Expert №26-27 (950)
First VEB Deputy Chairman Petr Fradkov believes thatthe NewDevelopment Bankcould speed up a process of the BRICS countries’ payments in national currencies.
Multilateral financing institutions to be formed within BRICS and SCO are excellent instruments for infrastructure development in their member countries. Russia will have to learn to use them building up its own long-term economic advantages.
Changes in the balance of forcesbetween global economic centers of power have been occurring at a quickened pace in the past two decades. The current pool of global leaders headed by the U.S. is losing its positions on the backdrop of increased economic and political influence of a whole number of other powers, the largest and the most dynamic of which are members of BRICS. The Western countries’ total GDP increased by 20% after the year 2000, but the rest of the world’s GDP doubled over this period. In terms ofannual average economic growth rates,non-western countries surpassed western countries by five times over this period.
The BRICS association functioning for a long time as a forum of five large, dynamic countries with emerging markets has been transforming in the past years into an economic bloc. In last July, a number of principally significant documentswere signed at the BRICS summit in Brazil including a Memorandum of Understanding and Cooperation between BRICS Countries Export-Import Agencies, an Agreement on Cooperation in Innovations, an Agreement on Creating the BRICS Countries Conventional Currency Reserves as well as an Agreement on Establishing a New BRICS Development Bank.The last one has been already ratified by Russia, Brazil and India. The South African Republic and China are planning to complete this work until late June. A Strategy of Economic Partnership of Five Countries up to the Year 2020 is expected to be signed at the 7th BRICS summit to be held on July 9-10. The document includes lines of cooperation in two dozens of sectors ranging from power engineering to telecommunications. In addition a multilateral memorandum on cooperation between BRICS development institutions and the New Development Bank(NDB) is being prepared for signing.
BRICS Bankis being launched
NDB is designed to fund infrastructure and sustainable development projects in the BRICS countries. NDB registered capital is agreed upon at the level of 100 billion dollars, with founding countries making a decision on equal shares of their participation in capital – 20% for each country. Each country’s expenses on forming authorized capital is to amount to 2 billion dollars within seven years. Then, the Bank will be able to raise funds on international capital markets. NDB is open to other countries’ participation. Developedcountries are entitled to be the Bank’s partners rather than its borrowers. Developing countries can be both members and funds recipients. And the BRICS countries reserve at least 50% of the total number of votes.
NDB’s functions are to extend loans and guarantees, participate in capital of managing companies responsible for implementing infrastructure projects, render technical assistance in preparing and implementing them. “Taking into accountBRICS determination to encourage payments between BRICS partners in national currencies, NDB could play a special role in this process, specifically,by acting as principal partner in hedging currency risks including with regard to transactions conducted by BRICS national development banks”, says First Vnesheconombank Deputy Chairman Petr Fradkov. So far, payments in national currencies are not very common in the BRICS area although there are exceptions. For example, this MayVnesheconombank and the China Eximbank signed an agreement on providing funds by the Chinese party in yuans. There is no doubt that it is a qualitative breakthrough in the cooperation of the two countries’ financial institutions. Moreover, we can see a tendency toward changing the approach to funding, that is, a shift away from framework bilateral agreements in favor of agreements on funding specific agreements. A future agreement with the China Development Bank (CDB), which is now being worked out by specialists of the two banks is going even further, it provides for funding a whole cycle of projects including pre-project preparations. And it is funding pre-project preparations where BRICS national banks can in our opinion cooperate efficiently with NDB.
NDB is being created a part of an interstate rather than an interbank cooperation mechanism. Key players of the process are finance ministries of the founding countries. But we shouldn’t underestimate national development banks’ role in in creating and future activity of NDB, especially taking into accounta large scale of transactions to be conducted by some of them. For example, a scale of credit transactions conducted by the Brazilian Development Bank (BNDES) amounts to 88 billion dollars a year(the World Bank’s respective indicator is 52 billion dollars a year).
A staff composition of NDB’s governing and executive bodies is to be formed on the basis of Vnesheconombank’s employees. VEB’s representativeis assigned to a position of NDB’s Vice President from Russia.It is not surprising that the situation is developing this way because VEB is quite experienced in a joint participation in funding projects both with BRICS countries national development banks and with multilateral financing institutions for example the European Development Bank (EDB). This experience will be needed in the process of building relationship inside NDB.
India’s representative, former CEO of one of the largest Indian private banks ICICI KundapurVaman Kamath will be NDB’s first President. The Bank is expected to be managedon a rotation basis by representatives of all member countries. The Bank is to be headquartered in Shanghai.
Pre-project investments should pay back
We can also see good prospects for increased cooperation between SCO countries’ financing institutions. The SCO Interbank Consortium (SCO IBC) is already cooperating. A remaining issue on the agenda is the creation of SCO Development Bank. Options of institutional platform for its creation is now under consideration. One of them is to establish this bank on the basis of the Eurasian Development Bank (EDB) with its headquarters in Alma-Ata. But there is little chance that this scenariowill be put into practice. First, being EDB members Armenia and Belarus are not SCO members. Second, one of EDB’s important functions is tomanage the Eurasian Fund for Stabilization and Development of the EurAsEC (the Fund’s largest project is a financial credit for supporting the balance of payments of Belarus, in 2011-2014 five tranches of this credit were disbursed for a total amount of 2.56 billion dollars). Delegating these functions to a SCO Development Bank appears not to be natural.
