A Bank for Development’s function can be compared with an icebreaker ship’s operation
Vnesheconombank’s Exports Financing Department Director Daniil Aguljan told in his interview to Arsenal’s correspondent Petr RUSHAILO about Russia’s exports financial support system and about how mechanical engineering production facilities can benefit from using it.
“There is a great potential in mechanical engineering”
What projects in supporting mechanical engineering exports are the most important for Vnesheconombank?
-Vnesheconombank is trying to support all exports of high technology products of Russia’s non-raw materials economic sectors. As far as mechanical engineering is concerned, there is a great potential in various sectors. As to the current projects, we are active in cooperating with Russian manufacturers of aircraft, railway carriages,construction machinery, engines and other kinds of mechanical engineering products. It should be noted that power engineering industry is one of the central growth points of Russian exports. This is true of atomic as well as of traditional power engineering – manufacturingof gas and steam turbines, equipment related to construction of thermal and hydro power stations. A potential for enhancing exports is concentrated in this sector. There are efficient by international standards manufacturers in our country with strong production and client’sties in many regions of the world. So, our power engineering industry is a very attractive sector in terms of prospects for promoting Russian exports.
What is VEB responsible for here?
-One of Vnesheconombank’s objectives is to provide financial support for domestic manufacturers in the period of a project’s implementation on the terms that can compete with those offered by other countries’ export banks.
You are talking about providing support for exports alone or projects as a whole?
-For the most part - exports. Here I’d like to highlight two aspects. The first one is direct funding of export transactions, the second aspect is providing Russian exporters with a necessary bid package for them to be able to take part intenders. Funding assurance guarantees, advance payment guarantees, performance guaranteesare needed by many Russian exporters to be able to make bids to participate in many competitions and tenders as well as to simply hold business talks. It is not uncommon that there isn’t any business transaction yet but an entire package of potential funding needs to be demonstrated so, we also attach a lot of attention to such preliminary support for Russian exporters.
How would you size up the situation in the state system of Russian exports support?
-I would say that in the last years the Russian system of exports support has made a huge step forward. A system of comprehensive exports support was created, it is comprised of credit, guarantee, insurance, leasing instruments, mechanisms for subsidizing interest rates on export credits. This system is based on the international standards and rulesthat shaped up with due regard to OECD and WTO requirements. In the past 1.5-2 years, we have made a great headwayin institutional development. We can see that Vnesheconombank’s exports financing portfolio increased by almost 10 times and its guarantee portfolio – by more than two times. VEB’s aggregate export financing portfolio amounts now to more than 180 billion rubles. If you have a look at EXIAR (The Export Insurance Agency of Russia), Vnesheconombank’s subsidiary responsible for providing insurance support for export financing, you can see that it has made evident and impressive progress. At present, an Exports Credit and Insurance Support Center is being formed up on the basis of such VEB Group’s companies as OJSC EXIAR and CJSC Roseximbank. It is designed to substantially make exports support more affordable and massive.
But if we compare Russia with such key players in his field as China, the US and Germany we have to admit that our exports support system is pretty young.
What companies can become your customers in this case, are there any limitations on participating of Russian companies in similar programs in terms of their specialization? What are selection criteria for participating in VEB’s export contracts?
-Absolutely any company can become a customer, there are no limitations and we are responsible for providing support for all non-raw materials exports. And one of the most important criteria is availability of non-raw materials exports. If a company plans to export non-raw materials products from Russia, if it is interested in receiving pre-export financing, that is, financing of a Russian company for it to manufacture products under a specific export contract we a happy to explore the possibility of cooperation.
And if we deal with products that are not manufactured at a given production facility? And if it is a case of supplying abroad spare parts and fuel and lubricants for Russian helicopters?
-It goes without saying that this option is possible. To be more specific, we are active in supporting supplies of Russian spare parts for aircraft and helicopters being operated abroad. This is a very common case of export financing.
What foreign markets are most attractive for Vnesheconombank and in what regions does VEB operate most actively?
-As part of the exports support system, we are now working with more than forty countries. And the number of them is growing pretty fast.
