Klepach: it’s time to cut a window into China

13 january 2016 года

Interview given by Vnesheconombank Deputy Chairman (Chief Economist) – Member of the Board Andrei Klepach to TV Channel Russia 24 in the course of the Gaidar Forum

HOST: We are again getting back to the venue of the Gaidar Forum. Now my female colleague Alexandra Suvorova is in direct communication with us with the latest details and exclusive commentaries. Sasha it’s your turn to speak now.

Alexandra Suvorova’s reporting

CORR: Sergei, hullo once more. Our guest Andrei Klepach is now with me in our studio. He is Vnesheconombank’s Deputy Chairman. Good afternoon Andrei.

Andrei KLEPACH, Vnesheconombank’s Deputy Chairman (Chief Economist) – Member of the Board: Good afternoon.

CORR: My first question is related to the agenda which is being actively discussed at the Forum. You took part in a session devoted to the latest developments in China. I’d like to remind you that that China saw the lowest GDP growth of 7 percent in 2015. What in your opinion should China do to restore its position in the world’s market and how should Russia interact with this country in the current situation? We can see that lately the emphasis has been on the Asia-Pacific region.

Andrei KLEPACH: In fact, China is going through a sort of economic adjustment or as they say economic rebalancing. Growth rates have slowed down. They expect economic growth this year to be about 6.8 or 6.9 percent. Experts expect economic growth to be even lower and I’d rather agree with their estimates. The reason for it is that China is forced to undertake such a serious structural restructuring. Their old model is not able to generate previous growth rates. And the main reason for it is a general slowdown in global trade growth. It shrank substantially in all countries and above all in OECD countries where main Chinese markets are. So, China’s exports shrank by more than 2 percent in 2015. And in 2016, significant economic growth is not likely to be possible. So, as Chinese people say themselves God forbid to live in a time of change. Now China is living in a time of change. But I don’t think that it will mean a hard landing of the Chinese economy this is not a slump and this is not a stagnation. China will maintain economic growth but the growth will be complicated and it is likely to be lower than they expect.

CORR: What sectorial markets in your opinion will be of interest for Russian players in China? And are there any chances for Russia to raise the capital that is now fleeing China?

Andrei KLEPACH: In fact, it’s very difficult for us to tap into Chinese markets because our presence there is rather insignificant. I think that besides the traditional market related to supplies of nuclear power equipment and construction of nuclear power stations there are important and potential niches in aviation industry including those related to joint projects on developing and manufacturing wide-body aircraft and to a potential project on launching the production of regional Sukhoi Superjet 100 aircraft. But these projects are very complex and they are being discussed so far. I think risks that they will be left on paper or in plans are great. We made a significant headway on foodstuffs because exports of Russian foodstuffs are starting to grow as their quality is better than Chinese ones. And many middle-income consumers start to prefer Russian food products. I think we can also cooperate in supplying our instruments to China. But Russian enterprises need to make a technological breakthrough to expand a range of products we are ready to supply to China. It’s very important for us not only to supply products to China but also to raise Chinese investments. Money has started to flee China but at the state’s level it has been purchasing assets abroad for a long time and above all raw materials. It’s important that private Chinese investors have started to invest in Russian projects for example in the Bystrinsky Mining and Processing Plant of Nornickel. We are now discussing issues of securing Chinese credits to fund projects related to Yamal LNG and the construction of the Moscow-Kazan High-Speed Motorway. So, we have a potential for raising Chinese investments. But China is a difficult partner and we need much time to put plans under discussion now into effect. Nevertheless, I believe that there is a large window of opportunity and it might be a matter of billions of dollars and not only in the raw materials sector but also in infrastructure projects. In the past China extended credits to Rosneft too.

CORR: As to China, many experts share the opinion that we can see China’s influence on trading floors all over the world. What factors in your opinion influenced oil price quotations and is there a speculative component in it?