An idea to set up a special institution responsible for pre-project work – an SCO International Project Financing Center (IPFC) – looks more realistic. A concept ofIPFC was initiated by VEB and was backed at an informal meeting of SCO IBC banks heads in China this January. One of the options under discussion sets forth that an SCO IPFC will be set up on the basis of - Vnesheconombank’s subsidiary – the Federal Project Finance Center (FPFC). IPFC functions are to address a whole range of objectives associated with preparing investment projects including preparation of feasibility studies anddesign estimate documentation, investment analysis and raising project financing. IPFC analogues are operating as part of the International Finance Corporation (IFC), (IFC is affiliated to the World Bank), the EBRD and a number of other international and national development institutions for example in India and Kazakhstan.
“IPFC is an international institution being established at the initiative and with the cooperation of national development banks, capable of raising private financing, operating through project preparation centers in relevant development banks – explained the idea of establishing this new institutionAlexandrBazhenov , Director General of the FPFC. Selecting and preparing projects are rather expensive, the cost of such work amounts to no less than one percent of project expenditure estimates and it is associated with high risks. IPFC’s task is to provide pre-project activites with resources and competences to minimize investors’ risks. It is principally important that funding of pre-project preparation should be reimbursable and profitable”.
Thus efforts being made by VEB to prepare a credit agreement with the China Development Bank are of special importance because this agreement is designed to fund a full cycle of investment projects including a pre-project preparation mentioned aboveby Petr Fradkov.
Candidates for a pool of projects
A substantial objective in the period of establishing new BRICS and SCO financing institutions is to form a portfolio of projects - beneficiaries of the Bank’s future investments. Here we mean selection and qualitative pre-project “packaging” of the most important infrastructure projects on the Russian territory.“The Russian side handed over a package of 37 projects intended for multilateral cooperation to its partners”, said Sergei Katyrin- President of the Russian Chamber of Commerce and Industry - in his interview to RIA Novosti.
A Memorandum on cooperation between the Russian Transport Ministry, RZHD, the National Development and Reform Commission of China and the China’s Railways upon the Construction of the Moscow-Kazan High-Speed Railway was signed in May in Moscow. Regulatory-legal and financial framework for implementing a project on this high-speed railway as well as joint manufacturing of equipment and its localization are being so far agreed upon.
This railway should become the first project on the way of creating a high-speed transport corridor Moscow-Beijing, which is an important component of an idea advanced by the Chinese side to create a transcontinental transport route from China to Europe – the New Silk Road (China’s One Belt One Road Initiative). This belt is supposed to run from the east to the west through 18 countries with a population of morethan3 billion. China also proposed to build the 21st Century Maritime Silk Road – aseries of shipping routes linking Chinese ports with Belgian Antwerp. A tandem of Chinese megaprojects provides for creating maritime and land transport routes with a total length of 11 thousand kilometers.
Last December, China established a Silk Road Fund - a special institution with capital of 40 billion dollars. It is designed to fund infrastructure projects as part of a new global transport corridor. Its main instrument is entering into capital of companies – operators of projects. And the National Development and Reform Commission of China formed a list of 1043 top-priority infrastructure projects worth 371 billion dollars. They are interested to implement these projects on PPP terms. A significant part of them,as may be supposed, are in line with the strategy for developing a New Silk Road economic belt.
China also initiated the establishment of Asian Bank for Infrastructure Investments (ABII) with capital of 100 billion dollars to fund projects in power engineering, transport and logistics. The ABII is to extend financing on the terms of national loans as is the case for example with the World Bank. There are about five dozens of states among the Bank’s founders both Asian (India, Indonesia, Bangladesh, Korea, Pakistan, Kazakhstan, Uzbekistan), Far Eastern (Qatar, Kuwait, Saudi Arabia, Israel) and European (Great Britain, France, Germany, Italy, Switzerland, Russia).So far, the US and Japanare turning a cold shoulder to participating in the process of establishing the Bank.
A similar specialization of ABII and NDB opens up an opportunity for syndicated lending for especially large-scale strategic projects. Nevertheless, as specialists note, possible differences in credit ratings, terms of foreign funding and corporate governance practice might cause incompatibility of these financing institutions’ credit policy, differences in procedures for examining projects and assessing risks.
One of the Silk Road’s land components – the Europe-Western China Motorway shows a high degree of readiness on the eastern side: China is completing the construction of its section of the motorway this year (with a total length of 3500 km) in 2016 - Kazakhstan (2700km). But the business situation with regard to the Russian section of the motorway (it is to run through the Orenburg region, Bashkiria, Kazan, Moscow and Saint-Petersburg, with the section’s total length in Russia being 2200 km) is very disappointing. Individual regions are performing engineering survey worksand laying out the roadat their own cost but at the federal level the project is frozen so far, because of the crisis despite the legally binding documents signed by our country under this project as early as in 2007.