Very important markets for us are naturally in South-East Asia and South Asia. Our potential here is substantial in terms of all kinds of mechanical engineering products. Here I mean aviation industry, power engineering industry and transport mechanical engineering. South and Central America are regions with potentially strong demand for Russian products. A good example here might be a large-scale project to supply SSJ110, which is funded by Vnesheconombank a part of international consortium. An interesting example is also VEB’s funding of the construction of power stations in Ecuador. We are also cooperating closely with our Brazilian and Argentinian partners.
As of today, Africa accounts for about a third of Vnesheconombank’s export portfolio. Here we have decades old well-functioning ties between African and Russian enterprises in mechanical engineering. We also participate in a project on supplying a satellite system to Angola. Algiers and the Middle East?
-Yes, of course, they are our old-time partners. Talking about the African continent, I also meant North Africa. We are working very closely on a great number of projects with both Egypt and Algiers. A global exports support system has been already formed at VEB. In this respect,I’dlike also to mention Central and Eastern Europe–now more and more projects related to this region are emerging.
“A Bank for Development’s function is to go with national manufacturers to foreign markets”
Many commercial banks are involved in supporting exports including non-raw materials exports, a great number of them are accredited under EXIAR. What’s the difference between VEB and a commercial bank if we are talking about funding export transactions?
-Vnesheconombank is a financial development institution and its operating principles differ from those of commercial banks, specifically upon supporting export transactions. The fact is that funding of foreign projects is traditionally regarded as a high risky and complicated business. And if we talk about non-raw materials exports, about high-technology products it is often a matter of long financing periods. So, as a rule commercial banks do not consider this sort of transactions as attractive as for example standardized financial banking products inside the country.And this is typical not only for Russia but also for all other countries. And under these conditions a bank for development’s function is to go with national manufacturers to foreign markets and try to create conditions for financial cooperation between countries making it possible in the future to engage commercial banks for cooperation. In this case, a bank for development’s function can be compared with an icebreaker ship’s operation.
By funding Russian exports, Vnesheconombank performs this very function. It’s task is to tap new markets, establish ties and show that projects can work efficiently. And then commercial banks would be interested in joining the process. And I’d like to say it once more that this is common international practice. For example, if you take Germany, there is the KfW Banking Group which is a financial development institution responsible for providing financial support and there is also a very strong banking sector there.
The principle is the same: first the state represented by the Bank for Development helps commercial financial institutions and then they themselves operate actively on foreign markets. The same is typical for France, the United States and other countries.
It’s quite clear in terms of ideology. But what does it mean in terms of financial indicators? Longer credit tenures, lesser interest rates?
-Yes, of course. In the first place – longer projects’ funding periods and as a rule - competitive interest rates on credits.
What are criteria for selecting projects besides a requirement for exports to be high technology products?
-Naturally, a borrower’s credit quality.As of today, our main products are credits to foreign buyers. We are trying to ensure competitive interest rates and funding periods that would help our producers to be on equal footing with foreign ones. Nevertheless, Vnesheconombank is a financial institution, which assesses risks, analyzes its borrowers and uses its banking and financial competence upon evaluating projects. We want not only to fund a project –we also want toget back the money invested in it.
Who are your main foreign borrowers? Are they private companies, governments, private companies guaranteed by their governments ?
-It’s different each time. We don’t have any clear-cut preferences here. There are, for example, private companies whose credit ratings are substantially higher than those of state-run companies. We analyze each project separately and try to form such a credit security package that would allow us to manage our risks most efficiently. There aren’t any limitations in this respect.
How does everything happen from technical point of view? For example, an exporter has found a counterparty abroad and brings it to you…
-If we mean a buyer’s credit there are two main options. First, our exporters often come to us and say that they plan to conduct a transaction and we start to establish contacts with buyers. But there might be a contrary situation. There are large foreign companies, which traditionally use Russian products. Having experience in working with VEB, they come to us and say that they intend to buy various products from a Russian producer. There is another separate line of activity when we extend tied loans in line with very common international practice to foreign banks for buying Russian exports. A local bank can often better assess prospects for business and quality of a local borrower - due to the regional specifics of doing business and financial reporting. It’s easier for us to assess a local bank’s credit quality because banking reporting is standardized as a whole all over the world.
