Alexey Miroshnichenko is the vice-chairman of VEB.RF, the Russian National Development Corporation established by the state to support finance for projects that contribute to the public good. Here he reflects on how COVID-19 is reshaping global priorities, and sets out how new policies are channelling investment towards sustainability in Russia.
At the end of March, I was looking forward to the Berlin Energy Transition Dialogue, where I was due to present the first-ever Russian Green Finance Standard – a new financial policy that has the potential to transform the Russian economy into a more sustainable one. Unfortunately, it didn’t happen: the coronavirus pandemic made travel impossible, and the event was cancelled.
It is ironic, however, that the travel restrictions have done more for the environment than any climate conference so far. Satellite images show substantial drops in pollution levels over cities and countries under lockdown - a stark reminder that in many cases the interests of nature and the economy are in opposition: when we suffer the planet thrives. But as we sit in quarantine or spend weeks self-isolating, there is no better time to think about how to change this sad equation.
The new green finance standard being developed by VEB.RF serves this exact purpose. Russia has never been known for its environmental preservation efforts – even beyond extensive negative stereotyping abroad. Yet the facts paint a more favorable picture. Russia has 54 million hectares of protected natural areas, an area roughly the size of Spain or Thailand. Since 1990, its carbon footprint has decreased almost by 30 percent. The country signed the Paris Climate Accord in 2019 and has resolved to uphold it, gradually decreasing emissions and improving its policies.
But all this does not mean that there are no problems.
A January 2020 report by the Russian Accounting Chamber says 38.6% of Russia’s population breathes polluted air, while 88% of the water used in agriculture and manufacturing did not meet decontamination standards. A January Levada-Center poll suggests such failings do not sit well with Russians, who place environmental issues at the top of the list of problems that humanity faces in the 21st century.
The government reacted to such concerns by adopting the “Ecology” national project two years ago. Running from 2018 to 2024, its goals include the liquidation of all 191 known illegal garbage dumps and reprocessing 60%of solid communal waste – an ambitious target, considering that only 3% currently undergoes such treatment. Big urban centers are being targeted for a 20% decrease in air pollution, while the logging industry will be made sustainable by replacing 100% of all trees culled, while the ecosystems of Lake Baikal and the Volga will be restored. And these are only some of the projects under the “Ecology” umbrella. After all, Russian forests, lakes and rivers are among the world’s biggest – so their importance extends far beyond national borders.
“38.6% of Russia’s population breathes polluted air, while 88% of the water used in agriculture and manufacturing did not meet decontamination standards.”
But the program comes at a cost - over 4 trillion Rubles, or roughly 50 billion Euros. And while the government will support it with 800 billion Rubles, the remaining sum will have to be found on the private market, both domestic and foreign.
Here’s where Russia’s national standard of green finance comes in. Intended for presentation later this year, it will outline ways of facilitating private investments into environmental projects of national importance.
The market for green bond and other debt instruments is almost non-existent in Russia at present. While the Moscow stock exchange opened a sustainable finance section in November 2019, so far only 5 issues of green bonds with a total value of approximately 80 million Euro are registered there.
Given the current absence of a green finance culture in Russia, market and government stimulus will be need to create momentum behind sustainable bonds. After placing bonds with a total value of 500 million Euro on the EU market in 2019, the Russian Railroad monopoly RZHD created an example of what this market stimulus might look like – they successfully reduced their borrowing costs and the issue was oversubscribed. For now, investors cannot hope for such premiums from the Russian market. But that is about to change.
VEB.RF chief Igor Shuvalov says the national standard will outline measures to make such bonds attractive for companies and investors. Planned are coupon subsidies, tax breaks, verification process subsidies and other measures to draw investment. The figures are still being worked through, but the stimulus will be sizeable enough to attract a wide range of companies.
In addition, companies will be able to issue green bonds through VEB.RF’s special project finance SPV that will allow firms to obtain government guarantees if the project is deemed critically important to achieving the targets of the “Ecology” program. As a national development institution, we intend to include the terms of the standard in our lending process and supplement state incentives with our own; for example, by reducing the loan rates for sustainable projects.
