Sergei Gorkov: “VEB intends to support Prominvestbank with funding”
Author: Vita Filonich
Vnesheconombank’s Chairman has told about further plans concerning Prominvestbank owned by VEB
Sergei Nikolaevich, is VEB as the shareholder going to support financially its Ukrainian subsidiary bank”?
VEB used to support Prominvestbank’s liquidity. In the near future, the bank’s operation will get back to normal. That is why I would like to assure existing and potential customers that the bank is capable of undertaking its activity in a normal way.
What amount of liquidity is Vnesheconombank ready to provide?
The amount of liquidity has been determined but I’m not going to disclose it. But I can say that it is pretty substantial for the bank and enables it to normalize the situation with liquidity. I would also like to say that the tension which emerged around the bank was unsubstantiated because of the market situation.
When are you going to provide liquidity?
This will happen this year.
The Russian mass media informed about VEB’s intention to get rid of problem assets including Prominvestbank…
For one thing, I don’t view Prominvestbank as a problem asset. It is not the worst and even bad bank on the Ukrainian market. The situation in February was more a result of random circumstances than real ones. But in general, VEB as a bank for development should not operate commercial entities. For us this is an issue of a new strategy which is being developed now. In terms of implementing our strategy our objective is not to have commercial entities on our balance. We’ll need time to implement our strategy and an exit processes.
How long will it take?
Everything will depend on potential offers. For the time being, I am not ready to talk about a specific time horizon. I’d like to say it again that our principal is as follows: VEB should not have commercial entities on its balance. Practical steps depend on purchasers, market conditions and other circumstances.
Who are your potential purchasers?
We can see some potentially interested customers but so far we have been only in preliminary talks.
Did you have a meeting with the National Bank of Ukraine (NBU), when will a problem bank status be revoked?
We had a meeting. A decision depends on the National Bank of Ukraine. We made every effort to have this status revoked in the most immediate future.
What activity limitations does the bank experience and what losses does it suffer because of its status?
Limitations are more of psychological nature. Private and corporate customers working with the bank are worried about its problem status. So, our task is to get it revoked as soon as possible and move to a normal bank status. Our management is making every effort to achieve fast result.
When can it happen?
I am not ready to give you a specific date because I am not supposed to make a decision it’s up to the National Bank. As far as we are concerned, we’ll do our utmost to make this happen in the most immediate future.
Besides VEB’s financial injections, NBU was also refinanced, were the funds provided earlier repaid and will new funding be provided?
We are discussing this opportunity with the National Bank.
You mean receiving new funding?
We are discussing this opportunity.
Did NBU buy out OVGZs from Prominvestbank?
We are not ready to comment.
Until the bank’s final destiny has been shaped, what advantages in your opinion does Prominvstbank have over other financial institutions that are getting ready for sale?
Prominvestbank, one of the largest banks in the system, is able in the near future to normalize its activity and work with a variety of sectors. Historically, Prominvestbank was highly instrumental in working with industrial production companies and enterprises. The bank’s other advantages include advanced IT-platforms, a compact network of offices, efficiency growth potential for business processes. All of this will make it possible to have a certain niche on the market and operate and develop normally.
Besides financial resources for stabilizing the bank are you going to provide funds to support its operation and development, for example lending?
We are most likely to be responsible for restructuring its portfolio, dealing with problem assets.
Is it true that you are putting up the bank’s entire loan portfolio for sale?
No, it’s not true. We are working on the bank’s loan portfolio, on specific assets. We are not putting up the bank’s entire loan portfolio for sale.
Are you discussing an idea of transforming Prominvestbank into a treasury bank?
No, we are not. We are going to formulate Prominvestbank’s strategy later on. Our task is to develop VEB’s general strategy by summer and then we’ll deal with strategies of our subsidiaries. By autumn we’ll be able to formulate and state Prominvestbank’s strategy.