Russian President Vladimir Putin put forward an idea of connecting of the New Silk Road Project to economic mechanisms of the Eurasian Economic Union (UAEU). In May, President of the People’s Republic of China Xi Jinping backed the initiative. In this situation instruments and institutions of SCO, specifically, IPFC might be especially needed.
A balance of interests is important
The signing at the summit level of more than three dozens of large-scale long-term economic agreements on cooperation between Russia and China that took place in May in Moscow is a qualitative breakthrough in the bilateral relations. It’s premature to say that we have found an adequate substitute for western capital and technologies, access to which was closed last year by sanctions for an indefiniteperiod of time. But in any case,two things are certain: the West has failed to impose a total foreign-economicblockade on our country and despite sanctions and selective anti-sanctions, Russia was able to avoid a temptationof self-sufficient development and self-reliance in all directions.
How long and irreversible is the current thaw in relations between Russia and China going to be? The question remains open. An answer to it will depend on a factual content of framework agreements signed in Moscow by the leaders of the two countries.
Let’s be realistic: a balance of interests is not going to emerge automatically. We have already witnessed examples when financial participation of Chinese business in major raw materials projects on the Russian territory was stringently tied to guarantees to use Chinese technologies and Chinese equipment on a preferential, non-tender basis.“And we can understand them pretty well. They have a lot of long-term money and infrastructure demand inside China is subsiding, the economy is slowing down and they need export supplies and offshore ordersto maximallyutilize their production and construction capacities”, explains Vnesheconombank Deputy Chairman Sergei Vasiliev. Last year, China’s outgoing foreign direct investments reached 116 billion dollars and China became the third world’s largest capital exporter (after the US and Japan). But so far, Russia accounts for no more than 1.5% of accumulated Chinese outgoing direct investments.
We often fail to receive counter guaranties for a transfer of technologies and competences, for assimilating novel technologiesand developing new markets because our business, diplomatic services, specialized governmental institutions and agencies do not often have enough perseverance and consistency. The only reassuring thing is that the Chinese will build infrastructure in Russia and they won’t take it away with them.
In this respect, multilateral mechanisms for economic cooperation could in some cases ease bilateral contradictions and in others help us to receive bilateral agreement performance guarantees.
Russia is quite capable of using all these instruments for cooperation both for promoting is own interests in the BRICS and SCO multilateral area as well as for supporting Russian exports. Lately, VEB has been placing special emphasis on this line of its activity working in close contact with line ministries and agencies to upgrade the exports support system. The Russian Export Center came into being as part of Vnesheconombank. It integrates all financial and non-financial instruments for exports support, said Petr Fradkov. A unique feature of the Center is that itoperates as a single window – a sort of the exporter’sassistant, aconnecting link between the customer and relevant institutions. Its activity is designed to simplify procedures associated with export support.
Blocs of new leaders
BRICS is an alliance of the international monetary and financial system reformers aimed at promoting interests of member countries’ economies with due regard to their role in the global economy. Wecan’tget an adequate evaluation within the Bretton wood institutions (the World Bank, the IMF, the Asian Development Bank, EBRD and others). The total proportion of the BRICS countries’ votes at the IMF is a bit more than 11%, with the Bloc’s proportion in the global GDP being almost 28% ( according to IMF estimates this proportion evaluated by purchasing power parity exceeded that of the Big Eight). Moreover the BRICS countries account for 18% of the world’s trade, a third of earth’s land area and as much as half of the world’s population.
The BRICS stock exchange alliance cross lists 7000 companies of member countries with a total capitalization of more than 8 trillion dollars.
Best operation practices and competences in expert examination and project structuring being applied by Bretton wood institutions will be borrowed and used by institutions being set up. BRICS financial institutions should be regarded as additional rather than alternative ones to the functioning multilateral institutions. The BRICS countries development institutions including Vnesheconombank have a multi-year experience of cooperation. Specifically, an informal association of G20 countries’ development institutions was set up not long ago. It gains momentum year after year and seeks a formal status. The BRICS countries’ banks are members of this association.
P. Fradkov: “Our task is to create a single window for exporters, where they could receive all measures of government support”
TV Channel Russia 24
HOST: We are getting back to a main topic of our program. An International Economic Forum has opened in Petersburg. Vnesheconombank First Deputy Chairman Petr Fradkov told my colleague EvelinaZakamskaya about the Forum’s work.
CORR: Good afternoon Petr Mikhailovich.
Petr FRADKOV, Vnesheconombank First Deputy Chairman, Member of the Board: Good afternoon.
CORR: You became head of a new center –the National Export Center. This means that all measures of state supportare united ina single window. What are the tasks of the new Center?
Petr FRADKOV: You’re absolutely right. Our task is to create a single window for exporters where they could receive all measures of state support that exist now. It is very important. These measures are a bit isolated – they are provided by various institutions. They apply different procedures and different approaches. Exporters and especially medium-sized exporters (and we focus on medium-sized exporters because we believe that this segment of companies is our basic potential for developing Russian exports) often find it difficult to make sense of both aprettylonglist of these supportmeasures and of procedures for receiving them.
