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.
VEB’S CHAIRMAN TO DISCUSS THE POSSIBILITY OF PLACING BONDS IN YUANS WITH CHINA’S FINANCE MINISTRY
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.
INCLUSION OF THE YUAN IN THE BASKET OF RESERVE CURRENCIES IS BENEFICIAL FOR RUSSIA – VEB CHAIRMAN DMITRIEV
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.
VEB VIEWS ITS POTENTIAL ENTRY INTO CHINA’S DEBT MARKET IN 2016 WITH CAUTIOUS OPTIMISM
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.
RUSSIAN-CHINESE TRADE AND FINANCE PLATFORM IN CHINA TO START OPERATING IN 2016 - VEB’S CHAIRMAN
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.
LOGISTICS HUB IN CHINA MIGHT BE LAUNCHED IN THE 1ST HALF OF 2016 WITH VEB’S PARTICIPATION
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.
UDOKAN PROJECT MIGHT BE FUNDED IN YUANS THROUGH USING THE CHINA DEVELOPMENT BANK’S CREDIT VEB’S CHAIRMAN
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).
THE NEW BRICS DEVELOPMENT BANK (NDB BRICS) TO START OPERATING ON THE BASIS OF NATIONAL DEVELOPMENT BANKS’ PROJECTS
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.
VEB DOESN’T FIND IT NECESSARY TO RECEIVE THE DAGONG RATING OF CHINA
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.
THE CHINA DEVELOPMENT BANK TO EXTEND CREDIT WORTH 10 BILLION YUANS FOR A PERIOD OF 5 YEARS TO VEB
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.
RDIF, VEB AND THE CHINA-EURASIAN ECONOMIC COOPERATION FUND TO SET UP INSTITUTION TO FUND EXPORTS FROM CHINA TO RUSSIA
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.
THERE IS NO DOUBT THAT VEB WILL BE PROVIDED WITH SUPPOPRT FROM THE STATE, ONLY A FORM OF SUPPORT IS UNDER DISCUSSION-VEB’S CHAIRMAN
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.
VEB IS IN TALKS WITH THE CENTRAL BANK ON HOW TO REMOVE FROM ITS BALANCE SHEET THE DEBT USED TO REHABILITATE SVYAZ-BANK AND GLOBEX
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
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
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.