Is there any specifics of funding supplies of military hardware?
-No, there isn’t as a whole in terms of financial instruments.
“High technology exports are custom-made products”
Funding is not enough to get on international market -you have to be able to work on it. Are you involved in consulting, do you help enterprises to tap markets andexecute transactions adequately?
-High technology exports are custom made products, this sort of projects are not standard. So, training process is going on continuously. We ourselves are learning a lot as part of these projects and try to share experience we gained working on a specific market with exporters.
As opposed to such traditional export powers as Germany, France or the United States a great number of Russian producers are not experienced enough in manufacturing products for exports. And we try to help them to tap new markets. Naturally,we can’t substitute specialized consulting firms we do not have competences related to, for example, industrial production and engineering technologies. But we try to provide financial support. Vnesheconombank is cooperating closely with Russian representative offices abroad, with the Economic Development Ministry and the Ministry of Industry and Trade. We are interested not only in ensuring volumes of products to be supplied, we are also keen to maximally increase the number of companies working for exports.
How did sanctions affect the situation related to supplies of equipment and lending?
-Naturally, sanctions exacerbated the situation. On the other hand, it should be noted that main consumers of Russian technological exports are not among countries that joined the sanctions regime. Nevertheless, there is no doubt that opportunities for international funding of Russian projects have diminished. In terms of financial transactions, the situation also worsened in a technical sense. Quite often, projects in in which partners from EU countries and the US participate are rescheduled. But this damage hasn’t been catastrophic so far.
And what about borrowing costs? Because of the sanctions, money has become more expensive for all. Did it become more expensive for you?
-If global changes are taking place in the worldwe can’t remain uninvolved. But if we talk about exports support from exporters’ point of view this problem hasn’t been so acute so far as it is in the domestic market for most banks and companies and this results from subsidizing interest rates. We have been so far competitive on the world’s market.
Are there enough attractive high technologyprojects that could be sold on the world’s market?
-We have enough projects. There is a problem that I have already mentioned – a great number of enterprises do not have considerable experience in working abroad. Therefore, these projects require additional monitoring and preparation. We have to do a lot of information and consulting work for them to enter the market.
VEB is usually associated with major state projects. What is your smallest project?
-If it is a matter of guarantees, the smallest projects related to supplies of mechanical engineering products were worth about several thousand dollars. The smallest credit facility agreement signed this year was worth about 900 thousand dollars, the largest – 500 million dollars.
This means that medium-sized enterprises can participate in Vnesheconombank’s programs?
-They participate actively. At present, we are cooperating intensely not only with the largest companies but also with medium-sized enterprises.
How do you form your portfolio of projects? What does an enterprise need to do to get into Vnesheconombank’s program?
-Here, standard banking procedures are used. An enterprise is to apply to Vnesheconombank and submit a request. We analyze it, examine financial statements, a business plan and a financial model. Then we submit required information to consideration by VEB’s corporate governance bodies authorized to make a decision on a transaction. Recently we have succeeded in accelerating considerably a decision-making process.As far as more or less standardized products are concerned a decision-making process takes now 40 business days and this is in line with a level of western countries’ development banks.
Quite recently, we have launched a new electronic platform, which enables us to ensure advanced online interaction with customers on all export services of Vnesheconombank Group in a single window format.
Who participates in this “single export window”?
-First, Vnesheconombank itself of course with its exports financing department. The Bank extends export credits to buyers and pre-export financing to sellers, conducts documentary operations as well as extends guarantees. Second, our subsidiary EXIAR,which is responsible for insuring credits. Third, VEB’s subsidiary Bank, namely, Roseximbank, which acts as an agent for state guarantees. And finally, VEB-Leasing, Russia’s largest leasing company which we actively use as a leasing instrument upon structuring transactions. Moreover, Vnesheconombank hassubsidiary companies and representative offices abroad. Thus, by connecting to Vnesheconombank’s electronic platform yon get access to resources of this entire system. It’s very important for us as the new systemwould ease the workfor both Vnesheconombank Group’s institutionsand for our partners.