CORR: And make sense of those who provide them?
Petr FRADKOV: A problem here is where to go and what to do.
CORR: Could you listinstruments at the disposal of the state today. What kind of support can be provided to business?
Petr FRADKOV: Globally, all types of support can be divided into two blocks: financial support measures and non-financial ones. I’d like to start with financial support measures and here we have made a big step forward in the past two-three years when we started to understand that quality of products and access to a market are very important but without adequatefinancial offers products become uncompetitive. And we have done a lot in this respect. First, we have established EXIAR (the Export Insurance Agency of Russia). EXIAR is Vnesheconombank’s subsidiary and we can say that it is operatingto the max.
CORR: This is a main instrument,isn’t it?
Petr FRADKOV: In terms of readiness to offer mass products, this is a fully functioning mechanism. The company is operating efficiently, they have developed a product line and its main segment is comprised of medium-sized companies. A mechanism for subsidizing interest rates upon providing export financinghas been launched. Vnesheconombank has already been using this mechanism actively and Roseximbank, a member of Vnesheconombank Group, is to start applying it this year. These measures are fully allowed by the WTO and the OECD on the one hand and on the otherhand,they help financing banks to provide decent funding without sustaining losses. In 2015, Vnesheconombank was provided with 4.5 billionrubles to subsidize interest rates, Roseximbank received 3billon rubles. This is a new, I would say,innovative mechanism, which did not exist in the past.We are working on it and the government helps us. Roseximbank’s capitalization is going on. This year 10 billion rubles were allocated from the federal budget to Roseximbank’s capital in the form of subsidies for it to be able to fund medium-sized companies.As a head institution, Vnesheconombank focuses more on major, complex-structured projects. This work is in progress, the portfolio is growing steadily.
CORR: How many projects are there in your portfolio and what’s the percentage of non-raw materials exports?
Petr FRADKOV: The amount of no-raw materials exports is growing. We would like high-tech exports to grow more rapidly and we are working on it. We plan to use measures I’ve mentioned before especially subsidizing interest rates to help companies which are involved in high technology exports. Unfortunately, now the proportion of high technology companies exports amounts to less than 10 percent of all exports. But I’d like to stress that non-raw materials exports amount already to almost a half.
CORR: What about the proportion of small and medium-sized enterprises?
Petr FRADKOV: Here we mean aboveall medium-sized business enterprises. The proportion is very insignificant, may be several percent of the whole exports. But I’d like to stress that it is medium-sized enterprises that are growing pretty fast because favorable economic conditions are now developing for companies to refocus their production facilities on foreign markets. The main factor is of course the devaluation of the ruble that is always beneficial for exporters as well asthe domestic market saturation. And the companies that to some extent think about their future are trying to refocus at least part of the production facilities on exports. We believe that if at least 20-25 percent of company’s receipts account for exports, it’s a great success, a very great success.
CORR My understanding is that another way of boosting support for non-raw materials companies and medium-sized enterprises is to work with regions?
Petr FRADKOV:You are absolutely right.
CORR: And this work accounts for a significant part of your activity.
Petr FRADKOV: Of course, we set ourselves this task. Financial support measures are important but in one form or another they existed in the past, we worked on them. Along with financial support measures,it’svery important to develop a range of non-financial support instruments. These are very important issues - a long list of issues starting from support for companies in tax administration. Acompany should be well versed in taxation because it is one of company’s attributes, a company should be a responsible taxpayer but the fact is that when you deal with exports there are a bit different procedures, different approaches…
Companies don’t know about it.
Customs clearance is a very serious matter. In the past when we talked about optimizing customs clearance procedures, we meant imports. We seldom talked about exports because it was power engineering, a sector, which was a domain of very large enterprises and they had competence.It turns out that medium-sized enterprises have a lot of problems dealing with certification, intellectual property rights, patents – we regard all these issues as being non-financial ones. And now, they are as topical as issues of financial support.And the center should deal with these issues and assist exporters in receiving relevant support in relevant institutions through a single window.
CORR: What markets do Russian businesses choose irrespective of their core activity and size?Can we say that we are making a turn to the East?
Petr FRADKOV: I think so.
CORR: Is it obvious and objective?
Petr FRADKOV: Maybe. I wouldn’t say it is only aturnto the East. It’s a turn to other directions other than the West – Latin America for example. Our partners from Latin America for various reasons would like to cooperate with us in implementing a great deal of projects in power engineering, transport mechanical engineering, infrastructure including railway one. CIS is making a revival now. The work with regions is becoming interesting because of the ruble devaluation. And I believe that our partners in CISrealized that, given comparative quality, our products are less expensive. And in this region a contract’s value is of great importance.And Asia of course.And I wouldn’t like to limit myself to China, I would talk about the Asia Pacific region, about the South-East region, Indonesia and Vietnam.
CORR: I’m sure you are still interested to cooperate with Europe. To what extent would you recommend to work with European partners in the current atmosphere of pressureand alarming signals that keep on coming?