The standard will be based on international CBI and ICMA criteria to be compatible with the demands of the EU and British stock exchanges and investors. It will exclude new coal projects (although coal plants account for less than 16 percent of all electric generation in Russia) and will include a maximum threshold of carbon emission for projects in different spheres such as waste management, energy production, construction, manufacturing, transport, water management, forestry, landscape and biodiversity conservation and adaptation to climate change.
VEB.RF will be positioned as the verifying agency, managing the standard itself and updating it through an expert council composed of state officials, environment experts and businesspeople with a credible environmental portfolio. The competence center will authorize independent private rating agencies (second level verifiers) to issue certificates of approval of green status to the bonds and projects of the market players. These private agencies will also be obliged to track the implementation of the project and ensure that money from bond sales are truly spent on the stated objectives.
Easing the garbage crisis is the first practical benefit of the project. The growth of solid communal waste in the 2010s resulted in the near-collapse of the Russian garbage disposal infrastructure – designed and built decades before today’s consumer culture. Illegal dumpsites started to mushroom across Central Russia, leading to mass protests. The picture has improved somewhat with a VEB.RF investment of $1.7 billion into the construction of four huge waste-to-energy plants using Hitachi Zosen Inova technology in the Moscow region. When they go online at the end of 2022 they will be capable of processing 2.8 million tons of garbage a year – that’s 35% of all waste in the Moscow region.
“As we contemplate the clearing waters and more breathable air, we realise that there must be better ways to deal with pollution than an epidemic of world proportions.”
This, unfortunately, is not enough. Creation of a national system of waste reprocessing is a monumental task, and waste-to-energy plants must be supplemented with recycling facilities to avoid loss of valuable resources. We hope that with the help of the national standard, Russian private and public companies will be able to attract money to finance such projects.
Though ambitious for Russia, we recognize that our efforts are only a small part of global efforts to curb pollution and greenhouse gas emission. Yet achieving the targets of the Paris Agreement is possible only through the concerted effort of all nations.
As we contemplate the clearing waters and more breathable air in countries most severely affected by the pandemic we all know that there are better - and more lasting - ways to clear the skies and the rivers than an epidemic of world proportions. Let us hope that once this emergency has passed, it will leave all of us determined to increase our efforts in achieving a sustainable balance between humankind and nature.
Alexey Miroshnichenko, VEB.RF
VEB.RF and the Russian Agricultural Bank Group have signed an assignment agreement in respect of Eurodon’s loans. The transaction totalled 6.2 billion roubles.
As Eurodon’s major creditor, VEB.RF gained control of the company in 2018 after its previous owners had found themselves unable to service their debts. In February 2019 the company came under financial monitoring as part of insolvency proceedings. VEB.RF took on Eurodon’s operational management and carried out the company’s financial restructuring, which enabled the company to carry on as a production facility, ensured the settlement of all its debts, wage arrears included, and eliminated phytosanitary hazards.
“As the principal owner of Eurodon, VEB.RF fulfilled its functions of a development institution: we saved the company as a production facility and resolved a host of phytosanitary issues. I think the agreement to assign such an important local business to Russian Agricultural Bank, which has all the necessary expertise to provide financing for agriculture, is a very good decision that will allow Eurodon to realise its potential,” VEB.RF’s First Deputy Chairman Mikhail Kuzovlev said.
“As a bank systemically important to Russian agribusiness, we believe that the company’s financial restructuring is our first priority. Russian Agricultural Bank is interested in enabling Eurodon to resume operation as soon as possible. A whole range of agricultural investors have shown an interest in the asset. We’ll be considering all proposals to take the optimal decision for the company and the agricultural sector in general,” Russian Agricultural Bank’s First Deputy Chairperson of the Board Irina Zhachkina said.
VEB.RF Provides RUB25.5bn Worth of Support for Projects Important to Russia’s Economy
From 25 March to 9 April 2020, VEB.RF disburses a total of 16.8 billion roubles on important projects. Its guarantees issued within that period exceeded 8.7 billion roubles. For the year to date, VEB.RF has allocated over 111 billion roubles to the Russian economy.
“These investments made by VEB.RF make it possible to continue carrying out Russia’s major industrial projects in the gas chemical sector, infrastructure, including the port infrastructure, the digital economy etc. Some projects use the Project Financing Factory mechanism. VEB.RF, therefore, works in partnership with commercial banks to attract an inflow of investment in the economy and continues to fulfil its obligations to partners and customers by providing financing on schedule, without delay. