China’s best practices will help VEB avoid mistakes in its new strategy – first deputy chairman of state corporation
BEIJING, May 27 /PRIME/. In the course of their visit to China, Vnesheconombank’s representatives held a workshop at the China Development Bank. Our Chinese partners’ best practices in terms of risk management, human resources policy and lending could be used upon preparing a development strategy of state corporation, said VEB’s First Deputy Chairman Nikolai Tsekhomsky to RIA Novosti.
VEB’s delegation is in Beijing as part the Group of Twenty countries financial development institutions’ heads – D20 meeting.
“Our main goal here is to participate in the D20 meeting. But in addition to it, we decided to combine the useful with the useful and brought here a team that spent yesterday a whole day at the China Development Bank participating in a workshop. And it’s very interesting for us to listen to about our colleagues’ successes and failures and the ways of overcoming these failures maybe in the late 90s, reasons for these failures and the way they adjusted their strategy.
He reminded that now VEB was forming a new strategy that will be presented in late June.
“So, we are interested in any introductory information from the respected banks and especially from the China Development Bank which is one of the most successful development banks”, said the Deputy Chairman of the state corporation.
“We listened to very attentively about their risk management, their human resources policy and their lending policy. To my mind, we held a very useful workshop yesterday, our team members took a lot of notes. I think we can borrow something from them but in any case it was very useful”, added Mr. Tsekhomsky.
Mass media materials on Vnesheconombank Chairman Sergei Gorkov’s meeting with journalists
Gorkov presents plans for VEB’s future (RIA Novosti)
It became clear last November that VEB was in a pre-default situation and that 1.3 trillion rubles had to be found to repay its debts until 2020. Then the authorities stepped up their discussions about saving this state corporation.
MOSCOW, April 5 – RIA Novosti. Sergei Gorkov who came from Sberbank and has been VEB’s Chairman for a little more than a month intends to build a new business model which will take advantage of foreign best practices until late June.
The authorities’ discussions about saving VEB stepped up in November when it became clear that VEB was in a pre-default situation and that 1.3 trillion rubles had to be found to repay its debts until 2020. In late February, Sergei Gorkov succeeded Vladimir Dmitriev who had been in charge of the state corporation in the past 12 years.
“The past month was not easy both for me and the Bank’s team because of new principles, new people, structures and processes. So, our first main task was to size up the situation. We keep on estimating our assets and we are trying to evaluate subsidiaries. We’ll to analyze numerous aspects of the Bank’s activity during the whole April, although in general we can already say that the old model is not working”, Gorkov said to journalists at a briefing on Tuesday.
According to him, the state corporation’s model was formed when the market was completely different and there were no sanctions. Mr. Gorkov is convinced that if sanctions hadn’t been imposed the state corporation would not have been confronted with such an acute liquidity problem.
“The situation developed in the following way: we borrowed at high interest rates on the market however VEB had to invest in long-term, low-income projects. In principle, the model does not work in such a way. There is a need for long cheap money rather than short money but initially this discrepancy was built into the model”, explained the new head of the Bank for Development.
The problem is that VEB should change both the pattern of funding and the pattern of assets, recommended Mr. Gorkov.
Difficulties are left behind
At present, VEB doesn’t have any problems with liquidity, all covenants are fulfilled in particular thanks to a subsidy worth 150 billion rubles provided by the Finance Ministry, said Mr. Gorkov.
“I can say that “the patient” is more alive than dead because we had a crucial moment of going through covenants as of the end of the first quarter and we have gone through all covenants successfully. As a whole, it was very important for us to go through capital adequacy ratio covenants and net assets covenants – two basic covenants which are of interest for our investors”, said Gorkov.
According to him, now the state corporation’s capital adequacy ratio exceeds 11%. “As far as net assets are concerned, we also exceeding this covenant”, he said acknowledging that they had such problems in late February.
“We don’t have any problems with liquidity. You know that we received subsidy worth 150 billion rubles from the Finance Ministry for us to be able to make payments to our international investors – 74 billion rubles were provided in the first quarter. This enables us among other things to normalize all our basis parameters”, explained the head of the state corporation.
Foreign best practices
At present VEB’s new business model is only being developed, noted Mr. Gorkov. He said that VEB’s experts are studying best practices of many foreign development banks including Brazilian, Chinese, RSA and European banks.