Petr FRADKOV: We are ready to cooperate. We always side with exporters. If the exporter has made a decision, if the exporter believes that he is competitive, if he is in a position to work on the European market, we’ll do our best to help him. Technically, there are no financial limitations in terms of exports but we shouldn’t ignore the current situation. By no means we are going to dissuade people from working in Europe.
CORR: How do you assess the risks of insurance events?Do they exist today?
Petr FRADKOV:Even before we started to discuss issues of sanctions pressure we had placed our stake onmarkets of Latin America and South East-Asia with rather low sovereign rating but it was a revelation to me to find that our partners who were in a difficult financial position worked with Russian exporters in the most responsible way. What the eye fears the hands do. To tell the truth, I didn’t feel any radical change in the approach after sanctions were imposed. Paradoxically, exports are rather safe business activity.
CORR: This means that a lot depends on us.
Petr FRADKOV:Everything depends on us ourselves.
CORR: Thankyou. I wish every success.
Petr FRADKOV: Thank you very much
Vladimir Dmitriev: “Above all, top priority line of activity of all development institutions is infrastructure”
TV Channel Russia 24
Host Alexei Bobrovsky
CORR: Thank very much. I am very happy to introduce our guest, VladimirAlexandrovich Dmitriev – VEB Chairman at the Petersburg International Economic Forum.
Good afternoon Vladimir Alexandrovich
Vladimir DMITRIEV: Good afternoon.
HOST: What sessions are you participating in? I know that one of the sessions you spoke at is called “Russia’s regions, creating and enhancing growth points “. Do you know where these growth points are, do you understand them?
Vladimir DMITRIEV, Vnesheconombank Chairman: Naturally, we understand themand it’s no coincidence that our loan portfolio is comprised of projects that are being implemented in all theregions. There is no doubt that that we attach key importance to the territories and regions that are of top-priority significance in terms of socio-economic development and in the long run,in terms of national security protection in all its aspects: military, food and energy ones.In this sense, the Far East, the North Caucasus, the Kaliningrad region and other regions that are in need of our investments, long-term money are undoubtedly of top priority for us.
HOST: As to the lines of activity, you’ve mentioned food, military and infrastructure sectors…
Vladimir DMITRIEV: These lines of activity include of course infrastructure and providing support for high-technology sectors. As to the Far East, we have to mention Komsomolsk-on-Amur where with our assistance they are implementing a project on the assembly of SukhoiSuperjet 100 aircraft as well as advanced military fighter planes. So, these sectors are of top priority for us.
HOST: In late May,you participated in the third meeting of the Heads of the G20 financial development institutions, it is called the D20 by analogy with the G20. VEB initiated and organized these meetings. Bu we don’t know much about development institutions in other countries. Are these meetings really important, how can we benefit from them?
Vladimir DMITRIEV: It’s no coincidence that it was our initiative to create a constant working platformas part of the G20 to discuss topics of common interests for development institutions and not only national but also international ones. Our initiative was backed. We met for the first time in Moscow three years ago and our third meeting was this year in Istanbul. It confirmed again the need for discussing joint projects as well as the need forfor putting forward concrete initiatives. It’s a good thing that our partners and colleagues from other development banks including countries from countries with developed economies believe that they can expand their investments not only in their own countries and regions surrounding them but also in the countries with developing economies. In this sense,I’d like to mention SACE agency which started to undertake in investment activity and the Italian Development Bank that intends to expands its cooperation beyond the country. It’s of overriding importance for development institutions to synchronize ouractivity in relations with financial regulators because our activity associated with raising financial resources and extending long-term credits is not always in line with the Basel regulations. So we want special regulations special standards to be applicable to us for us to be able to engage in our core activities and invest in the economy.
HOST: This is also a problem for development institutions beyond Russia?
Vladimir DMITRIEV: Absolutely.
HOST: You study their strategy, it is similar to VEB’s strategy, they also invest in infrastructure and all the sectors you’ve mentioned.
Vladimir DMITRIEV: Above all, top priority line of activity of all development institutions is infrastructure.And another top-priority line of our activity is providing support for small and medium-sized enterprises. And here the most important issues deal with social responsibility, sustainable development and with funding green economy. These issues are top of the agenda for international and national development banks and we also place overriding emphasis on them in our policy and our strategy.
HOST: It’s very interesting because in many economic aspects we are moving in opposition to the world’s trend.And as far as development institutions are concerned we outstripped the existing trend if I get it right. I am under impression that in many countries a role of the state as a main investor is on the rise, is this really the case.
Vladimir DMITRIEV: Let’s remember a 15-year old debate in our country when we argued about the need for development institutions and the need for the state’s participation in the economy. There is no doubt that we should develop free competition and form our national economy on the basis of liberal views.We do not argue about these issues any more, now it’s a matter of boosting the state’s participation in our country’s economic development. It goes without saying,that we should not return to a Soviet centrally planned economy.But efficiency of the state’s participation in the economy is very important in formulating government policy. And I think that in this sense a potential of development institutions, the bank for development, our subsidiaries has not been exploited to the full. But it’s important for us to rely not only on private entrepreneurial initiative but also on the state’s participationand above all through development institutions.
HOST: Are you worried about investments in Ukraine? Have you identified long-term major projects for your Bank to fund? Premier Medvedev spoke about it at a meeting of VEB’s Supervisory Board
Vladimir DMITRIEV: We have serious increased risks in Ukraine, given the developing situation there and given the current attitudes towards Russia. Suffice it to say, that yesterday the management of our subsidiary bank in Ukraine got into trouble – the bank and its head office witnessed violence. There were ‘mask shows’ in the best traditions. They turned offices inside out,copied all the information and took in a blatant way a picture of the Russian President’s portrait in the office of the bank’s head. This is a Russian bank and probably it’s of no interest for special services. Of course, it’s very difficult to work under such conditions. In Ukraine, credit repayment rate last year, and banks with Russian participation are no exception here, was 20 percent of the projected one. These are non-payments The situation in the economy is catastrophic.
HOST: And what about investments inside the country – do you have any plans here?
Vladimir DMITRIEV: The Bank’s Supervisory Board showed once again that the state attaches great importance to Vnesheconombank. 300 billion rubles were allocated to Vnesheconombank from the National Wealth Fund for funding investment projects. These are projects in automotive industry, aviation industry, military industrial complex and agriculture. We are to report to our Supervisory Board with regard to each project to be funded from the National Wealth Fund. And our Supervisory Board is to make an individual decision on each project
HOST: Thank you very much Vladimir Alexandrovich for finding the time to come to our studio. Thank you.
Vladimir DMITRIEV: Thank you.
Vnesheconombank Deputy Chairman I.V. Makieva’s Interview to Regnum News Agency
In the course of the Petersburg International Economic Forum -2015 Vnesheconombank Deputy Chairman Irina Makievatold about how Russia’s Mono-Cities Development Fund operates.
Corr: Irina Vladimirovna, recently the list of Russia’s mono-cities has undergone some changes; the Government issued a new executive order, the list’s structure changed.Quite how?
Irina Makieva: In accordance with the package of measures for boosting mono-cities’ investment appeal approved by the Russian Prime Minister, the Russian Economic Development Ministry together with the Working Group on Modernizing Mono-Cities under the Governmental Commission on Economic Development and Integration is to review at least once a year the list of Russian mono-cities by upgrading (if necessary) all its categories. Every year the situation changes – some cities improve their situation, the others worsen it. Each year we have to check what sectors are feeling worse than others. For example, the automotive industry is now feeling worse and the aluminum industry is feeling a bit better.The same is done with regard to mono-cities of relevant profiles. Therefore cities with such basic sectors as automotive or mechanical engineering industries replenish the “red zone”. After the latest review of the mono-cities’ list the “red zone” numbers 94 cities (earlier there were 75 cities). 68 cities are ready to move forward cooperating with the Mono-Cities Development Fund.
Corr: Out of 94 cities 68 are ready to move forward. The remaining 26 can be diagnosed for being more dead than alive.
Irina Makieva: No, of course. There are cities that do not want to work. They believe that everything is fine if people can find jobs on their own in the nearest population centers. In the course of our work we saw that there are territories that do not give any proposals for improving their situation. We continue to work with them, monitor the situation, hold videoconferences, trying to understand the situation which is developing there. If we see that a great number of people working at a city-forming enterprises might be laid off , we work with it in a special way. For example, two weeks ago we held a conference devoted to NaberzhnyeChelny. We are working on a proactive basisforecasting a situation 6-8 months in advance – sometimes with cities that are not included in the ”red zone” but where risks are quite high. We start working even if workers have not been given notice of dismissalbut there is a forecast of the negative development of situation.
Corr: Nevertheless, you say that there are cities that do not want to work. What does this mean? As a rule administrations of cities meet representatives of VEB and the Monocities Development Fund with prepared lists of residents and tasks which need the state’s support. It’s quite obvious that they are interested in this support.
Irina Makieva: But before starting a business tripwe work very hard and meticulously, we hold dozens of meetings of our working group in order to find investors because there are territories that do not offer much or they propose business fantasies or business ideas.
For regional businessmen to move from business ideas to business plans we have to perform pretty meticulous, methodical and routine work whichremains invisible. But there are territories that are not ready for this work. For example in the city of Nadvoitsy (the Republic of Karelia) a very grave situation developed. We have been working with them for a year and a half. We find it extremely difficult to find investors. Local business is very passive. They believe that if someone will be the first to come from outside, they will see and might think and decide if they should expand their own business.And we have to work longer and talk more harshly with such cities as Nadvoitsy than with others because it is in thesedifficult, slow starting territories we need to create jobs. We understand this and administrations understand this too, but business does not trust anybody. And we hold not only visiting conferences on such territories but also business forums unseen for such territories in the past. We bring people from the whole country to these territories – the best managers of Tatarstan, Siberia, the best practical experts from across the country. And these businessmen tell them how they started their businesses and how they achieve their goals. Unfortunately, we haven’t achieved tangible results so far. But we’ll go on working until we can persuade people that they should work where they live and do their best.
Corr: And for the time being, these slow starting territories are just waiting for the state to provide them with non-reimbursable money and that would be the endof everything?