Klepach: a gas war also lies ahead, it’s time to launch a counter-offensive!
HOST: Good evening Andrei. Thank you for finding the time for an interview.
Andrei KLEPACH, Vnesheconombank Deputy Chairman (Chief Economist) – Member of the Board: Good evening.
HOST: You’ve put forward one of the most interesting ideas today. You said here at the forum that it might be worthwhile for Russia to think of carrying out a same sort of operation on the gas market as Saudi Arabia is carrying out on the oil market - a same game to a certain extent. Could you say in more detail what this idea is all about?
Andrei KLEPACH: First, as opposed to oil where we appear to have reached a ceiling production level of 533 million tons, there is a potential for increasing gas production. We are in a position to increase gas exports substantially. For example, now we export about 160 billion cubic meters but in fact we can export more than 200 billion cubic meters. The question is whether there is a demand, a market for it. It is clear that Europe won’t buy it in such huge volumes for economic reasons - its economy is either stagnating or recovering very slowly. And for political reasons we have problem going to the East. This means that there is a need for infrastructure and it will be built. But there is also a question of strategic choice. We can either keep export volumes at a stable level or increase them insignificantly. What does this mean? Now gas prices are falling and they will keep on falling. And in this situation liquefied gas is starting to account for a greater market share. The number of suppliers is on the rise too. Europe imports a lot of liquefied gas and America is most likely to start exporting gas. These volumes are not very large but they are going to influence prices significantly. You can either adapt to these conditions or lose your market share as is the case with Gazprom now. OPEC countries and Saudi Arabia went through this sort of situation in the 2000s. They were losing their market share. Prices were at the peak and then they started to go down. But they could keep them. Instead of such a passive adaptation, the Saudis launched a counter-offensive and started to beat their competitors and above all Americans and to some extent us and tap our markets in Poland and Germany. But the price paid for it was a sharp fall in oil prices. This is their way to beat competitors. There is also a threat to our gas that we supply via pipelines. And there will a fierce competition on Asian markets where historically high gas and liquefied gas prices are starting to dwindle. Under these conditions. we can follow rules of the game and we can also play our own game by increasing production volumes. Maybe, this sort of approach would be strategically justified.
HOST: By the way, a gas market is not an oil market. It is a lot more segmented. First, what segments does this competition deal with? Second, if we launch this sort of offensive, will Gazprom have to sacrifice some of its fundamental principles, for example, long-term contracts, price development and etc? Will we have to operate more on the spot market? Or maybe it’s a matter of increasing independent producers’ export volumes?
Andrei KLEPACH: We don’t have any reliable information on LNG production costs with regard to our and other countries. But according to expert estimates, gas prices could keep on going down significantly and gas exports will remain to be profitable including our LNG projects both on Sakhalin and the Yamal LNG project.
HOST: This means that LNG is competing with LNG?
Andrei KLEPACH: This is the first sphere for competition, because American shale gas is more of our indirect competitor. Competition with other energy resources is also a possibility. China’s oil consumption is more than 3 billion tons of coal per year. Potential demand for gas is huge, although it is growing slower than expected earlier. I think that in the future China is bound to increase its gas consumption volumes by many times . They have their own sources, they have also methane production potential. We have to enter this market. And we are in apposition to do it. Somehow India will follow China’s path. There are Iran and Iraq too. But we can also supply gas to India in the future. In a sense, we have to change rules of the game here. We should apply different approaches to contracts and not only to spot ones, we should identify our own benchmark gas prices which are not directly tied to oil prices. And I think we’ll have to set up a sort of mini “gas OPEC” with our partners and colleagues from Central Asia. Here I mean above all Turkmenia and Uzbekistan which are now major suppliers of gas to China where we can use the existing capacities. We should not build the Altai gas pipeline worth more than twenty billion dollars but we should reequip and launch the Asia-Center gas pipeline. Yes, it’s a transit through Kazakhstan and other countries. We have a negative experience with Ukraine. But I think we can play here a different game. They are our partners and we can supply gas through their gas pipelines to the Chinese market.
HOST: Now I suggest we move to the Forum’s main theme; this is “Russia. Strategy 2030”. What sort of consensus over this strategy can you see after the Forum’s first day? How is it being worked out under these very difficult conditions? What sort of strategy in your opinion should it be?
Andrei KLEPACH: It’s a good and positive thing that in our difficult times when we approve a budget for a period of one year or even shorter and we start cutting or optimizing it right after approving it, we nevertheless discuss Russia’s long-term plans as well as strategic vision of Russia’s future its resources and ways of developing our human capital and land. Arkady Dvorkovich said that we should use not only hydrocarbons but also our human, land and agrarian capital. Discussions are underway and it’s very important for us to learn lessons from how we implemented the strategies we had. Our official strategy approved by the Government is a concept of long-term socio-economic development until the year 2020. It was approved in 2008.We failed to fulfil many quantitative parameters, for example, with regard to economic growth rates because a different economic situation developed but the ideas on which it was based are still relevant and justified. And we should understand why we failed to put in effect those ideas and what changes we should make. Here I mean ideas related to a technological breakthrough in the economy and a stake in making significant investments in the development of human capital and a stake in developing new technological initiatives related to biological, medical technologies, structural economic shifts in exports and import substitution. We should try to understand what we could do under these conditions because we froze and even cut expenses in real terms on science, education and public health care. We cut the expenses as a result of the fall in oil revenues. Maybe be we should get back to a strategy of economic growth and in order to make this happen we should increase our government debt, above all, our domestic debt to be able to fund our social sector, the creation of new services and a new quality of human capital.
HOST: When experts are talking about the current economic crisis they often compare it with some analogues. Most often, they cite examples from Latin America’s history, for example Argentine in the second half of the nineties. Can you compare the current economic dynamics in Russia with something that already happened somewhere in the past? And how is this crisis in your opinion going to develop? Is it going to last for decades or is economic growth going to recover a year or two years from now?
Andrei Klepach: I think that Latin America’s development differs from ours. Those who didn’t like Argentina’s development model and institutional decisions made, used Argentina’s example to scare people almost throughout the 2000s. Argentina went through several defaults but it is developing. We have also Brazil’s example where they even had a left-wing government that carried out reforms, but nevertheless until recent years it enjoyed high economic growth rates and its nominal GDP exceeds that of Russia. In terms of purchasing-power parity Brazil is lagging behind. This enabled Jim O’Neil to create BRICS which is comprised of Brazil, China, India and Russia. These countries demonstrated a very dynamic development in the 2000s. Our challenge now is to become a dynamic country that could have and implement an economic growth model in line with our domestic needs which is attractive for Russian business, Russian citizens and for other countries. Our development model had a positive image in the 2000s. The current crisis is a pretty serious test. But I think we have a good chance to overcome it. And it’s not a matter of a 10-15-year stagnation. To my mind, our economy is sure to get out of the crisis. But would we be able to develop dynamically or our development would be weak. As opposed to Brazil, we have serious demographic limitations. We have a lot of structural problems and large social obligations which they don’t have in China. We can develop without fulfilling them but we can also try to strike a balance between significant investments in human capital and a stake on efficiency, productivity and flexible structural shift in the economy. We have a unique research and technological potential. We have highly qualified production workers and competitive engineers. Although we have a lot of problems. We have, for example, labour shortages. But I think we’ll be able to find solutions that will allow us to develop pretty dynamically.
HOST: So, we can assume that the worst is behind us at least as far as financial markest are concerned.
Andrei KLEPACH: I think that the most serious shocks on the financial markets are behind us. But serious challenges inside the country still remain. And they can bring about certain social unrest. Economic situation will remain to be rather complicated in 2016 and even at the beginning of 2017. We need to take very serious measures. In fact, the Government has now considered a crisis management package. It resolves many specific problems. But in order to respond to the current challenges, for example, the risk of a serious economic downturn this year, we need to take additional measures including budgetary and monetary stimulus as well as certain institutional, structural reforms.