“De-facto they all have different business models. None of these development banks are alike, so it’s very important for us to find our own place”, explained VEB’s Chairman.
Speaking about international best practices he mentioned the Brazilian Development Bank which is funded from pension and sovereign wealth funds. “European banks raise funds from the market but market borrowing conditions are completely different from ours and they don’t have sanctions. As to the China development bank, its task was a bit different, it was responsible for supporting infrastructure and it received financial resources from special funds”, said Mr. Gorkov.
“It’s very important for us here to find a model of our own and we are thinking hard on it because we’ll have to make a somewhat unique history because we can’t make use of Brazilian experience alone, we can’t use Chinese expertise and we can’t’ follow German best practices alone”, he stressed.
“We’ll have to weigh all models and find out what is applicable for us, identify Russian specific features and the best ways of using the bank for development in Russia. This is a very difficult task and we are given short time”, he said.
Mr. Gorkov, former Deputy Chairman of Sberbank’s Executive Board said that the Russian largest bank’s expertise will be used in the state corporation’s new model, for example in risk management but he believes that not all business experience of Sberbank could be directly applied at VEB.
“It’s very comfortable for us to use risk analysis which is used at Sberbank. We have some specifics but in this case we can use best practice but as you can see not all business experience of Sberbank could be directly applied at VEB, he said.
Nevertheless, Mr. Gorkov said that they didn’t have any have ready solutions with regard to VEB’s business model. “Perhaps, we’ll ty to devise some sort of combination, it’s hard to say which combination because in the situation when we are denied access to foreign markets we’ll have to focus on domestic markets. We are now considering various instruments and it’s a matter of a wide-ranging discussion including with the government and the Central Bank”, he said.
At the same time VEB’s Chairman said that he didn’t want the Bank to receive banking license. “We can discuss all possible scenarios but I am not a proponent of this model because none of development banks in the world have banking licenses except for Mexico. I don’t have a position now so when we form it we’ll state it”, he said.
Mr. Gorkov told journalists about prospects for the Bank’s Ukrainian business. According to him, he met head of the Ukrainian National Bank Valeria Gontareva and discussed the future of Prominvestbank – VEB’s Ukrainian subsidiary. The liquidity situation at Prominvestbank got normal and he expects the National Bank to make a decision this week to withdraw the bank from the list of problem banks, said the head of the state corporation.
Nevertheless, VEB is going to leave the Ukrainian market in the foreseeable future. A final decision will be made after a new strategy has been developed. “In the long term we’ll consider the possibility of leaving the Ukrainian market. Until now we haven’t held talks on this issue. But in terms of our strategy it might make sense for us to leave the market in the foreseeable future because Vnesheconombank is after all Russia’s development institution and in terms of strategy we shouldn’t have a commercial bank in Ukraine. But a decision on this bank will be made when we develop our strategy”, he said.
“At the same time, the liquidity situation at VEB’s other subsidiary banks – Svyaz-Bank and Globex is normal and if necessary VEB is ready to additionally capitalize them. “The liquidity situation is quite normal. As to Svyaz-Bank, we are getting substantial inflows of customers and as to Globex, we are also getting inflows of customers. These subsidiaries are of course very important for us and if necessary we are ready to additionally capitalize them”, he said.
VEB’s Chairman added that they hadn’t made a decision on the future of their subsidiary banks yet. “We are considering various options but in our strategy we’ll decide what to do with them. We have at least four different development scenarios” he said declining to disclose details.
VEB will go on living but hasn’t decided how (INTERFAX-AFI)
Moscow. April 6. INTERFAX-AFI Vnesheconombank (VEB), which was established to develop Russia’s economy needs now government support because of the sanctions and the accumulated problems. The Bank will develop a new business model until late June and decide the future of non-performing assets as well as banks in the Russian Federation and in Ukraine.
“We keep on estimating our assets and we are trying to evaluateour subsidiaries. “We’ll analyze numerous aspects of the Bank’s activity during the whole April, although in general we can already say that the old model is not working, because this model was based on raising redeemable market funds and placing them in non-performing assets”, VEB Chairman Sergei Gorkov told journalists at the first news conference in his new status.
He described the situation at VEB as follows: “the patient is more alive than dead” adding that internal due diligence will be completed by late April and a new business model will be presented until June 30.
According to him, the state corporation’s model was formed when the market was completely different and there were no sanctions. “If sanctions hadn’t been imposed the state corporation would not have been confronted with such an acute liquidity problem at the end of the last year and at the start of this year. In the situation when we are denied access to foreign markets we’ll have to focus on domestic markets”, he said.
Now VEB’s management is studying best practices of foreign development banks in China, Brazil, India, RSA as well as best practice of IFC although he admits that they will have to develop a unique model adapted to the Russian realities.
“In my opinion a new model will be of great interest for the pension system. We would like to have a look at foreign best practices. For any development bank it’s a matter of where to get money from to fund significant strategic projects”, said Gorkov without disclosing VEB’s proposal.
He said that a development institution should operate on a break-even basis but it should not be a highly profitable institution because it invests long-term at low interest rates.
BACK TO NORMAL
Thanks to the state’s support VEB ended the first quarter successfully by resolving liquidity problem and fulfilling covenants on obligations. The Finance Ministry provided the state corporation with 150 billion rubles to make payments to international investors.
“Moreover we worked with our customers that is why as a whole we don’t have problems with liquidity although in late February we had such a problem. In principle we can’t see liquidity problems in the second quarter. To a large extent we’ll cope with the problem till the end of the year. I’m sure we’ll make it next year too,” Sergei Gorkov said adding that this year VEB does not expect any assistance from the Finance Ministry.
According to him, VEB is working on the market for corporate deposits and is interested in raising funds of companies and state corporations.
“We are working with companies, raising deposits at the moment, it’s very important for us to have balanced funding, we want companies and state corporations to keep money in our Bank but we are not discussing any compulsory measures”, Gorkov said.
At the same time, VEB’s new Chairman does not want the Bank to receive a banking license. According to him, none of development banks in the world have banking licenses’, Sergei Gorkov said.
One of the other measures under discussion now is a sale of ADR Gazprom (MOEX: GAZP). Sergei Gorkov said that VEB was in talks now and a final decision hasn’t been made so far, but in case of ADR’s sale it will be done outside the market.
According to VEB’s new management estimates, up to a half of the state corporation’s assets do not generate sufficient incomes. These assets got into a difficult situation because of the market conditions, explained Sergei Gorkov.
“We are examining special projects - it is our theme for the near future, I think we’ll sort out the situation out until late May. We have different kinds of assets – we have not bad assets, complicated and bad assets. So far, we have been evaluating them, our task is to formulate a strategy with regard to them by late May. For example, we have a lot of forest assets and I set up a group for working with them because these assets were spread out in different departments. And when you look at them separately you can’t see any strategy.
Moreover, a subdivision for working with problem assets were set up at VEB. “This must have been the first order that I issued”, adding that the head of the subdivision has not been appointed.
When asked a question if they discuss the possibility of transferring a part of VEB’s assets to a closed-end investment fund he said: We discuss many options including this one too. In fact, we discuss 5-6 options but first of all we want to size up the situation. In order to decide what to do with them we should formulate our strategy. Our task now is to additionally examine the Bank’s portfolio and form up a strategy.
The Olympic projects account for almost 10% of VEB’s loan portfolio.
“When they say that the Olympic projects are bad projects, I can assure you that it is not the case. The Olympic projects are performing well and this season in Sochi will be a special one and there will be no hotel vacancies in Sochi, it will be a golden time for the Olympic facilities. Some of them are located in the lowland and some - in the mountain cluster. As a whole, it’s evident that these are performing assets, they generate operating incomes, they are not idle, they are working, they are reserved well. I don’t think that these projects are bad. Each project is most likely to be in its specific situation, they differ in terms of their clusterability, economics and de-facto quality”, he said.
As far as VEB’s subsidiary banks are concerned, their future will be specified in the state corporation’s new development strategy. Now we are considering at least four possible options for developing Svyaz-Bank (MOEX: SVZD) and Bank Globex, on which the future of VEB’s debt obligations to the Central Bank will depend. The Central Bank provided 211 billion rubles to the state corporation in 2008-2009 to rehabilitate these banks.
Sergei Gorkov also said that that the situation in VEB’s subsidiary bank in Ukraine had normalized but the state corporation could leave the Ukrainian market in the future.
“In the long term we’ll consider the possibility of leaving the Ukrainian market. Until now we haven’t held talks on this issue. But in terms of our strategy it might make sense for us to leave the market in the foreseeable future because Vnesheconombank is after all Russia’s development institution and in terms of strategy it shouldn’t have a commercial bank in Ukraine. But a decision on this bank will be made when we develop our strategy”, VEB’s Chairman said.
WIND OF CHANGE
A new organizational structure is scheduled to be formed in the coming months.
“We plan to start the second half of the year with a new organizational structure and with performance tasks for the second half of the year. The Bank’s structure is sure to be changed. Our task is to put together a basic team. To my mind, a final structure will be put in place as of January 1, 2017 and an intermediate one - as of July 1”, said VEB’s Chairman.
With his appointment as Chairman, the role of the risk management subdivision was enhanced, now risk management is to be supervised by Sergei Gorkov himself.
“VEB used to have a mixed financial unit, for example, borrowing activity was not supervised by this unit it was supervised by the export unit. The Bank’s IT is very outdated, like in the 90s, the Bank has paper document flow. In this sense, the Bank is in need of modernizations, said the state corporation’s new Chairman.
In his opinion, the Bank needs to change its organizational structure and corporate culture.
“We have rated 1100 managers working for VEB and its subsidiaries. Unfortunately, our conclusion is that VEB’s culture was not focused on the result. At the same time, intellectual level is high – higher than the market one as a whole but readiness for change is very low. In this sense it’s very important for us to select those leaders of change (we have launched such a project) who would be able to become drivers, points of change. They are above all VEB’s employees”, said Sergei Gorkov noting that it’s not possible to replace VEB’s managers with people from the market.
According to him, VEB’s culture is not oriented on the result and there is no customer orientation.
“VEB has never been a commercial bank and there are in fact a lot of customers – state-run companies, the state itself and many private companies. We should give top priority to the result and customer orientation, responsibility and as a whole responsible attitude to state money, Sergei Gorkov said reminding of his track record in forming values in various organizations.
According to VEB’s new management estimate, a potential for optimizing the number of employees in subdivisions performing supporting functions is about 400 people but in other lines of activity new positions will appear.
“We can see that VEB lacks some functions so we have to create them. In general, we’ll be optimizing the number of employees but we’ll have to engage about 100 people to perform these functions”, said Sergei Gorkov. Now the average staffing number of VEB’s employees is 2,2 thousand people.
VEB’s new strategy will be ready in early summer (TASS)
MOSCOW, April. /Corr. TASS Natalia Starostina/ VEB’s new management will present its reform strategy only in the mid-year but even now it is clear that VEB will drop its old business model and is most unlikely to become a commercial bank. Vnesheconombank Chairman Sergei Gorkov told about it at the first news conference after his appointment.
“VEB’s old business model based on investing market funds in non-liquid assets is not working”, said VEB’s new Chairman Sergei Gorkov at the start of his first meeting with journalists after his appointment.
According to him, a main task of VEB’s new management is to evaluate assets, personnel potential of the state corporation and develop a new development strategy. Mr. Gorkov plans to present first results as early as in June.
A bank of bad debts
As early as last year, representatives of the state corporation spoke repeatedly about VEB’s debt problems and its need for a substantial additional capitalization to avoid default on debt obligations. The Bank’s former management cited different amounts of support – up to 1.2 trillion rubles.
According to Finance Minister Anton Siluanov, VEB received up to 150 billion rubles for its additional capitalization from the budget to fulfil its obligations.
In his State of the Nation Address to the Federal Assembly Russian President Vladimir Putin stressed that many of development institutions numbering more than two dozens had become a dumping ground for bad debts. And VEB’s management also said earlier that one of its strategic objectives was to fight bad debts.
In late February, new Chairman was appointed at Vnesheconombank. On February 26, Russian President Vladimir Putin signed a decree on appointing Sergei Gorkov - former Deputy Chairman of Sberbank’s Execute Board as Chairman of the state corporation. In this post he replaced Vladimir Dmitriev who had been in charge of VEB for the past 12 years.
VEB’s problem assets
According to VEB’s new management estimate, up to a half of the state corporation’s assets do not generate sufficient incomes and are not covered by funding. “For the most part theses are credits. Some of them are sufficiently reserved and some are not. These are different assets including Russian ones which got into a complicated situation because of the market conditions”, said Mr. Gorkov.
VEB was active in extending credits to finance projects that required urgent funding.
VEB has a lot of problem debts in the forest sector. In the real property sector Vnesheconombank has fewer such projects and some of them are profitable. The Olympic projects funded by VEB are not hopeless. “The Olympic projects account for 10% of VEB’s portfolio. They are sufficiently reserved. They are not VEB’s worst projects”, said Mr. Gorkov.
According to him, VEB’s business model was formed when there were no sanctions but because of new realities it should be changed.
VEB’s global transformation
VEB is on the threshold of great changes: Mr. Gorkov is determined not only to renew personnel but also change the state corporation’s organizational structure. During March, the Bank’s new management tested the work of the state corporation’s employees. “We have rated 1100 managers working for VEB. Unfortunately, VEB’s culture was not oriented on the result and customer orientation”, said Mr. Gorkov. According to him, this is what they have to change.
They have already started to make personnel changes, for example, Senior Vice President, Director of Sberbank’s Finance Nikolai Tsekhomsky and Deputy Head of Strategy at Sberbank Nikolai Klekovkin moved to VEB.
The Bank’s team will change too”, Mr. Gorkov said. According to him, no all Sberbank’s best practices are applicable at VEB. “We’ll take a part of specialists from the market”, said Gorkov noting that salaries are not high at VEB and they will have to change personnel’s motivation.
VEB’s new Chairman also intends to change the state corporation’s organizational structure. According to him, everything was separated in the old structure, there was no unified asset management.
“There were 6 subdivisions which operated on the sectoral principle. There was no problem debts department. It is this department that Gorkov created when he moved to VEB. Moreover, Mr. Gorkov was amazed at a large volume of paper document flow and outdated IT which are most likely to be updated.
Following foreign development institutions’ best practices
The state corporation’s management plans to prepare new strategy by late June. Upon preparing new strategy VEB will take into account foreign development institutions’ best practices, said M.Gorkov. Now VEB’s experts are studying best practices of many foreign development banks including Brazilian, Chinese, Indian RSA ones and IFC.
They all have different business models. None of these development banks are alike, Gorkov said.
According to him, it’s very important for us to find our own model. “We can’t use only Brazilian, Chinese and German best practices. For example, IFC is not limited to funding projects but it is also responsible for monitoring them following certain rules. We are most likely to come up with some sort of combination”, said Mr. Gorkov.
Mr. Gorkov doesn’t think that VEB should become a commercial bank. “I don’t think that a bank for development should have a banking license, because none of development banks in the world have banking licenses except for Mexico’s bank”, said VEB’s Chairman.
VEB wants to meet investors from Asia and the US in April-May – First Deputy Chairman Tsekhomsky (RIA Novosti/Prime)
MOSCOW, April 5 – RIA Novosti Prime Vnesheconombank intends to meet Asian investors in April, and after it publishes its annual financial statements under IFSR it also plans to hold meetings with investors from the US, VEB First Deputy Chairman Nikolai Tsekholmsky told journalists.
“Yes, we plan. In late April I intend to visit Asian investors and then I’ll go to the US, after we publish our financial statements under IFRS, I think in the middle - end of May”, he answered a question if VEB planned to meet investors.
“We are going to tell them about our tactics said Mr. Tsekhomsky.
According VEB Chairman Sergei Gorkov, restructuring of the state corporation’s foreign debts is impossible because of the sanctions. “Minimum restructuring is possible, “basically we need to agree it upon with Americans explained Mr. Tsekhomsky.
VEB Chairman Sergei Gorkov said they could meet investors only after publishing financial statements. “So we’ll meet investors after publishing them, we’ll tell them about our current status and what we are going to do. We have been told that our financial statements are fairly normal. By this time, we’ll already find out what we are supposed to do in the first place”, said Gorkov.
“I think that in autumn we’ll organize a normal road show to tell investors about our new strategy. We hope that by this time there will be some changes in geopolitics and we’ll have a good window. Now we don’t have it because of the sanctions.
VEB seeks to get rid of a half of non-performing assets in the limited budget (Reuters)
MOSCOW (Reuters) A half of Vnesheconombank’s assets are rated as low income ones. The Bank’s new management plans to formulate a development strategy of the state corporation by July. This strategy might provide for withdrawing from Ukrainian business and adding legal entities deposits and pension money as funding sources.
Due to the state’s support in the form of placing the Finance Ministry’s deposits and 150 billion rubles from the budget, VEB met capital adequacy ratio included in covenants on foreign loans said Vnesheconombank Chairman Sergei Gorkov at the first news conference in his new status.