Irina Makieva: Territories vary a lot. There are territories that try to work with people, work with local big and medium-sized businesses, and prepare documentation. But there are also territories that adopt a wait-and-see attitude – we’ve got money but it might run short. And we might have to make too much effort. So, we above all support those difficult territories where business seeks to develop and people living in the city want to make changes andan administration makes strenuous efforts to transform a depressive situation into a stable one.
Corr: The list of “redzone”cities is increasing. Has any city you’ve started to work with moved from a “red zone”into a “yellow one”?
Irina Makieva:Not yet. Decisions were made to commit money to several cities but so far tenders are being held for selecting contractorsto build water-pipe lines,boiler stations, sewage treatment facilities. This is a legal procedure making it possible to make projects less expensive. Investment projects are waiting for construction projects to start in order to begin developing facilities at these sites. The first decisions on committing funds have been made with regard to two most problematic cities of the Kemerovo region: Yurga and Anzhero-Sudzhensk. A decision on Kanashwas made two and a half weeks ago, a decision on Krasnoturinsk –was made a week ago. A decision on Kameshkovohasn’t been made yet - documentation and investors are being examined. We are planning to visit another five cities in August-September.
Corr: In one of your interviews, you said you worked with territories in a manual regime and that it would make sense to set up a universal office to process “red zone” projects. Does it mean that cities are often passive?
Irina Makieva: There is no doubt that above all we select cities that have design estimation documentation. Butthere arecities that can be described as scroungersand they believe that if they got in the “red zone” everything should be done for them by someone else. But the Mono-Cities Development Fund is not authorized to work instead of them. An algorithm is as follows: you got in the “red zone”, you developed a comprehensive investment plan. This plan includes a manpower balance sheet, a state of small and medium-sized business, education. This a small and easy to understand document. You develop documentation, you find an investor, you come to our working group. We take two pages from this document and one table which is called manpower balance sheetand itincludes information about possible layoffs at a system-forming enterprise and a potential of investment projects, that is, dynamics of a possible smooth transfer of workers from one enterprise to another without any interruption and a sharp growth in unemployment. We can see all emerging problems from these documents. We ask cities to develop documentation… Andthey respond: And what if you’ll deceive us? We’ll spend money and you won’t support us? We can’t yield to this sort of blackmail. We tell them to have a try. If you do this,we’ll go further with you. The Monocities Development Fund shouldn’t do this work instead of territories, it’s not its responsibility. This a region’s responsibility if it wants to move further it should do something. We can assist in searching for investors, we can enter into companies’ capital, we can help with money, we can help to train managerial teams that will be in charge of business processes on the territory but we won’t work instead of regions.
Corr: You spoke about small and medium-sized enterprises at the Petersburg International economic Forum. Is it true that demand for small and medium-sized enterprises in mono-cities has increased now?
IrinaMakieva:To be more exact, the demand for credit facilities increased. It is associated with the fact that SME Bank Management Board Chairman Sergei Kryukov is a member of the working group on mono-cities, he always travels with us and see this problem from inside. Sometimes SME Bank tackles a problem on a turn-key basis, that is, provides preferential credit facilities to all businessmen of the city on equal terms. Sometimes representatives of small and medium-sized enterprises become residents on the territory of a business park. They come to us and say that banks are ready to extend credits to them at an interest rate of 30 percent. Being aware that cooperation with mono-cities is one of its priorities, SME Bank increases partner banks’ limits and then an interest rate for small and medium-sized enterprises in these cities reduces from 30 to 13 percent and money is provided for a tenure of five years rather than a year. That is, this money becomes long-term and inexpensive and this contributes to the development of small and medium-sized enterprises
As earlier reported by Regnum News Agency, on November 11, 2014, Russian Prime Minister signed an executive order to provide the Monocities Development Fund with a subsidy from the federal budget worth 3 billion rubles and another 26.6 billion rubles are scheduled to be received by the Fund in 2015-2017, this document also specified the rules for providing the Fund with this subsidy which will make it possible to start work as soon as possible.
Dmitriev: VEB to get involvedin implementing a project “the Moscow Kazan high-speed railway (HSR)”
TV Channel Russia 24
HOST: We are now in touch with Maria Bondareva from the Kremlin, she is interviewing live Vnesheconombank Chairman Vladimir Dmitriev. Only a short time ago talks and a news conference between President Vladimir Putin and PRC President Xi-Jinping ended.We’re listening, go ahead Maria.
CORR.: Vnesheconombank Chairman Vladimir is next to me now. Good afternoon Vladimir Alexandrovich.
Vladimir DMITRIEV, Vnesheconombank Chairman: Good afternoon.
CORR.: Vladimir Alexandrovich, let’s start with the contracts you have signed here today. One of the contracts was signed between Vnesheconombank and the China Development Bank for an amount of 8 billion dollars. Tell us about this agreement in more detail.