Andrei KLEPACH: This issue is being discussed actively every day almost every hour. But a key role here is being played by Saudi Arabia which is struggling to restore its position on the oil market. It competes with shale oil producers from the United States and other countries. And in this case we act as an active competitor too. I think that this process will continue. In my opinion, speculative components are not playing a major role here as was the case in the past when there was a financial bubble caused by investments made by various funds in oil financial instruments. This resulted then in bringing oil prices to more than a hundred dollars per barrel. This is not the case now. But I think that the situation in the oil sector will have to change for restoring oil price quotations because Saudi Arabia’s margin of safety is not limitless. According to various estimates Saudi Arabia’s financial system will withstand for 1.5-2 years because the country’s budget deficit is about 20 percent. On the other hand, oil production is bound to fall both in the United States and in a whole number of OPEC countries as well as independent countries. So, the world could face a high volatility of oil prices. But in general, we have entered a period when an average level of oil prices will be a lot lower than in the last years. And I believe that estimates from 50 to 70 dollars per barrel are realistic and probable in the mid-term.

CORR: Let’ get back to the Russian agenda. Do you think that the Central Bank is likely to reduce the key interest rate?

Andrei KLEPACH: As the ruble is weakening because of the fall in oil prices the key interest rate is unlikely to go down. There are risks that it will go up to keep the ruble from falling further. If oil prices go up in the second half of the year, inflow of foreign currency will increase and the ruble is likely to strengthen and the key interest rate is likely to go down. Due to limited consumer demand and limited consumer incomes inflation will slow down, especially in the second half of the year.

CORR: You predict that inflation won’t reach double digits.

Andrei KLEPACH: I think that we won’t have double-digit inflation.

CORR: And now my last question. Do you believe that a devaluation of the ruble is possible or not?

Andrei KLEPACH: We can already see the ruble devaluation at the beginning of the year.

CORR: Is the ruble going to fall further?

Andrei KLEPACH: No, it is not if oil prices do not collapse and I don’t think that oil prices will fall further. In the first half of the year oil prices are likely to be about 30 dollars per barrel. I do not rule the possibility that oil prices will go up and strengthen the ruble. The more so, capital outflow has diminished.

CORR: I’m sorry but our time is running out. Thank you very much for finding the time for this interview here at the Gaidar Forum.


Vnesheconombank’s Chairman Briefing for the Mass Media

17 december 2015 года


BEIJING, December 16 /PRIME/. Vnesheconombank is exploring the possibility of placing bonds in yuans and it is to discuss this issue on Thursday with China’s Finance Ministry, VEB’s Chairman told journalists.

“In fact, we are exploring this issue… Not all is clear yet in terms of domestic legislation and restrictions. We are removing them gradually. Nevertheless, we have to discuss this issue with the Chinese regulator. We are holding a meeting with the Chinese Finance Ministry tomorrow”, he said.

By the way, the state corporation counts on the support of such Chinese partners as the China Development Bank and other financial institutions. “We believe this issue holds promise and the more so, our Finance Ministry said that it might be possible to borrow in yuans and at the Russia stock exchange. So, we are moving this issue forward, we are interested in borrowing in yuans… the yuan has become one of reserve currencies”, said Dmitriev.

“We also raise credit facilities in yuans on our own. So, we believe that it’s worthwhile placing our debt instruments in yuans but so far not all restrictions have been removed in terms of our domestic legislation”, added VEB’s Chairman.

As early as in June, Deputy Finance Minister Alexei Moiseev said that the Ministry was discussing with VEB the possibility of issuing bonds in yuans. The Finance Ministry itself announced its intention to place bonds worth 6 billion yuans at the Moscow Exchange, with the bonds being intended for China’s investors.

Mr. Dmitriev said that he would view VEB’s potential entry into China’s debt market in 2016 with cautious optimism. “We know how fast our partners are moving in making such principal decisions, progress is being made and restrictions are being removed. Nevertheless, I can’t see any possibility at least in the first half of 2016 of entering capital market in yuans”, said Vnesheconombank’s Chairman.


BEIJING, December 16. /TASS Corr. Oleg Trutnev/. The recognition of the yuan as a reserve currency is a favorable event for Russia, VEB Chairman Vladimir Dmitriev told journalists today.

“As a whole, the yuan’s strengthened role as a reserve currency is a positive development”, he said. Russian banks were directly affected by sanctions imposed by Western countries, so without being able to borrow in Western currencies we are naturally turning to Chinese creditors. We borrowed from China in the past too and now we are increasingly turning to the yuan.

Dmitriev noted that after sanctions had been imposed there were some difficulties in Russian-Chinese bank payments. “But we are glad to say that despite sanctions our Chinese partner banks continue to extend credits to us especially when we deal with supplies of Chinese equipment together with raising Chinese investments. This also gives us serious advantages and they feel positive about our moving to borrowings in yuans”, said VEB’s Chairman.

On November 30, the IMF Board of Directors included the yuan in its basket of reserve currencies (Special Drawing Rights – SDR). The decision is to become effective on October 1, 2016.


BEIJING, December 16. /TASS Corr. Oleg Trutnev/. VEB views its potential entry into China’s debt market next year with caution optimism. Vnesheconombank Chairman Vladimir Dmitriev told journalists about it today.

“I would view such a prospect with cautious optimism. We can see that progress is being made and restrictions are being removed. Nevertheless, I can’t see any possibility at least in the first half of 2016 of entering capital market in yuans”, he said.

Vnesheconombank’s Chairman said that the work continues along this line of activity. “We are to hold a meeting with the Finance Ministry tomorrow to discuss this issue. I hope our Chinese partners and above all the China Development Bank and the Eximbank Bank of China would support us”, said Dmitriev.

“We believe that this issue holds promise, the more so our Finance Ministry said that it might be possible to borrow in yuans at the Russian stock exchange”, VEB’s Chairman stressed.

According to him, the Chinese currency is of interest for us because it became one of reserve currencies and because of the increased trade turnover between Russia and China.


BEIJING, December 16. /TASS Corr. Oleg Trutnev/. A Russia-Chinese Trade and Finance Platform to promote Russian exports to Asian markets is to start operating next year. Vnesheconombank Chairman Vladimir Dmitriev told journalists about it today.

“I believe that we would launch this project in the first half of the next year”, he answered a question about the dates of launching the Platform. “Now we are now working on codifying this process”, VEB’s Chairman said.

According to Dmitriev, the project’s road map will be developed in the near future. “We’ll choose about ten pilot Russia exporters on the basis of which we’ll work out logistics mechanisms for supplying Russian products to China for their further distribution”, he said.

Vnesheconombank, JSC the Russian Export Center, the leadership of China’s province of Guangdong and Sinotrans & CSC Group entered into a Memorandum of Understanding on creating a trade and finance platform in the course of Russian President Vladimir Putin’s formal visit to the People’s Republic of China in September.

Under the Memorandum, it is planned to set up a trade and finance platform in South-East China in the city of Shilong of Guangdong Province in order to enhance trade relations between the countries and promote Russian exports to Asian countries.

Guangdong Province is PRC’s strategically important center with a high concentration of trade and industrial parks as well as a territorial anchor of a long-term macroeconomic Chinese Program “One Belt. One Road”. The program provides for creating a Trans-Eurasian industrial belt running throughout the length of the Great Silk Road from China to East Europe.


BEIJING, December 16 – RIA Novosti/Prime, Zhanna Manukyan. A road map on creating a trade and finance platform in the South -East of China for supplying Russian products to Asian-Pacific region countries is to be formed in the near future, he project could start operating in the first half of 2016, VEB Chairman Vladimir Dmitriev told journalists.

Earlier VEB, the leadership of Chinese People’s Guangdong Province and Sinotrans& CSC Group entered into a Memorandum of Understanding on Creating Trade and Finance Platform in this province in the South-East of China. Guangdong Province is PRC’s strategically important center with a high concentration of trade and industrial parks as well as a territorial anchor of the Silk Road Economic Belt Project.

Dmitriev noted that the project provides for creating a logistics cluster. Products of Russian exporters are to be supplied there for processing. VEB’s subsidiary VEB Asia is to participate in the project.

Opening a direct railway service between Guangdong and Russia’s border through Inner Mongolia would help to promote Russian products to the regions of South and central China and South-East Asian countries.

“This railway route would help to enhance trade and economic ties and we hope that through the support of the Russian Export Center we’ll be able to expand the range of products that are supplies to China and other South-East Asian countries”, said Dmitriev.

He said that he held talks with the Governor of Guangdong province and Sinotrans company’s management.

“We agreed to form a road map in the near future. “We’ll choose about ten pilot Russia exporters on the basis of which we’ll work out logistics mechanisms for supplying Russian products to China for their further distribution to Chinese regions and South-East Asian countries”, said Dmitriev.


BEIJING, December 16 /PRME/. The Udokan copper deposit development project might be funded in yuans through using the China Development Bank’s credit, Vnesheconombank Chairman Vladimir Dmitriev told journalists about it.

“The second large project we are focusing on is the Udokan deposit – one of the world’s largest copper deposits. A decision to fund the project was made by our Supervisory Board. And we hope that it would be funded in yuans by way of using the China Development Bank’s credit”, said Dmiriev.

The Udokan deposit in the Trans-Baikal region is one of the world’s largest deposits by copper reserves. An industrial integrated facility to be build there is designed to process 36 million tons of ore per year. According to the JORC Code the Udokan’s mineral resources are estimated at 2.3 billion tons, with an average copper content of 1.06% and the amount of copper - 2.6 million tons. The Baikal Mining Company acts as the project’s operator (BMC is an entity of Metalloinvest company).


BEIJING, December 16. /Corr. TASS Oleg Trutnev/. Operation of the New BRICS Development Bank (NDB BRICS) will be based at the first stage on national development banks’ projects. VEB’s ChairmanVladimir Dmitriev told journalists about it today.

“We have already agreed with the Head of the New Development Bank to base the Bank’s operation at an initial stage on the projects under consideration by national development banks in order to launch the Bank as soon as possible”, he said.

“We, as heads of SCO countries’ development banks, find it necessary to develop close cooperation with new emerging financing institutions in the region such as the New Development Bank, the Asian Infrastructure Investment Bank, the Silk Road Fund”, said Dmitriev.

An agreement on establishing a new BRICS Development Bank (Brazil, Russia, India, China and the Republic of South Africa) was signed at the BRICS summit in Brazil in June of 2014. The Bank is designed to fund infrastructure projects and sustainable development projects in BRICS states and developing countries. NDB’S authorized capital is 100 billion dollars. The Bank is headquartered in Shanghai.


BEIJING, December 16 – RIA Novosti. Vnesheconombank is not planning so far to receive the Dagong rating of China but does not rule this possibility in the future, VEB Chairman Vladimir Dmitriev told journalists about it.

Earlier, Russia’s Gazprom, Gazprombank, Gazpromneft, Metalloinvest received ratings from Dagong, VTB also stated its intention to receive rating from Dagong.

“We are not working with them so far. As our rating is in line with a sovereign one, we don’t find it necessary. But it is obvious this rating could help us to expand our presence at a local level including on the stock market upon placing bonds. I do not rule out that we will attach more importance to this issue in the future “, Dmitriev said.


Channel 1, Vremya, Moscow, December 17, 2015 21:21

Relations between Russia and China have reached a special level and started to bear fruit for the economies and people of the two countries. This is the way Russian Prime Minister Dmitry Medvedev sized up relations between the two countries after his visit to China. Only today we have signed 33 documents including those dealing with joint projects in agriculture and power engineering. Work is going on the construction of a gas pipeline along east and west routes. Dmitry Medvedev also mentioned new projects related to new kinds of energy resources and to tapping new markets. Our special correspondent followed all the events in the Celestial Empire.

Corr: Dmitry Medvedev completed his 4-day visit to China in Beijing. In the course of his visit he met his counterpart – Premier of State Council of the People’s Republic of China two times. The composition of the Russian delegation at the second meeting was impressive – almost all members of the Cabinet of Ministers and representatives of the largest businesses of the country and each has his own multi-billion projects with China.

VLADIMIR DMITRIEV (VNESHECONOMBANK’S CHAIRMAN): We are to sign an agreement with the China Development Bank. It provides for extending a credit worth 10 billion yuans at a preferential interest rate and on favorable terms: the credit tenure is 5 years. And we intend to use these funds to fund relevant projects most of which are included in the list of Chinese-Russian investment cooperation.

Corr: Such meetings of Russian and Chinese Heads of Government are held once a year and this is the 20th jubilee meeting. And it is quite productive. Its participants signed more than 30 documents on cooperation in the economic sector.


BEIJING, December 17 (Reuter) – The China Development Bank is to extend a credit worth 10 billion yuans for a period of up to five years, VEB Chairman Vladimir Dmitriev told journalists about it.

“We held talks with our partners and are to sign an agreement with the China Development Bank. The agreement provides for extending 10 billion yuans to VEB at a preferential interest rate”, Dmitriev said.

According to him the credit tenure is 5 years and the funds are to be used to implement joint projects.