Mr. Gorkov moved to VEB with his team from Sberbank in February and replaced former VEB Chairman Vladimir Dmitriev.
“The patient is more alive than dead. We went through a very important period and fulfilled all covenants. Our capital adequacy ratio is more than 11 percent”, Mr Gorkov told journalist on Tuesday.
VEB was hit by Western sanctions and was denied access to foreign capital markets, its balance is burdened with problem assets in Ukraine and with Olympic projects which inflict losses and eat up its capital.
Mr. Gorkov said that a half of VEB’s assets do not generate sufficient incomes. As of September 30, 2014, VEB’s assets amounted to 4.3 trillion rubles out of which 2.5 trillion account for credits. The state corporation’s losses exceeded 133 billion rubles for nine months of the last year.
“In late February we were confronted with liquidity problems, now we don’t have such problems”, Mr. Gorkov said adding that the state’s support this year will be limited to 150 billion rubles.
The authorities estimated the total amount of the state’s support at 1.2 trillion rubles but this year the amount of support was limited to 150 billion rubles, a decision on converting the Central Bank’s deposit into the state corporation’s capital has not ben made so far. The deposit was made available to rehabilitate Globex and Svyaz-Bank.
Four scenarios of the future of Gloex and Svyaz-Bank are under discussion now.
“If necessary we are ready to additionally capitalize them. We’ll decide their future as we prepare the Bank’s strategy, we are discussing various options”, he said promising to formulate strategy for the Bank’s assets.
VEB could abandon Prominvestbank and leave the Ukrainian market.
“In the long term we’ll consider the possibility of leaving the Ukrainian market. Until now we haven’t held talks on this issue. But in terms of our strategy it might make sense for us to leave the market in the foreseeable future because Vnesheconombank is after all Russia’s development institution and in terms of strategy it shouldn’t have a commercial bank in Ukraine”, said Mr. Gorkov.
As of September 30, the loan portfolio of VEB’s Ukrainian subsidiary was 23.4 billion rubles and its reserves were 6.5 billion rubles. As a whole the state corporation estimated its risks in Ukraine at 561 billion rubles. Reserved risks account for less than a third – 170 billion rubles
ON THE WAY TO CHANGES
Mr. Gorkov said that VEB would prepare a new business model of the Bank by June 30: it doesn’t provide for receiving a banking license but it may include new sources of funding the state corporation – the Central Bank stopped refinancing it against the security of non-market assets.
“It is now clear that the old business model is not working. It was based on the one hand on raising redeemable market funds and on the other hand on placing them in non-performing assets”, he said.
Mr. Gorkov believes that VEB’s sources of funding could be expanded by way of raising deposits of companies and pension money.
“We are working with companies, raising deposits at the moment, it’s very important for us to have balanced funding, we want companies and state corporations to keep money in our Bank but we are not discussing any compulsory measures”, Gorkov said.
Mr. Gorkov didn’t say how pension money would be used in the new business model.
According to him the Olympic projects are not the worst at all.
“They are sufficiently reserved; most projects are working. When they say that the Olympic projects are a bad hole for VEB, I can assure you that this is not the case”, he said.
The Olympic projects account for 8.5 percent of VEB’s assets.
Mr. Gorkov also said that he would downsize VEB’s personnel, the number of which is excessive.
“Essentially, we’ll make it till the end of the year. By the mid-year, we’ll be able to develop a strategy, and I’m sure we’ll make it next year too.
Diagnosis was given to VEB. The state corporation was prescribed with new strategy (Kommersant)
Sergei Gorkov, who became Chairman of Vnesheconombank (VEB) a little more than a month ago, made public his first conclusions about the condition of the bank for development: “more alive than dead”. He plans to change the existing business model based on raising expensive credits and sort out problem assets. By the way, experts do not believe that VEB will be able to resolve its problems without the state’s support.
VEB’s new management have analyzed the situation with assets which it was left with after Vladimir Dmitriev’s resignation. “During the whole April we’ll analyze various aspects of VEB’s activity although as a whole it’s already clear: the old business model which is on the one hand is based on raising redeemable market funds and on the other hand on placing them in assets almost a half of which do not generate sufficient incomes is not working”, VEB Chairman Sergei Gorkov said at a news conference yesterday. A new model providing for raising cheaper credit facilities will be completely ready by June 30, although its main principles can be formulated a month earlier, he added.