Vladimir DMITRIEV: First, it should be stressed that we have been fruitfully cooperating with the China Development Bank for a long time – this is our partner bank. It performs the same functions as Vnesheconombank. We signed and implemented a whole number of agreements on funding projects in such sectors as timber processing and power engineering; we also cooperate closely within SCO. Butthe said major agreement provides for cooperation in implementing projects in the Far East. They include projects in infrastructure, power engineering and agriculture. We also hope that the China Development Bank will get involved in cooperation between development banks of the Eurasian Economic Union in implementing a project “The New Silk Road” And we are holding a dialogue with the China Development Bank and our partners from Kazakhstan and Belarus on this issue. A relevant agreement is to be signed on the issue. We believe that this format will suit our Chinese partners well and we are going to jointly explore and in the long run implement projects that are of interest for our countries.
CORR.: When could you sign this sort of agreements? Is the statement on cooperation within EAEU and the Silk Road project a main document that has been signed today by President Putin and President Xi-Jinping?
Vladimir DMITRIEV: We believe that we’ll be able to reach more concrete arrangements by this September when we mark the end of the Second World War and when the head of our state visitsthe People’s Republic of China. This is a suitable format for us to sign relevant documents in the presence of heads of state. But it’s important that the China Development Bankis not the only partner for us. We have also signed an agreement in yuans today with EximBank of China. Sberbank also signed an agreement with the China Development Bank. Basically, these are breakthrough agreements in financial cooperation between banking institutions of our countries as they open up the way not only for trade but also for investment cooperation. In this sense, a lot has to be done. Last year they signed agreements at central banks’ level on currency swaps, they are still valid with regard to trade relations,credits are extended for a tenure of 1 year at most. Through intermediary of our partners from EximBank of Chinawith the National Bank of China and the Bank of Russia we are now holding talks about expanding the format of using national currencies with the help of swaps and apply them to investment transactions for a tenure of more than one year.
CORR.: Are you going to sign any other similar agreements on mutual payments?
Vladimir DMITRIEV: It is important that an agreement signed today is not a framework one. It is a concrete agreement and it is applicable to a credit transaction, which VEB is implementing in Khakassia. It’s a project on the construction of manganese plant on the basis of deposits in the Kemerovo region. We believe that our Chinese partners can fund a part of equipment, which will be imported fromChina and end products might be in demand in the People’s Republic of China. Another agreement we are considering with our partners among other things with EximBank of China is also tied to concrete projects. It’s not a framework agreement, these are concrete transactions to be funded in the regions.
CORR.: What kind of projects are they?
Vladimir Dmitriev: These are projects in small-scale power generationon the Kola Peninsula. Our Chinese companies are experienced enough in this field and they have pretty competitive equipment they are ready to supply and EximBank of China can fund this transaction. There is also a transaction in minerals production and primary processing. In this respect we have now a project we are considering together with Nornikel. So, there are a whole number of projects that can be funded by Chinese banks. Out of them,I’d like to highlight a project on providing affordable and comfortable housing which is very important in terms of socio-economic significance. We are implementing it with the China Development Bank and the said 8 billion dollars could be usedto fund the project in which capabilities of the Housing Mortgage Lending Agency and Vnesheconombank will be employed. Affordable and comfortable housing is a large –scale project. We’ll engage Chinese contracting companies in implementing it and ensure Chinese funding.
CORR.: An agreement on cooperation on the construction of the Moscow-Kazan high-speed railwayhas been signed. And VEB plans to somehow participate in this cooperation?
Vladimir DMITRIEV: We believe that this contract will be implementedincluding throughdebt financing. Chinese banks will fund supplies of Chinese advanced equipment and machinery to implement this mega project on the construction of a high-speed railway. So, Chinese banks need Russian partners which will raise financing to lend to Russian banks or to extend guaranteesagainst credit facilities to be raised by Russian companies. That is why we believe that there is a serious potential for cooperation between banks similar to the one we already have with Exim Bank of China and with the China Development Bank.
CORR.: How do you feel about attempts by the Russian Direct Investment Fund (RDIF) and the China Construction Bank to create a mechanism for raising Chinese investmentsfor Russian companies?
Vladimir DMITRIEV: In the current situation when our capabilities to raise foreign investments are limited, we rely on those countries that are ready to fund in national currencies and that did not join sectoral sanctions. This opens up additional opportunities for raising investments for projects ensured by debt financing. We have discussed this issue directly with the RDIF management and with the management of the Russian-Chinese Investment Fund. We can see opportunities for cooperating in implementing a whole number of projects where we provide a senior tranche to fund this debt financing project, with quasi-investment andquasi-equity financing being provided through using financial resources of the Russian-Chinese Investment Fund and the China Development Bank. I think that this scheme with mezzanine financing might be attractive – on the one hand it will reduce debt burden andon the other it will ensure pretty acceptable terms of funding these investmentprojects.
CORR.: My understanding is that it’sa matter of dozens of billion dollars?
Vladimir DMITRIEV: Given RDIF’s potential as well as capabilities of the Russian-Chinese Investment Fund and the China Development Bank with which we have signed this agreement today we can say that we deal with transaction worth about 10 and more billion dollars. Let’s show that this scheme works and that it can be used by Russian and Chinese banks to fund concrete projects where part of funding is carried out not only through debt but also through equity capital.
CORR.: Thank you very much.
Vladimir DMITRIEV: Thank you.