Vnesheconombank Chairman Vladimir Dmitriev’s Interview to the TV Channel Russia 24
Correspondent: Hello, Vladimir Alexandrovich. Let me start with congratulating you here in Bahrain on your Bank’s anniversary. The Bank for Development is going to be 90 years old on December 16.
Vladimir Dmitriev: Thank you.
Correspondent: In general, they call Bahrain a sort of Arab Switzerland where talks have been underway for several days about all events in the Persian Gulf. What sort of talks are you holding here?
Vladimir Dmitriev: I’m here in two capacities – first,as the Head of the Bank for Development. In this respect, we have been building up for a long time close constructive relations with Bahrain, its financing, economic institutions and business communities and second,I’m also here as the co-chairman of the Russian part of the Russian-Bahrain Business Council. In this respect, we have already done a lot but there is more to be done in the future. Especially, given that the management of the Bahrain part of the Business Council has changed. The management and the composition of the Business Council have been augmented and this encourages us to expand our bilateral cooperation in the interests of both countries.
Correspondent: What are the practical results of this cooperation? Have you signed any agreements?
Vladimir Dmitriev: I don’t know anything about agreements that might be signed in so far as it relates to Russian business. We discussed various sectors that are of interest for potential investors and Bahrain. They include medicine, pharmaceutics, IT-technologies, logistics, transport, projects on the development of agriculture and food industry. Bahrain and other Gulf countries provide themselves with foodstuffs through imports. They import foodstuffs from Australia and New Zealand but it might be more profitable for them to import food products from Russia. There is a great potential here for developing gas sector. Bahrain is not a gas producer so it uses its geographical position in some sense as a HUB. Bahrain hopes to cooperate with Gazprom and other institutions to provide itself and other countries with this raw material.
Correspondent: And can you carry out financial monitoring of this project.
Vladimir Dmitriev: Of course, we can. We hope that supplies of products with high added value from Russia can and must be financially supported by Vnesheconombank which also gives high priority to supporting Russian industrial exports of agricultural products. We have a great potential for this.
Correspondent: Let’s talk about supporting Russian industry and agriculture. Recently theRussian Government has made a decision to expand VEB’s powers and entitle it to buy foreign assets for Russian buyers. What assets do they mean and why did they make this decision.
Vladimir Dmitriev:Essentially, it just formalizes Vnesheconombank status as a development institution which is designed to support not only Russian industrial exports but also Russian investments abroad. To this end, the Export Insurance Agency of Russia was established. So, we have created a pretty efficient institution to support Russian businessmen who are ready to invest abroad. Here I mean above all sectors related to a transfer of technology, these are advanced production facilities designed to enhance positions of Russian medium-sized enterprises both abroad and in our country. Unfortunately, we don’t see any mass demand for financial instruments in innovation sectors inside the country. Maybe it exists but unfortunately we can’t ensure interaction between financial institutions and medium-sized enterprises because risks of purchasing high technology companies abroad are high.
Correspondent: In fact, are you going to buy high technology companies in the West? Are they going to sell you such companies? We all remember that several years ago, Sberbank and Avtovaz tried to buy Opel and they failed to do it at that time. The current political situation is more complicated. Will you be able to buy these assets? There are many examples when Russian business owns or co-owns advanced processing facilities. They are associated with activities of KAMAZ and “Rostechnologies” and there are also examples whenRussian companies become firmly established on their own or with Vnesheconombank’s assistance in foreign markets as for example a company which is a leader in software supercomputer manufacturing, namely, T-Platforms Company where Vnesheconombank is a shareholderwith a blocking stake. The company is operating successfully not in our country but also abroad, specifically in Germany. Therefore, in the current situation we hope that our potential for supporting Russian investments abroad will be needed.
Correspondent: Not long agoVnesheconombank filed a lawsuit with the Court of Justice of the EuropeanUnion in opposition to the sanctions. Is the litigation going ahead?
Vladimir Dmitriev: It’s going aheadas we expected under the procedures typical of European legal institutes.