Last year, VEB was hit by Western sanctions for Moscow’s role in the Ukrainian crisis and now it is unable to refinance its foreign exchange debts on foreign markets. The state corporation’s balance is burdened with a lot of non-performing assets related among other things to the Olympic construction projects.

The authorities are arguing about how to help VEB, which needs to be additionally capitalized with $20 billion for a period of several years.


Beijing. December 17. INTERFAX-AFI – The Russian Direct Investment Fund, Vnesheconombank (MOEX: VEBM) and the China-Eurasian Economic Cooperation Fund signed an agreement on cooperation in making investments in the economic top-priority sectors of Russia and China, Vnesheconombank Chairman Vladimir Dmitriev told journalists about it.

Specifically, the parties agreed to set up an institution to fund exports from China to Russia.

“We have completed talks on setting up a structure that will be responsible for funding Chinese exports to Russia and inflow of Chinese investments in relevant projects to be primarily deployes on the territory of the Far East and Trans-Baikal”, said V.Dmitriev.


BEIJING, December 17. /TASS/. There is no doubt that Vnesheconombank will be provided with the state’s support, only a form of support is under discussion, VEB Chairman Vladimir Dmitriev told journalist about it.

“This issue is still under discussion. There is no doubt that Vnesheconombank will be provided with the state’s support, only a form of support is under discussion. Vnesheconombank is bound to fulfil all its obligations relying on the state’s support”, he said.

However, Dmitriev refused to say which support mechanism is optimal for VEB.


BEIJING, December 17. INTERFAX- VEB (MOEX:VEBM) is in talks with the Central Bank of Russia on how to remove from its balance sheet the debt used to rehabilitate Svyaz-Bank (MOEX:SVZB) and Bank Globex (MOEX: GLBX).

“In fact, we are in talks with the Central Bank on the fate of these deposits and we feel necessary support on the part of the Central Bank to remove the debt from VEB’s balance sheet”, Vnesheconombank Chairman Vladimir Dmitriev told journalists about it in Beijing.

VEB was entrusted with rehabilitating Globex and Svyaz-Bank during the 2008-2009 crisis. To fund the rehabilitation, the Central Bank placed deposits with VEB which were re-registered IN 2014 as 7-year bonds at a rate of 2% per annum.

Vedomosti wrote in November with reference to the sources that Svyaz-Bank and Globex could be transferred from VEB to the Deposit Insurance Agency.


Strategic partnership between Russia and China in the financial sector reaches new level

16 december 2015 года

China and Russia have launched multilateral cooperation in the financial sector and signed a major interbank agreement.

Vnesheconombank Chairman Vladimir Dmitriev said to CCTV:

“Strategic cooperation between Russia and China in the financial sector is reaching a new level. Increased interaction between the two countries in producing energy resources and metals will have a positive influence on cooperation between the countries in the financial sector”.

Vnesheconombank of Russia is one of the largest institutions in the country. During the past years Vnesheconombank has been cooperating closely with the China Development Bank and the Export-Import Bank of China (the Eximbank of China) in many sectors.

Vladimir Dmitriev: “In the course of the Russian Prime Minister’s formal visit to China Vnesheconombank is to sign two agreements with the Chinese side”.

Vladimir Dmitriev: “We can also see our Chinese partners’ interest in extending credits to Vnesheconombank for it to fund projects in the Far East and the Trans-Baikal region in yuans. By expanding this sort of lending, Chinese companies would be given a chance to enter into capital of enterprises and borrowers of Vnesheconombank that could be of interest for Chinese companies and investments”.

Thanks to cooperation in the financial sector, Russia and China could enhance their cooperation in power engineering, logistics, transport infrastructure construction and gradually strengthen bilateral trade-economic and investment ties.

According to Dmitriev, besides Vnesheconombank, Sberbank of Russia and Bank VTB have entered into an agreement with Chinese financing institutions in the past years on opening a credit line in yuans. For the first time Russia raises credit facilities in China’s national currency to implement its projects thus opening a new stage in the Russian-Chinese financial cooperation.


Petr Fradkov: Medium-Sized business should become a driver of export growth

10 november 2015 года

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.


Andrei Klepach: the Russian economy is able to start growing at a rate of 4%

2 november 2015 года

02.11.2015, 17:41

CORR: Good afternoon Andrei Nikolaevich.

Andrei KLEPACH, Vnesheconombank Deputy Chairman, good afternoon.

CORR: All over the world, economic growth is slowing down. What should major financing institutions fear and where should they invest?

Andrei KLEPACH: The world is different – in fact, economic growth is slowing down in China but estimates vary here, for example, some expect its economy to grow at a rate of about 6-7 percent. Economic growth is slowing down in Brazil, which is also going through the economic slump. But as a whole according to estimates by the International Monetary Fund and the Organization for Cooperation economic growth is somewhat accelerating at a rate of 3.8-3.9 percent this year, it was three percent earlier and now many expect a growth of 3.8-3.9 percent. But countries behave differently. Such drivers of economic growth as China are slowing down but Indonesia and India are accelerating. In the long run, after 2016 both Russia’s and Brazil’s economy will start to grow. Europe is reviving a little, Americans are expecting about the same growth rates of 2.5 percent as now.

CORR: In this connection, is Vnesheconombank changing its strategy in its capacity of a major financing institution?

Andrei KLEPACH: We are responding not only to how growth rates are changing in the world but also to current challenges and needs of the Russian economy and therefore VEB is determined to build up its loan portfolio, investments and participation in capital of its subsidiaries. Moreover, now that lending growth rates have slowed down significantly in our country, VEB hasn’t slowed down so far and VEB’s share in the credits extended to non-financial companies last year and now has increased by 6.5-6.7 percent as compared to the loan portfolio in the economy as a whole. And VEB’s specific feature is that it focuses on investment lending and that’s why its share in long-term credits is also on the rise and now it exceeds 13 percent. So, we are a limiting factor countering investment slump and in terms of investments VEB’s role is great.

CORR: Are you going to change your strategy for 2016, are you going to increase lending or are you worried that credits might not be repaid in the current economic situation? It’s clear that things are not as good as you would like them to be.

Andrei KLEPACH: There’s always something wrong with our economy. There is a word combination American rollercoaster and in America they have Russian rollercoaster. In fact, a part of loan portfolio is restructured, payment periods are changed and interest rates are reconsidered. To a greater extent than other commercial banks, VEB either retained effective interest rates or increased them to a lesser extent thus giving rise to a problem – by raising funds from the market and receiving refinancing from the Central Bank through REPO transactions we often work at a loss as opposed to commercial banks if we deal with the projects needed by the state that must be continued. So, here VEB has to operate in a somewhat different as opposed to a commercially oriented bank. And we have to keep on funding infrastructure projects, projects associated with operating facilities built in Sochi, new projects as well as minerals production projects.

CORR: The Central Bank of Russia jointly with the World Bank announced that they would develop a new model of Russia’s pension system. What sort of model might it be, what can pensioners hope for?

Andrei KLEPACH: Pensioners should expect stable reliable pensions and investments if we mean investing pension savings. It’s hard to foresee what proposals the Central Bank and the World Bank would develop but above all the Government is responsible for pension reform and certain decisions have been made in this respect. There are several problematic aspects associated with a funded portion of pensions. Now a decision has been made to freeze it for a period of one year once more and use these funds to finance the deficit of the Pension Fund. Nevertheless, there is a question, how will citizens manage funds already saved? There are private pension funds and there is a state managing company – Vnesheconombank, which is also responsible for investing a significant part of pension savings. So, Vnesheconombank is competing here with other institutions in which people place much confidence. So, I hope that in 2016 we’ll be able to develop a new model of a stable pension system to avoid making temporary decisions.

CORR: Do you believe that the fact that the Finance Ministry has frozen the funded portion of pensions means that the Finance Ministry has exhausted all other possibilities to solve the problem of budget deficit?

Andrei KLEPACH: I wouldn’t say that. There is always a range of solutions but each solution has its pluses and minuses and if we don’t use pension savings we will have to cut down expenditures and it is almost impossible under the current conditions because this is 300 hundred billion or to run a huge budget deficit and borrow on the domestic market or use financial resources of the Reserve Fund to a greater extent. But as the budget does not provide for increasing domestic debt it would be wrong to spend financial resources of the Reserve Fund intensively. Nevertheless, I believe there is a possibility and a niche for borrowing more actively on the domestic market and for pursuing a more active debt policy. By the world’s standards our debt is not large - it’s a bit more than 12 percent of GDP. But it’s clear that it’s not cheap, we don’t have cheap credits but there is a possibility for increasing our domestic debt.

CORR: How will a freeze on pension savings affect investments in the country?

Andrei KLEPACH: I think that in the short term, it won't have any influence on investments because funds that go through private pension funds are not essentially used for making investments. It’s more important here that both business and the financial system are in need of rules and we have made temporary decisions for the third year in a row. In this case the Government said it and I hope that during 2016 this pause will be used to factually develop a stable model of pension reform.

CORR: What is in your opinion the most plausible scenario of Russia’s economic development and will our severe dependence on oil prices persist and as a whole is the fall in oil prices a plus or a minus in the current situation?

Andrei KLEPACH: I don’t think that low oil prices are good for us because an almost 50 percent fall in oil prices reduced Russia’s export income by about 150 billion dollars and this factor had a negative impact on Russia’s economic growth. Maybe, business and the Government are more worried by GDP than ordinary people, nevertheless, everybody was hurt because people’s real incomes and wages decreased, this year real wages will decrease by more than 9 percent. Nevertheless, besides oil prices, there are other things that play a crucial role for the Russian economy, for example, our ability to upgrade our economy, make investments more effective and boost productivity. And here there is much room for maneuver . In order to create a sustainable economy it’s not enough for us to simply boost efficiency and productivity, we have to carry out serious structural economic reforms. Above all, we should encourage sustainable domestic demand and those economic factors that work for the domestic market. Although industrial output is falling this year, our food sector has operated successfully so far. I think that next year, given import substitution and a good resource base created but our domestic agriculture, it has good opportunities for growth and in the longer term a potential for exports. We can export flour and we export it as well as our candies to say nothing of vodka and other drinks. Our export and agriculture potential is great, for example, we can see record amounts of grain exports. But some time from now our animal production in which large investments have been made in the past years could enter the world’s markets. But it won’t be easy for us to do it we need to receive certificates, we need to invest in logistics but there is a potential for increasing exports. Moreover, we have started to substantially increase supplies to China during the current and the past year. Chinese people believe that our food stuffs are better and in any case they are healthier.

VEB has also started to make its projections. We expect our economy to grow even faster than government’s forecast of 0.7 percent, we expect economic growth to be from 0.7 to 1 percent of GDP growth. Even now, our smelting, oil and gas industries are increasing their exports. We believe that exports of our mechanical engineering products might also increase. In terms of exports, VEB plays a special role because the Russian Export Support Center is its pet project and VEB’s important responsibility and significant financial resource are allocated to fund the Center. So, we believe that as a result of this activity we’ll be able to increase exports of mechanical engineering products and not only defense-oriented products but also civil-oriented ones. Secondly, our economic reserves have dropped significantly but our assumption is that they will start to recover. As far as consumer demand is concerned, it will continue to stagnate and even fall slightly but I would like to say that we haven’t hit the bottom yet. As far as investments are concerned we proceed from the premise that there is a potential for increased investments in the next year. In our estimates, this year investments have decreased by about11 percent but next year investments might grow somewhere 0.6 percent and maybe about a zero. Private investments might recover as well. It’s very important for us to return to the dynamics that was seen in the Russian economy in the 2000s. If we want to get back to an issue of competition, we talked about at the start of our conversation, we should assume that if the world’s economy grows 3.6 and further on -3.8, 3.9, we should achieve these growth rates to retain our role in the world and it’s not only a matter of national economic sovereignty, it’s also a matter of narrowing the gap between us and industrialized countries and it concerns everybody, each family. Our main task is to achieve an economic growth rate of about 4 percent and we can accomplish it because there is a potential for increasing consumer and especially investment demand. But to make this happen people and above all business should be determined to invest above all in Russia. The capital outflow is now lower than it was expected earlier. At the start of the year, some expected capital outflow to be more than 100 billion, others – about 90 billion, our Bank’s forecast was 87-90 billion, now capital outflow is likely to be about 60-65 billion. Nevertheless, this is a huge amount, this money is fleeing Russia and we should get back to an economic development model when amounts of capital outflow are not significant and when at some point in the mid-term capital starts to flow into the country, despite sanctions, despite Russian capital flight.

CORR: Andrei Nikolaevich thank you for your interview.

Andrei KLEPACH: Thank you for your questions and I wish our economy every success.


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