Moscow, September 1, 2015
Author: Anna Romanova
Russia’s Bank for Development and China’s financing institutions cooperate
In the context of the Russian President’s forthcoming visit to the PRC expected to take place in September off 2015, Head of Staff of the Presidential Executive Office noted: “I can say without exaggeration that at present the Russian-Chinese relations are at the highest level than ever before”.
The same can be said not only about political but also about financial sector. The Russian Bank for Development – Vnesheconombank (VEB) have been working together with Chinese financing institutions for a long time and in the past several years their cooperation has expanded.
Committed to development
VEB’s main partners are the China Development Bank (CDB) and the Export-Import Bank of China (the Eximbank of China). The extent of their cooperation is seen in their stated projects. From 2005 to 2014, VEB raised 10.74 billion dollars and out of them 10.11 billion dollars were provided by the CDB. Due to such significant amounts, VEB remains to be one of the CDB’s largest borrowers among Russian financing institutions. The two banks’ cooperation is based above all on an extensive and solid legal framework. For the past ten years they entered into five agreements and memorandums on cooperation, two framework agreements as well as ten credit agreements. These are the examples of projects where Russian and Chinese financial resources were used.
In 2009, VEB and CDB entered into a funding credit agreement the funds from which were used to fund the construction of a cement plant in the city of Slantsy of the Leningrad region. Cement in this city is manufactured in a special way: they use “dry” method of manufacturing this raw material on the basis of natural raw materials and technogenic raw materials received from production wastes of slate processing industry on the territory of Slantsy district municipality. Such a method is not also economical but also eco-friendly. VEB provided funds that cover more than a half of the project’s value – 237.1million euros from the total value of 442.2 million euros. Two years after the construction started (in 2011); the plant began to manufacture trial batches of products. Now the plant’s capacity is 1.86 million tons of cement per year.
In October of 2013, in the course of the 18th regular meeting of Russia’s and China’s Heads of State and in the presence of the Russian Prime Minister Dmitry Medvedev and Premier of the PRG State Council Li Keqiang, VEB and the CDB signed a credit agreement worth 400 million dollars to fund the third unit of the Ekidastuz-2 power station in the Pavlodar region of the Republic of Kazakhstan.
This project launched in 2009 is to meet Kazakhstan’s growing needs for electric power, electric capacity and close the energy gap in the Russian regions of the South Urals, West Siberia and Altai. Now 400 specialists are working there but by a launch of the unit scheduled for 2017, 1200 specialists will work there.
In May of 2014, in the course of Russian President Vladimir Putin’s official visit to China, CDB, VEB, Gazprombank and OJSC Yamal LNG signed a Memorandum on Arranging Financing of the Yamal LNG project. The Yamal LNG project provides for the construction of a liquefied natural gas plant (LNG) with a capacity of 16.5 million tons of LNG per year on the resource base of South-Tambeisk gas field. Credit facilities are to be raised from Chinese banks to fund it. VEB is to extend a banking guarantee in the amount of 3 billion dollars.
Taking into account the fact that China is our close neighbor some construction projects are being implemented in the Far East region. For example, a timber processing complex to manufacture chipboards and sawn materials was built in the Vanino district of the Khabarovsk Territory, with Vnesheconombank’s participation share being 277 million euros. The project’s total value is 415 million euros.
Joint social programs are among VEB’s and the CDB’s projects. In autumn of 2014, VEB and the CDB agreed to jointly fund the following programs “Housing for the Russian Family” and “the Rental Housing”. On the Russian side. a Memorandum of Understanding was signed by VEB and the Housing Mortgage Lending Agency. But the new Housing Development Agency will be responsible implementing it. The Russian and the Chinese sides intend to develop an optimal mechanism for funding the programs including bilateral syndicated interbankbank loans and they also explore the possibility of issuing bonds in Russia and in mainland China. The Housing Development Agency’s need for funding amounts up to 135 billion rubles for a period of 25 years. Chinese companies also intend to participate in housing construction.
From the dollar to the yuan
Until the year 2015, the dollar and the euro played a role of main currencies in bilateral and multilateral projects. In May, an agreement was signed that would be much appreciated in the near future. On May 8, 2015, VEB and CDB signed in the presence of Russia’s and China’s Heads of State a framework credit agreement worth up to 8 billion in the dollar equivalent. This framework agreement provides funding joint projects in various currencies including in Chinese yuans. It’s already known that the money will be used to fund the abovementioned programs “Housing for the Russian Family” and “the Rental Housing” as well as infrastructure projects, agro-industrial complex projects and projects of utilization and development of communications technologies.