Correspondent:It’s a politically correct answer.And what’s going in actual fact?
Vladimir Dmitriev: It’s an answer in line with the reality. In actual fact,we do not expect any speedy solutions. We are not the only ones, you know that other Russian banks and companies filed similar lawsuits. We are on equal footing and we are coordinating our moves to the extent we can but we can see that a decision-making process is rather lengthy. We know how a legal system works including abroad especially with respect to countries that imposed sanctions on us and companies that were hit by our Western-European partners’ sanctions.
Correspondent: This means that politics influences not only economy but also court.
Vladimir Dmitriev: So far, wehaven’t seen any deliberate sabotage but we are also aware that our colleagues are not going to step up their efforts.
Correspondent: The Bank was denied access to foreign currency because of the sanctions.
Vladimir Dmitriev: We are being funded and make payments within a period of up to 30 days.
Correspondent: Nevertheless,sanctions cause problems. Projects are often funded in dollars and euros.What back ways are you looking for?The word is that you can find back ways with the help of Asian banks?
Vladimir Dmitriev:Nobody is going to look for back ways. We traditionally cooperate closely with our partners from South-East Asia – in particular with Chinese banks. Our main partner is the China Development Bank. We also cooperate with China’s Eximbank and a number of other financing institutions. Our Bank has become a full member in the AssociationofDevelopment Financing Institutions inAsiaand thePacific, an annual session of which was held for the first time this year in Moscow. But it goes without saying that having come up against limited access to capital markets in Europe and the United States we are cooperating with our Asian partner more actively.
Correspondent: Will you be able to raise dollar liquidity?
Vladimir Dmitriev: We are already doing this. Here we do not deal with pure funding but with tied loans. Recently we have raised a credit worth several billion dollars from China’s Eximbank. The loan is tied to supplies of Chinese equipment and it can compete with equipment of European countries.
Correspondent: Aren’t you talking about supplies of component parts for the Superjet100.
Vladimir Dmitriev: No, I’m talking about supplies of Chinese high technology products. But on the other hand the SukhoiSuperjet 100 is also being sold abroad. As many as 12 planes are already flying in Mexico. There is a contract for another 10 aircraft. Our Mexican partners are delighted by this aircraft and it is flying not only in Mexico but also in Latin American countries and even in the US. We can see that localpartners and airlines show interest in this airliner because the need for this aircraft is great. And we are proud of this because we managed to use all mechanisms for exports comprehensive support including VEB-Leasing and EXIAR. Here we rely on our cooperation with state insurance agencies from France and Italy.
Correspondent: So, they want to sell their own?
Vladimir Dmitriev: To some extent. You are right saying “their own” because 60% of this aircraft content comes from foreign partners. Our Italian and French partners participated in manufacturing engines and avionics. Airliners intended for Mexico are assembled in Italy, in Venice. Therefore, despite the sanctions life goes on.
Correspondent: I can’t help asking you about your assets in Ukraine. VEB owns Prominvestbank there. What can you tell me about its future? My understanding is that you’re planning to additionally capitalize it.
Vladimir Dmitriev:We are planning to additionally capitalize it for an amount needed by the bank to comply with regulations of the Ukrainian National Bank. Given an unfavorable situation in Ukraine’s banking sector and liquidity outflow, we also intend to support the bank with liquidity because Prominvestbank is one of the largest creditors of Ukraine’s real economy. I’d like to say that outflow of customers’ funds – funds of both natural and legal entities varies depending on a bank and its involvement in a particular business from half a billion to several billion dollars. Of course, this affects banks’ stability very much.
Moreover, payment discipline in the Ukrainian banking system is extremely low. This year the proportion of credits that are repaid in accordance with original repayment schedules is as little as 20%. You can see that this delivers a heavy blow to stability and financial standing of the banking system. Our Bank is one of the largest and we are determined to provide necessary assistance to Prominvestbank.
Correspondent: This means that you are not going to scale down your business in Ukraine.
Vladimir Dmitriev: This is not our goal.
Correspondent:Vladimir Alexandrovich, thank you very much for your interview.