Author: Ilya Kopelevich

This year a Russian Export Center (REC) has been established to support Russian exports. Petr Fradkov who is the son of the Foreign Intelligence Service Head and the Former Premier Mikhail Fradkov became its head. How will REC operate and does the ruble devaluation have an effect on exports?

Photo: Denis Vyshinsky/TASS

Director General of the Russian Export Center Petr Fradkov told Business FM Editor-in Chief Ilya Kopelevich about goals and operational mechanisms of the Center. The Russian Export Center (REC) aims to increase the number of exporters through among other things providing support for medium-sized enterprises, subsidizing interest rates for exporters and exports insurance. He also told him what companies could count on the state’s support and how the devaluation had influenced the country’s export market.

The Russian Export Center was set up among other things as a response to the crisis and an attempt to assist the real economy in promoting exports. What are in your opinion the main forms of this support and what are the Center’s capabilities?

Petr Fradkov: The Russian Export Center is an attempt to consolidate all the export support instruments the state has at its disposal at the moment including financial support measures. Efficient financial support measures have been in place for a long time and they include export credit support, which we are to provide through Roseximbank - a special bank that has been operating for rather a long time. For many years, it was the agent for the government in providing guarantee support including a credit guarantees. We are capitalizing this instrument now.

By capitalizing you mean that you are increasing its authorized capital and expanding its loan portfolio?

Petr Fradkov: Yes, of course we are. On the one hand, we are capitalizing it – this year and in 2016, we allocate for budgetary expenditures in the amount of 10 billion rubles for each year, on the other hand it is a specific instrument related to subsidizing interest rates. This year has become a pilot one as part of implementing a new export support strategy within the WTO. We are using a mechanism for subsidizing interest rates to reduce it to a level that is acceptable in terms of competitive interest rates. I hope that the next year won’t be an exception. We are making efforts now to carry on this program next year. Roseximbank is already providing support for exports in the amount of billions of rubles. Export credit insurance is an efficient and important instrument too. EXIAR – the Export Insurance Agency of Russia is responsible for it. This is a new mechanism in Russia but it is well known in the world. We close export risks and foreign economic activity risks.

Are these risks just commercial or some special risks?

Petr Fradkov: These are certainly special risks.

Let’s assume that we would like to supply Superjet aircraft to some country and this country, for example, imposes sanctions, so the supply is cancelled.

Petr Fradkov: You’re absolutely right.

That is to say, these are not commercial risks.

Petr Fradkov: These are not commercial risks. We can insure commercial risks but those related to various particular circumstances

For example, a change in the currency exchange rate.

Petr Fradkov: Or expropriation of property or a ban on the export of currency from a country and this also happens, or a reluctance of our counterparty or our exporter’s counterparty to fulfill its obligations and its full protection in its homeland. We close all these risks. Now it’s much more comfortable for exporters to engage in foreign economic activity because we can insure those risks that they fail to understand.

Today, very large state-owned or private companies account for a lion’s share of exports. Probably they don’t need the state’s support so badly. I don’t know if chemical exports are on the rise in our country but I believe that Uralkali and PhosAgro can do without your support - they have their own huge potential. Is there any criterion for determining which company should be provided with the state’s support?

Petr Fradkov: Of course, we have such criteria. They are rather explicitly defined in our regulatory framework because we proceed from the premise that our limited financial resources should be used in the most efficient way.

Are there any limitations in terms of a company’s size?

Petr Fradkov: Sizes are important but we didn’t make any limitations on sizes for various reasons because at a given period of time we have to support a project be it a small or a large one because of its economic feasibility or for some other reasons. We don’t have any limitations here. We simply have corporate limits of responsibility.

It’s already a matter of examining a specific project and I’m now talking about a system of priorities.

Petr Fradkov: We can deal with anything. But our system is designed to focus on middle-sized enterprises because they must be drivers of increasing exports both in terms of its absolute size and in terms of its diversification. The number of new exporters is a very important indicator for us because our aim is to increase absolute volumes of non-raw materials exports, as our task is to cultivate companies that could supply products for exports.

We have a very large segment of exports - chemical industry - very close to raw materials sector. If this sector and for example the Toyota concern, which will produce RAV4 in Russia, will turn to the Bank to support their exports. Why don’t we use these capacities to supply their products for exports, as demand is limited in Russia now? There are automobiles – high value-added products and there are mineral fertilizers, which are not already raw materials but very close to them.

Petr Fradkov: It’s a very good question. Formally, we are not allowed to directly deal with raw materials.

But mineral fertilizers are not considered to be raw materials, are they?

Petr Fradkov: I agree, but if there are value-added products and they are not considered to be raw materials in their pure form, we can deal with them. And we can deal with chemical products because they might vary a lot. Many chemical products are the products with rather high added value.

Sometimes this added value is huge.

Petr Fradkov: You are absolutely right but formally these products are not raw materials.

Metals are not raw materials either because they are not metal ores.

Petr Fradkov: Metals are not raw materials because they are products with a certain level of added value. With all other things being equal, we focus on products with a higher level of processing.

Even in the absence of equal conditions, given lesser cost effectiveness you shouldn’t take initiative and try to provide support.

Petr Fradkov: I couldn’t agree more. But we make decisions on the basis of a current situation. If our insurance capacity or lending resource allow us at a certain time to support products with a lesser level of processing and it is very important, given Russia’s contracting market, we just make our analysis and if we see that we can support exports with lesser added value without affecting high-tech exports – what’s wrong with it?

Your operational procedures are important for business. Is REC going to provide credit, insurance and non-financial support for export contracts on the basis of common standards? Or will decisions be taken not only by you but also in consultation with VEB, the government on the basis of some social, political factors?

Petr Fradkov: Of course, we are not living in a vacuum and we have to take into account both the current economic conditions and the current top priority tasks set by the government. Our main principle is transparency, that is, transparency of procedures, transparency of our activity. So, we want our potential customers, our partners to understand our operational procedures and above all our decision-making logic. Therefore, we are in favor of business procedure. This is going to be an explicitly defined, easy-to- understand procedure. And it will differ a bit depending on financial stability, a scale of risks that we assume: we should be well aware of our capabilities so as not to assume obligations we are not able to fulfill. As far as non-financial support measures are concerned, we apply here a different approach – we assume a kind of lobbyist obligations. We assume responsibilities for consulting, promoting products in foreign markets, rendering assistance in defending intellectual property rights, settling disputes over limited access of Russian products to markets in international arbitrations. Logistics issues are also very important because often companies do not understand and know well how to take advantage of our infrastructure. Our partners should be fully aware what they could count on, how much time they need and what steps we have to make, if something has gone wrong, and why it has gone wrong. That is why we are in favor of transparency and a strict observance of procedures.

You use a mechanism for subsidizing interest rates. A subsidized interest rate is not exactly a market instrument but at least you can’t steal it. But although under certain conditions you can at least invest money for profit.

Petr Fradkov: We pay much attention to it. If desired you can devise any fraudulent scheme. At the start of our conversation, I referred to WTO procedures because here we do not try to reinvent the wheel. The whole world, industrialized countries devised a mechanism for state support for exports long ago. This mechanism in in place. It is a very clear-cut specific mechanism. Russia joined the WTO and assumed some obligations. How can the state support exports? I mentioned some instruments for example permitted forms of subsidies. They must also be transparent. At any moment, information could be made available to colleagues, specifically, to WTO members.

And to competitors on the market too because everybody should know why some enjoyed the state’s support and the others didn’t.

Petr Fradkov: You are quite right. The entire exports support system in the countries that signed WTO’s basic documents is a system where the countries must compete on the international, global market not for the cost of resources but for the quality of products. Thus, through a complicated system of formulas and settlement mechanisms, cost of resources should be brought to approximately one level. If you don’t do it it’s your problem but if you want to subsidize your exports you should follow generally accepted rules and then we can talk about free competition on the foreign market. Of course, there is a million of peculiarities, there are always exceptions, there are always those who fail to follow rules strictly but they are fined for this reason. Both exports insurance mechanism and mechanism for subsidizing the importer’s interest rates are fully permitted types of state support in the world and we all use them without any limitations.

Interest rate subsidizing is a main instrument for exports support. Could a credit be extended by any bank? Will the Russian Export Center and Roseximbank be simply responsible for granting compensation?

Petr Fradkov: This is not the case now but maybe in the future Roseximbank will be responsible for distributing such subsidies to commercial banks. But this will be the second stage. But so far, we have only two banks that have the right according to the relevant regulatory documents to subsidize their own interest rates – Roseximbank and VEB. They are some kind of development institutions, which have their own function. They are not competing with commercial banks with regard to other matters so there are no conflicting interests here.

Do you believe that it is the best way to use only one channel to subsidize interest rates? Or it would be better to have a reliable, trustworthy bank from the first ten banks whose customer is an export company and this commercial bank can extend credits to it at a certain interest rate and you as an export support institution will subsidize a part of it and the bank and you will be responsible for exercising control.

Petr Fradkov: In my opinion, this should be widespread practice for the banks that would like to support and fund exports. This is my conviction, it’s not new, I have often voiced it at all possible places. Exports will only benefit from it: the more interested financial institutions the larger the competitive environment, the fiercer the fight for the exporter and the better the services the exporter can receive. Our task is not to support a bank but to support our producer and create another banking instrument. I think it will be a good thing. But we should move forward step by step because we didn’t have such an instrument two years ago in our country, and for example we didn’t have an export insurance instrument three years ago.

Is there a long waiting list for subsidies?

Petr Fradkov: Yes, there is. The waiting list is pretty long but at the same time we can see that our financial resources are limited. We take a practical view of the situation, which is not bright, given budget constraints, so we take an objective view of our and the budget’s capabilities and we introduce certain criteria. And we introduce them publicly discussing them with our management to ensure maximum Russia’s participation share and to yield maximum effect from the budgetary ruble invested and spent.

How long does it take on average to review a request? I think one can get a refusal quickly?

Petr Fradkov: One can get a refusal very quickly. In terms of formal criteria it’s a matter of several days - just a superficial analysis.

If the door is set ajar, how long could it last?

Petr Fradkov: If the door is set ajar, everything depends on a project. It does not depend on us alone because here we deal with a government expenditure item, we agree upon this issue with line ministries.

This a very large-scale procedure.

Petr Fradkov: We have learnt to do it pretty quickly and it takes several days in ministries. It’s not only a matter of subsidy – we have to examine a project and it might take up to a month.

A month is not a long period.

Petr Fradkov: As I don’t want to be accused of being arrogant, here I mean a complete set of materials needed to analyze a transaction as a whole.

Without any correction.

Petr Fradkov: Yes.

In conclusion, could you size up in general the state of our exports? Unfortunately, we haven’t seen the effect of the devaluation in exports figures which we counted on in a serious way. In what sectors could we start seeing it in the most immediate future?

Petr Fradkov: I wouldn’t say that a devaluation effect is a panacea because it varies a lot depending on a specific sector. If we mean sectors with lesser added value this effect is without any doubt greater. And if we mean complex structured sectors those with high added value and the more so, sectors where the import component is used – a devaluation effect is lesser. I wouldn’t regard a devaluation effect as of paramount importance. It is a very important process at the moment and we should use this opportunity as a sort of boost for accelerating a bit. But it’s not a systemic phenomenon. As far as exports are concerned in general, figures differ. As a result of the devaluation, imports of course fell in terms of cost parameters. We are fully aware of it because in our country, many contracts are made in foreign currency and here we have peculiarities related to payments. In terms of physical volumes, exports are on the rise. Together with our colleagues from the Economic Development Ministry, we are thinking of how to address this problem because we have difficulty making calculations. Roughly speaking, we count rails together with microchips. In this respect, we can see an increase in physical volumes of exports and this is important too. And in terms of cost parameters, the most advanced technologies are growing faster than all other exports. I’d like to сite an example related to rail carriage manufacturing. If it were not for exports, the situation in the rail carriage manufacturing would be a lot more difficult.

Did you manage to start exporting rail carriages? At the start of the year, we told a lot about shutting down plants. Transportation companies didn’t want to be forced to buy those rail carriages under the conditions of reduced transportations and then we forgot this issue. Did you manage to start exporting rail carriages?

Petr Fradkov: Now about two thirds of Russian-made rail carriages are exported. This is being done through using instruments of Vnesheconombank and the Russian Export Center. If it hadn’t happened, the situation would be quite different. But globally, exports became lesser. At the same time, exports of rail carriages increased dramatically.

If this is the case, if they function, it’s a great contribution.

Petr Fradkov: This is pretty good evidence that exports support is a very important line of activity that allows us to keep production afloat. Of course, there always emerge issues of quality and competitiveness but these issues should be addressed in parallel. We are trying to start operating in motorway industry and agricultural sector.

Demand in transport mechanical engineering has diminished dramatically. So, we need companies especially international ones that produce here for the market.

Petr Fradkov: We are active in working with a whole list of auto producers in this country – both purely national ones and companies – international brands with a high degree of localization, we work both separately and we also work out a road map related to and non-financial measures, regulatory framework in order to draw up routes of exporting Russian-made automobiles to foreign markets. This is already happening and the Russian Export Center has already provided dozens of billions of rubles. Maybe this is a priority now. And in my opinion, this is also our trask.