Now VEB’s specialists are analyzing international best practices of development institutions. “All of them have different business models. In Brazil funding is carried out from pension funds in China – from special funds because the task was to implement domestic infrastructure projects in Europe they have for the most part market funding but their conditions differ from ours and there are no sanctions there”, explained Mr. Gorkov. According to him, VEB will think of some combination of the existing models upon creating its own business model. And at the same, as long as foreign capital markets are closed we’ll focus on our domestic market, we do not rule out that we’ll also raise pension money, VEB will discuss this issue with the Government and the Central Bank, he added. As of today, VEB resolved its liquidity problems which VEB faced in late February. They were resolved with the assistance of the Finance Ministry. It provided VEB with a subsidy of 150 billion rubles – 74 billion rubles in the first quarter. As a result, VEB’s capital adequacy ratio exceeds 11% (a minimum established ratio is 10%). In Mr. Gorkov’s opinion, VEB won’t have liquidity problems till the end of the year.
VEB will have to think over market sources of raising credit facilities - the absence of banking license denies it the opportunity to raise cheap household deposits or legal entities’ funds. According to Mr. Gorkov, there are good inflows of customers in such VEB’s subsidiaries as Svyaz-Bank and Globex and if necessary VEB can capitalize them additionally. But the subsidiaries’ destiny will be determined by the first half-year. VEB wouldn’t refuse legal entities’ funds but in order to raise them it needs to receive a banking license (now VEB has the right to raise deposits of those legal entities with which it has projects). In February of 2016, Governor of the Central Bank Elvira Nabiulina said in her interview to Reuters Agency that the Central Bank is discussing the possibility of transforming Vnesheconombank into a commercial bank. But VEB’s new management doesn’t like such option. “I don’t want VEB to receive banking license”, said Sergei Gorkov yesterday. In experts’ opinion it would be difficult for the Bank to implement measures made public by VEB’s management because the state corporation doesn’t have many possibilities to raise cheap credit facilities from the market. “VEB cannot raise natural entities’ deposits and doesn’t have settlement accounts of legal entities, whereas these are cheap sources for commercial banks”, says Fitch analyst Anton Lopatin. So, a main way of making credit facilities cheaper is to receive funding from the state at interest rates below the market rates”. Gazprombank’s analyst Andrei Klapko believes that VEB can receive cheap credit facilities by additionally capitalizing its subsidiaries which can raise funds of natural and legal entities. “Another option is to issue bonds”, Mr. Klapko goes on to say. It’s hard to imagine any other market options for reducing the cost of funding if a development institution doesn’t have a banking license.
New business model and values are to be developed for VEB (Vedomosti)
Vedomosti, Margarita Papchenkova,Alexandra Prokopenko 05.04. 17:12
“The patient is more alive than dead”, said VEB Chairman about the Bank’s condition.
Vnesheconombank’s old business model is not working any longer – by June 30, VEB is to prepare a new business model, said new VEB Chairman Sergei Gorkov at a meeting with journalists.Former model does not fly any longer
The former model does not fly, explains Mr. Gorkov, one thing runs counter to another - raising funds at market rates and funding low-income projects. We’ll have to change the structure of both assets and liabilities, he says.
Now VEB is studying best practices of development banks in different countries – in Brazil, RSA, China as well as Germany. For example, in Brazil funding is carried out by way of using pension funds and in Germany the bank for development is mostly funded through using market funds but it operates in a different situation – the bank is not under sanctions like VEB, says Mr. Gorkov. In general, a bank for development’s objective is not to generate income but to invest in projects that are important for our country’s development even the ones with low profitability that is why funding should be adequate.
Now they are studying several models, Mr. Gorkov didn’t disclose any details. One of the options is to increase the proportion of long cheap money in the amount of funding.
VEB was active in placing Eurobonds – before the accession of Crimea the market conditions for Russian quasi-sovereign bonds were very favorable in the world but then sanctions made it impossible to prolong these Eurobonds and a sharp devaluation of the ruble increased VEB’s debt obligations manifold. If sanctions hadn’t been imposed VEB’s problems wouldn’t be so acute, says Mr. Gorkov.