HOST: Andrei, thank you for your answers.
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)
Vnesheconombank Chairman Vladimir Dmitriev’s interview to TV Channel Russia 24
TV Channel Russia 24, INTERVIEW, 22.01.2016, 13:04
HOST: Now, we are getting in touch with Switzerland. Today, is a day of Russia at the Davos Economic Forum, delegates are discussing the situation in our economy and share their visions of its development. My colleague Nailya Asker-Zade is in direct contact with our studio. Her guest today is Vnesheconombank’s Chairman who is also at the Forum. Hello, it’s time for you to speak.
Host Nailya Asker-Zade
HOST: Good afternoon Ekaterina. Our guest today is Vnesheconombank’s Chairman Vladimir Dmitriev. Vladimir Alexandrovcich good afternoon.
Vladimir DMITRIEV, Vnesheconombank’s Chairman: Good afternoon.
HOST: Let’s first of all talk about the Davos Forum’s agenda, what themes are being discussed on the sidelines, you held meetings with your foreign partners, what are they worried about, what are they interested in and do they express any interest in Russia?
Vladimir DMITRIEV: As usual, the Davos Forum’s agenda is extensive and emphasis is as a rule placed on relevant challenges faced by the global community and by individual countries. And in this respect, challenges related to the fourth technological revolution or industrial revolution have a bearing on almost all aspects of our life. Strange as it may seem, this is undoubtedly related to our financial sector, our economic development. As a development institution our bank is interested in the themes on the Forum’s agenda that are related to financial sector and development banks. In this respect, a very interesting session of financial institutions’ leaders was held yesterday - it was devoted to long-term financial resources that are used to fund long-term, expensive large-scale projects. This issue is topical for all investors and development institutions because many of them follow Basel recommendations and there is a definite gap between short-term resources used by banks to fund their transactions and long-term resources that are committed to fund major, above all, infrastructure projects. This is an issue that is also of great interest for governments, regulators and investors. High priority in the Forum’s agenda is also given to the situation in individual countries. Today’s panel discussion devoted to prospects for the development of the Russian economy was very interesting and useful. To my mind, the discussion aroused vivid interest not only among member of the Russian delegation but also among foreign representatives and businessmen. You asked a question about our bilateral meetings. Undoubtedly, we use the Davos venue to hold talks with as many of our partners as possible and our discussions show that we as bank for development and Russia as a whole are of interest for them. Because of sanctions, some of them do not maintain business relations with us, they do not fund our projects but we maintain contacts at various levels and here I mean not only national financing institutions but also international financing institutions such the European Bank for Reconstruction and Development, the International Finance Corporation, the European Investment Bank. This process has never stopped and our conclusion from the conversations we had is that our foreign partners demonstrate their vivid interest in what is going on in Russia as well as their readiness to get down to implementing joint projects with Vnesheconombank in Russia as soon as sanctions are lifted.
HOST: What should the Russian Government do? Now a strategy of mid- and long-term development is being developed. What measures in your opinion should this new anti-crisis strategy include?
Vladimir DMITRIEV: I think there is no way of devising something radically new. For many years we’ve been talking about the need for structural reforms. I think it’s high time now to move from words to action, we should get down to reformatting the budget for it to be in line with our current capabilities, adapt to the current conditions related to oil prices volatility, lower oil prices and the ruble’s volatility. What is important for the economy, for businessmen and investors is predictability, confidence in economic sustainability and in consistency of reforms. I think that the state should identify priorities and when I say that the budget should be reformatted I mean that we have to look at the way we use our budgetary expenditures with regard to various federal target and special programs. We insist that a part of these programs could be funded on a reimbursable basis through development institutions ensuring control over a targeted use of budgetary funds, technological control and financial audit. We should make strenuous efforts to optimize budgetary expenditures and increase their efficiency.
