Invoice for losses. Vnesheconombank finds itself at crossroads
Text: Tatjana Zykova
Lately, there has been a lot of talk about Vnesheconombank’s (State Corporation ‘Bank for Development and Foreign Economic Affairs) problems. An observer of Rossiiskaya gazeta (RG): discussed the situation with Rector of the Financial University under the Government of the Russian Federation Mikhail Eskindarov.
Mikhail Eskindarov: Financial Institutions are basically the state’s political instruments. Photo: Sergei Kuksin/RG.
Mikhail Abdurakhmanovich, what is happening to Vnesheconombank, you know the situation from the inside being a member of the Expert Council. Is everything really so bad?
Mikhail Eskindarov: I believe that the discussion in the mass media of Vnesheconombank’s situation and its capitalization was artfully put in the wrong direction. Readers and TV viewers were immediately shocked by a gap of 1.5 trillion rubles which was a result of VEB’s operation and which has to be closed that the bank by the Finance Ministry with budgetary funds. So, people got the impression that the bank for development and the state’s anti-crisis policy as a whole were inefficient. This development caused and keeps on causing damage in the eyes of foreign creditors.
Moreover, the situation with VEB serves for the political establishment of the West as an additional argument that sanctions against Russia are working and the West should act in the same spirit.
The Finance Ministry put forward several proposals. It proposed that Vnesheconombank’s foreign debt should be repaid through converting VEB’s eurobonds into the Finance Ministry’s Eurobonds. It also proposed to repay Vnesheconombank’s foreign tranches by way of using federal budget funds (as part of recognizing such payments beyond the scope of budget deficit of 3 percent of GDP). Which option to choose?
Mikhail Eskindarov: Both options contravene the Law on the Bank for Development. It sets forth that Vnesheconombank is not to be liable for obligations of the Russian Federation. And the Russian Federation is not liable for Vnesheconombank’s obligations. Thus, the Finance Ministry’s proposal changes terms of VEB’s credit agreements with foreign creditors giving them a formal basis to issue covenants worth billions of dollars.
The Finance Ministry also proposes that VEB should sell its assets in order to radically capitalize the Bank. And in my opinion this proposal is not relevant either.
First, blocks of companies’ shares were purchased by the Bank under the different conditions and if you sell them in the low market there will be another hole in the Bank’s balance sheet. If VEB sells its portfolio of shares and bonds purchased under individual decisions made by its Supervisory Board, it will incur losses of more than 200 billion rubles.
But it also goes without saying that if Vnesheconombank tries to sell blocks of shares of Gazprom, Rusal, United Aircraft Corporation and Rostelecom simultaneously, it will collapse the market. A sale of such business companies as (the Russian Direct Investment Fund, EXIAR, VEB Engineering etc.) will require to make independent audit accounting estimates with regard to each of 17 subsidiaries and hold tenders and transactions, it will take a lot of time and even in this case these transactions won’t cover expenses incurred by VEB to capitalize its subsidiaries, make huge interest payments under credits raised from the Central Bank to rehabilitate Globex and Svyaz Bank in the 2008-2009 crisis. So, this transaction will cause damage both to Vnesheconombank and the state.
How do you feel about Kudrin’s proposal to sell 25 percent of Vnesheconombank’s shares to private companies?
Mikhail Eskindarov: This proposal is not realistic because VEB is a state corporation. Converting VEB into a joint stock company 100 percent owned by the state and a subsequent sale of its block of shares will require the passage of two federal laws and a plenty of by-laws (for example in terms of property).
All this will take at least 1.5-2 years. I believe that the discussion did not touch upon the main contradiction related to Vnesheconombank – it was established as a bank for development and it is managed as a bank for development but its performance is evaluated as that of an ordinary joint stock company. The Bank implemented more than a hundred projects worth trillions of rubles and now it is being invoiced for losses.
In the last year alone, such an “inefficient” state bank is said to have supported dozens of projects of national significance worth hundreds of billions of rubles. They include the launch of Express-AMT7 spacecraft, a unique pharmaceutical integrated facility in the Yaroslavl region, the Boguchan Aluminum plant in the Krasnoyarsk Territory. The T-Platform Company into the capital of which VEB entered creates the world’s best super companies.
To my mind the most important thing now is to end unnecessary public debates about the Bank’s poor performance. We need to focus our conversation on capitalizing the Bank for Development for it to address strategic objectives. This is a principal moment. To this end, we have to remember why development banks are established. Today, 590 financial development institutions are operating in the world. The Russian model was formed by VEB 9 years ago in close contact with the German KfW Development Bank.
Capital of any development institution abroad is formed and replenished with rare exception by the state and with its own profit when it is available. This happens from year to year including periods of crisis. And none of foreign governments regard their national development banks as being free loaders squandering money of the state and people.