VEB can find long cheap money in pension funds. But a decision to abolish funded portion of pensions which is now under discussion in the Government could significantly limit VEB’s capabilities. If the funded element is abolished,VEB can go after money that has already been accumulated in the pension funds and in the Russian Pension Fund.
Mr. Gorkov said that if they restructure the Bank and introduce a new business model VEB’s bonds could be very attractive for both for pension funds and other investors. Everything depends on how exactly the state would cover funds’ risks - if they have 100%- guarantees and the state’s subsidiary responsibility there will be no problems, says a topmanager of one of the largestnon-governmental pension funds. If this is not the case, we have to study VEB’s assets attentively: the fact that profit is not the state corporation’s top priority does not at all mean that its bonds are not reliable, the fund’s top manager thinks.More alive than dead
“It should be stressed that the patient is more alive than dead”, said Mr. Gorkov about VEB’s condition. The most important task for the new team was to save VEB from breaching covenants on Eurobonds. We managed to do it including covenants on capital adequacy ratio and net assets.
VEB doesn’t have any problems with capital – its capital adequacy ratio exceeds 11%. This is more than 10% agreed upon for VEB. After creating additional reserves on non-performing assets this indicator could go down but now it’s difficult to determine how many funds we will need, says Gorkov. We have yet to make a large-scale evaluation – maybe in some cases we’ll have to dismiss reserves, he said.
VEB used to have problems with the Olympic and Ukrainian assets. The Olympic assets reservation accounts for 70% but the level of reserves against Ukrainian assets is very low as estimated by Fitch Ratings. The Olympic credits are not the worst – there are performing assets there. We are very worried about credits extended to companies operating in the timber industry and in the real estate market. VEB’s borrowers ran into problems because of the general situation in the Russian economy and this affects VEB too, explains Gorkov.
VEB also resolved liquidity problems for 2016.In part, the Finance Ministry helped by providing 150 billion rubles (74 billion in the 1st quarter). Problems with covenants could have emerged in February but the Bank went through this period successfully, says Mr. Gorkov. According to him, there is no urgent need to sell liquid assets for example such as ADR Gazprom.Mr. Gorkov hasn’t said so far if VEB will be able to resolve liquidity problems in the future but he said that a new business model would be developed which is supposed to resolve liquidity problems too.
VEB’s reforms will be also aimed at introducing a new corporate culture: So far, no specific objectives have been set before VEB’s employees, there were no key performance indicators (KPI). By July values will be developed for VEB. Mr. Gorkov said that upon developing new culture he will rely on his own business experience but at the same time it won't be a direct copying of Sberbank. VEB is a different institution and it has completely different objectives and tasks and its values will be different, explains Mr. Gorkov.
VEB announces restructuring (RBK Newspaper)
Sergei Gorkov announced the preparation of a unique business model. VEB is to prepare a new business model by June 30, said VEB Chairman Sergei Gorkov. He noted that they would have to develop a unique business model on the basis of the world’s best practices. “We looked at different development banks, each of them is unique, for example the Brazilian development bank is funded by way of using pension funds, in China by way of using special funds, neither of them in its pure form will work in Russia, said Mr. Gorkov at a briefing on Tuesday, on April 5. Sergei Gorkov stressed that he doesn’t want the Bank to receive banking license because none of development banks in the world have banking licenses. He said that VEB’s current model was not working : “We used to have market funding at high interest rates but VEB has to invest in low income, long-term projects. It was an unbalanced model”. According to Mr. Gorkov, as a result, 50% of projects do not generate sufficient interest incomes. A significant part of non-performing assets is in the timber sector, Ilgiz Valitov was responsible for supervising it. He was arrested on Eurodon case. According to Gorkov, VEB will not face liquidity problems this year. Mr. Gorkov says that VEB has two subsidiaries which are important for it – VEB leasing and Prominvestbank (Ukraine). “As far as Prominvestbank is concerned, a decision was made to get its problem bank status abolished, we can also apply for a stabilization credit”, said Mr. Gorkov. According to him, in the long-term VEB would consider the possibility of leaving the Ukrainian market. As to VEB Leasing, Mr. Gorkov said that its head Vyacheslav Solovyov was undergoing a course of treatment in Switzerland. “The situation is under control. VEB Leasing is to make certain payments in the near future. The future of Svyaz-Bank and Globex has not been decided, four deferent scenarios are under discussion now”, said Mr. Gorkov.
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)