As opposed to a framework agreement signed by VEB and CDB, VEB took its first practical step together with the Eximbank of China by signing an agreement on a credit line for an amount of 3.9 billion yuans (an equivalent of 630 million dollars) for a period of 15 years. It was the first time when VEB raised credit facilities in the Chinese national currency to implement an investment project in Russia. It’s a really breakthrough agreement even for such a large-scale financing institution as VEB.
It should be noted that so far it’s not possible to hedge risks with regard to the ruble-yuan currency pair on a long-term basis and this hinders a process of transferring to payments in our national currencies.
One of the first steps in addressing this problem was an agreement the Russian Central Bank and the China People’s Bank signed in 2014 on a swap (a conversion transaction) in national currencies for an amount of 150 billion yuans.
This is only a part of already stated and implemented VEB’s projects with Chinese partners. As part of the already concluded agreements there will be new projects and this means that new production facilities manufacturing new products and creating new jobs will emerge.
We haven’t been relieved of a task to develop Russia’s economy
Vnesheconombank First Deputy Chairman – Member of the Board tells about working with Chinese financing institutions, new foreign exchange payments, selection andimplementation of investment projects and the current economic situation.
Photo: Denis Vyshinsky/TASS
-In the coming days, Putin is to visit China and Vnesheconombank’s team will be included in the Russian delegation. What prospects can you see for the Bank itself and for your Chinese partners?
-The scale of VEB’s interaction with the Celestial Empire financing institutionsis vividly seen from the following fact: we raised 10.7 billion dollars from Chinese banks from 2005 to 2014. We maintain correspondent relations with a whole range of Chinese banks, with our main partners being the China Development Bank (CDB) and the Export-Import Bank of China. As to CDB’s customers,our Bank is one of the largest Russianborrowers among Russian financing institutions.
-What projects do you fund with this money?
-I’ll mention the largest ones.In 2009, we concluded a funding credit agreement and we used credit facilities from it to fund the construction of a cement plant in the city of Slantsy in the Leningrad region. VEB funded more than a half of the project’s cost - 237.3 million euros from the total value of 442.2 million euros. In 2011, the plant started to manufacturea trial consignment of products and now its capacity is 1.86 million tons of cement a year.
In autumn of 2013, VEB and CDB signed a credit agreement worth more than 400 million dollars to fund the construction of the third power unit of Ekibastuz HPS-2 of the Pavlodar region in Kazakhstan. The project will meet Kazakhstan’s growing needs for electrical energy and electrical capacity and will close the energy gap in the Russian regions of the South Urals, West Siberia and Altai. At the moment, 400 specialists are working thereand by the time of launching the power unit in 2017, 1.2 thousand people will work there.
Last year, Russian VEB and Gazprombank, China’s CDB and the Yamal LNG Company signed a Memorandum on organizing funding for the construction an LNG plant with a capacity of 16.5 million tons of LNG per year on the resource base of the Tambey gas field in the Yamal-Nenetsk district. Credits of Chinese banks are to be raised to fund theproject and VEB is to issue a banking guarantee worth 3 billion dollars.
VEB funded the construction of a timber processing integrated facility to manufacture chipboards and sawn timber in the Vanino district of the Khabarovsk Territory. VEB provided 277 million euros funding a part of the project with a total value of 415 million euros.
-For the projects you’ve listed, the Bank raised for the most part American currency. In which currency are you funding now?
-This spring VEB signed a breakthrough agreement with the Eximbank of China in yuans. It opens up new opportunities not only for trade but also for investment cooperation. It is for the first time when VEB raises credit facilities in Chinese yuans to implement an investment project in Russia.
We also signed in May a framework credit agreement with CDB for a total amount, which is equivalent to 8 billion dollars. Under the agreement, funding can be made in any currency except for American one and above all in yuans of course.
Switching to ruble and yuan payments will make it possible for us to reduce the amount of payments between Russian and Chinese companies in US dollars and will help to increase the amount of trade turnover and mutual investments. This move is sure to give additional impetus for strengthening economic cooperation between Russia and China
Why are you so optimistic about prospects for ruble yuan payments?
The process of a large scale switching to payments in our national currencies is hindered by a small amount of the yuan-ruble market and the absence of a long-term currency risks hedging. But our regulators are making certain steps in this respect. For example, in 2014 the Russian Central Bank and the People’s Bank of China entered into an agreement on the currency swap in national currencies worth 150 billion yuans.
Now, this agreement allows us to conduct currency swaps for a period of up to a year and only as part of trade agreements. And this is not enough taking into account the scale of potential cooperationbetween Russian and Chinese companies. So, we have to create conditions for concluding longer-term swap agreements for periods of at least three and even five years. And in the future we should increase periods up to ten years. This would help to raise long-term investments for Russia.
-A recently signed agreement with CDB, which is equivalent to 8 billion dollars focuses above all on the development of the Far East. Is there already a list of potential assets for investing?
-We are now making strenuous efforts to search for and select projects that could be funded as part of this agreement.
-Speaking about Russian-Chinese partnership we have also to recall the recent BRICS and SCO summit in the city of Ufa and the New Development Bank (NDB) where Russia and China will be actively represented.
-In the city of Ufa in summer, heads of banks – participants in the BRICS Interbank Cooperation Mechanism entered into a Memorandum of Intent on Cooperation with NDB. Head of the New Development BankKundapurVaman Kamath said: NDB can extend the first credit as early as in the second quarter of 2016, (a total amount of funding from NDB is 400 billon dollars – Gazeta.Ru).
Now, work is underway to prepare documentation on regulating NDB’s activity and determining criteria for selecting projects. Requirements for projects are not formalized now but we believe that high priority will be given to infrastructure and sustainable development in line with principles of green economy, energy efficiency that yield positive socio-economic effect
Upon defining the degree of projects attractiveness for NDB, they’ll take into account the number of the BRICS countries interested in their implementation as well as the possibility of co-financing projects by other investors including the BRICS development institutions. It is these financing institutions that will be able to provide NDBat the first stage with well-prepared projects with clear prospects.
-Could there be any other formats of cooperation between Vnesheconombank and its Chinese partners?
-In September of 2014, under the auspices of the Extended Tumangan Initiative (ETI)for (a regionalprogramme to render assistance to North-East Asia countries approved by the UN, Russia joined it in 1995 – Gazeta.Ru) a framework agreement of the North-East Asia Export-Import Banks Association (VEB and the Eximbank of China joined it) an agreement was signed in the Chinese city of Yangtze. It provides for a cooperation mechanism of the parties in implementing projects under ETI auspices, a procedure for approving potential projects to be funded within the association and sharing information on projects. There are already 18 projects in the Association’s project pool from member countries and we are happy to say that one of the first projects being considered as a pilot one is a Russian project on the construction of the Zarubino Port in the Primorsky Territory 18 kilometers from China.
Another future joint plan is to create either a bilateral Russian-Chinese rating agency or multilateral rating agencies within BRICS and SCO independent of individual state’s political will or economic interests of large corporations. It might be a matter of forming a whole network of specialized rating agencies within associations whose members are Russia and China. In Russian experts’ opinion this move would be instrumental in creating a single and transparent that might rating area that might be open in the future for other states which do not want to be hostage to an opinion about the so called Big Three international rating agencies
-How is the creation of a Russian-Chinese rating agency coming along?
-There is some progress here but unfortunately it isn’t so big as we would like it to bedespite Russian institutions’’ interest. The most difficult thing here is to form a legislative framework and get a Law “On Rating Agencies”passed. A draft law itself has been already submitted to the State Duma and we hope that our lawmakers won’t delay its consideration.
-Many fear that Chinese capital expansion would be so great as to result in the Russian economy’s dependence on China.
-We see no problem in Chinese companies’ participation in joint projects being implemented in our country. It’s not a secretthat until quite recentlymost projects being implemented jointly with foreign partners focused above all on western companies’ participation.
A share of Chinese companies’ participation in projects on the Russian territory is extremely small, so we welcome Asian companies’ participation in joint projects in Russia. This makes it possible for our country to build up more balanced economic relations.
-In what projects on the territory of the Silk Road Economic Belt is VEB interested to participate?
- We haven’t been relieved of a task to develop Russia’s economy, so we are interested in any project that contributes to economic development and creating new jobs and new production facilities. As far as projects being implemented in the Silk Road Economic Belt are concerned we give top priority to projects aimed at developing all types of infrastructure and creating high value added production facilities.