The problem is that so far there are no clear-cut criteria for performance evaluation of state corporations.
Because such development institutions are established by the state to address tasks of national scope. For example, the German KfW Development Bank was designed to rebuild Germany’s economy after the Second World War. The Brazilian Development Bank BNDES funded the creation of aviation industry in Brazil from scratch. Another objective is to build up exports of products as was the case with the Export-Import Bank of Japan or French COFACE Insurance Agency.
They form their capital through receiving money from federal budgets. Development banks play an exclusive role in the periods of crisis by cushioning blows to the economy through implementing government programs.
Can development institutions change their legal framework?
Mikhail Eskindarov: Even if a development institution is converted into a joint stock company the state retains total control and fully guarantees all its eurobond issues. The mentioned above KfW and the China Development Bank serve as example of this. As to the latter the state has formally withdrawn from it: 51 percent of shares are owned now by the finance ministry and 49 percent - by the Central Bank of China. Only Vnesheconombank, as a state corporation, finances projects for the most part with funds raised from the market.
Under the letter of the Law on the Bank for Development, the state shall guarantee its obligations only in the amount of the first contribution to the Bank’s authorized capital, which was made in 2007, that is, 180 billion rubles. Vnesheconombank pays interest on all eurobonds and other loans on foreign and domestic markets. Even financial resources of the National Wealth Fund and credits of the Central Bank intended for rehabilitating banks in a time of crisis are placed in VEB’s accounts on a paid basis. VEB places Eurobonds and raises syndicated loans at higher interest rates than, for example Sberbank and VTB.
Who is responsible for approving investment projects in VEB?
As far as I know a lion’s share of projects are approved by VEB’s Supervisory Board but they are funded from the market. VEB extends credits for a tenure of 10-30 years. 90 percent of credits are extended for a tenure of more than 5 years. But interest rates are not market-oriented ones because profit is not included in the Bank for Development priorities. None of commercial banks can afford it including such quasi-state banks as Sberbank and VTB. This is a framework in which Vnesheconombank carries out its investment policy.
What is the main conclusion?
Mikhail Eskindarov: Capitalization of the Bank for Development and its investment efficiency are different conceptual categories. They are parallel vectors. In any case, a need for capitalization is not a direct result of efficiency.
Financial institutions are in effect political instruments of any state. It doesn’t matter if a country is run by a left- or right-wing government, liberals or social-democrats, they all keep on capitalizing development banks.
For example, in Brazil, capitalization of BNDES increased from 2008 to 2014 by 2.2 times. The same is true of the China Development Bank (CDB). The Korea Development Bank (KDB) increased its capital by 1.5 times to say nothing about their foreign currency equivalents of their capital. In case of CDB it’s 110 billion dollars and in case of BNDES – 24 billion dollars. As of January 1, 2016, Vnesheconombank’s capital was 492 billion rubles which is equivalent to about 6 billion dollars at the current exchange rate.
In a word, capitalization is not a reward for efficiency and the more so it shouldn’t be a punishment. It is an instrument for replenishing development institution’s resource base to ensure sustainable development of national economy.
The state should evaluate an institution’s performance by the results of implementing concrete projects. The problem is that there are no clear-cut criteria for evaluating state corporations’ performance so far.
What are the risks of the approach backed by the Finance Ministry which was instructed by Vnesheconombank to prepare proposals for Vnesheconombank’s future activity?
Mikhail Eskindarov: The Finance Ministry’s philosophy is dictated by the current state of the federal budget, so, its approach appears to be short-term and momentary. It’s a good thing for VEB’s capitalization that the government made a decision to reduce the interest rate to 0.25 percent and prolong by 5 years the placement the National Wealth Fund’s financial resources on VEB’s deposits. In the longer term, it will make it possible to keep capital adequacy ratio at a level of 12 percent and prevent foreign creditors from issuing covenants.
An issue of VEB’s capitalization and its adequate investment policy requires systemic solution. To my mind, a proposal made by the Economic Development Ministry is more technological and less costly. The Ministry proposes to capitalize Vnesheconombank through using OFZs (federal loan bonds). According to preliminary estimates an optimal sum is 1.2 trillion rubles.
In order to reduce pressure on the federal budget, this sum can be disbursed by tranches of 200 billion rubles. Time intervals between tranches is to be determined by Vnesheconombank’s standing at a certain time. Moreover, in order to increase VEB’s current liquidity we could get back to earlier voiced ideas of placing funds of companies not related to the Bank’s projects on VEB’s deposits and to proposals for VEB to make special issues of foreign currency bonds for them to be purchased by exporters.
Rossiiskaya gazeta – Federal issue № 6880 (12)
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.