HOST: This morning in the course of discussion, European journalists asked questions about Olympic credits. Should they be repaid by investors that took them or through receiving the state’s support.
Vladimir DMITRIEV: We regard the Olympic program that we funded as a project of national significance. This hugely expensive project financed with investors’ and budgetary funds resulted in creating the world’s class alpine-ski resort, well-equipped stadiums and recreation zones in Imeritinskaya Lowland at the Black Sea seaside. These projects were financed through using borrowed funds and we raised credits in foreign currency abroad but extended them in rubles. And now we have problem repaying credits to foreign creditors. Initially, the state confirmed that it assumed joint and several liability for borrowed funds extended to our investors together with Vnesheconombank by issuing Olympstroy’s surety to Vnesheconombank. When they started to plan to liquidate Olympstroy there was a serious high-level talk that Olympstroy’s surety should be replaced with a guarantee of the Russian Government. Now we have neither Olympstroy nor its surety and we don’t have any guarantees either. We believe that we are on the right path in our dialogue with the Government but we should create favorable conditions for investors for them to be able to repay these credits to either Vnesheconombank or to the state.
HOST: What’s the amount of these credit facilities?
Vladimir DMITRIEV: We granted credits worth 220 billion rubles to fund the Olympics. This year, we estimate our indebtedness under foreign credits at 2 billion dollars.
HOST: For the most part, credits to what courtiers?
Vladimir DMITRIEV: These are such large -scale projects as Roza Khutor, Krasnaya Polyana, projects in Imertinskaya Lowland. They range from 20 to 80 billion rubles.
HOST: What foreign countries extended credits?
Vladimir DMITRIEV: Basically, these are credits to foreign banks and foreign investors which bought bonds issued by Vnesheconombank.
HOST: When might a decision be taken on providing the state’s support for VEB?
Vladimir DMITRIEV: I would say with thanks to the Finance Ministry that measures of the state’s support have already been taken including reconsidered subordinated foreign currency deposit made available from financial resources of the National Wealth Fund. Its interest rates and terms were reconsidered in such a way as to improve Vnesheconombank’s balance sheet indicators. We have arrangements with the Finance Ministry that provide for placing funds of the Federal Treasury in significant amounts of up to 50 billion rubles on pretty favorable terms in Vnesheconombank thus making it possible for us to address current liquidity issues. But package support measures are to be implemented until this February. There is no doubt that Vnesheconombank remains to be a key financing development institution and it will keep on performing its functions but at the same time the state support will support Vnesheconombank for it to be to repay debts in due time and in full to foreign and Russian creditors. But we are well aware that we have great potential inside the Bank related to reducing general administrative expenses, optimizing our loan portfolio and asset management. We’ll use these potential capabilities to minimize budgetary expenses and perform functions of a bank for development.
HOST: And now my last question. Now we can see a highly volatile foreign exchange market. Do you think that such volatility will remain unchanged in the near future?
Vladimir DMITRIEV: Despite the fact that oil and energy price volatility is a lot greater than the ruble volatility, a certain correlation between the ruble exchange rate and energy prices exists. And in the foreseeable future this correlation will continue to persist. But there is also no doubt that the implementation of the government anti-crisis program and carrying out structural reforms in the Russian economy will have a positive impact on our future and on the correlation between the ruble exchange rate and energy prices. We must put an end to our unconditional dependence on energy prices.
Is there a maximum low level in the decline of the Russian ruble exchange rate?
Vladimir DMITRIEV: I’m afraid I can’t give you a correct answer until the ruble exchange rate depends unconditionally on energy prices.
HOST: Vladimir Alexandrovich, thank you very much for finding the time to answer our questions.
Vladimir DMITRIEV: Thank you.
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.