just be able to work with them in a proper way and in this case, we are sure to find an adequate approach.How do you feel about it?
Vladimir DMITRIEV: It is obvious that we are not devising any new strategy; we are following the strategy that we have been implementing within several decades.
Alexei BOBROVSKY: That is to say, you had it in the past?
Vladimir DMITRIEV: Yes, we did - with respect to South-East Asia and China in particular. We have good relations with such partners as the China State Development Bank, one of the largest financing institution, the China Eximbank, China’sInsurance Agency SINOSURE. Above .all, I’d like to single out our relations with the China State Development Bank. I’d also mention our bilateral relations, our leading role in SCO Interbank Consortium as well as our close cooperation within BRICKS.
And I’d like to stress that our cooperation with the China State Development Bank is based not only on trust but also on the projects we are jointly implementing both in our country and also in third countries. Here I mean Kazakhstan where we are working together with the China State Development Bank to upgrade and expand the Ekibastuz production facilities. In the course of decades of our cooperation with the China State Development Bank we have raised billions of dollars on a tied and untied basis. And quite recently we have signed a new agreement with the China Eximbank on funding the Elginsk Coking and Power Generating Coals Deposit.
Our Bank and NOVATEK work with our Chinese partners - the China State Development Bank and the China Investment Corporation. Our work is designed to engage our Chinese partners in the Yamal LNG project. The China State Development Bank has extended credit facilities worth more than 500 million dollars to build a multifunctional office complex. The complex is to be built by Chinese companieson the territory of the former Slava watch plant next to Belarussian railway station. We received this property through rehabilitating GLOBEXBANK.So, we maintain multilateral cooperation and it is based not only tied credits but also on pure credit facilities. And we highly appreciate this cooperation without changing our strategy, without devising any new firefighting methods, measures and schemes. This is a long-time cooperation, it is stable is advancing rapidly.
Alexei BOBROVSKY: I wish you every success in this task.
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.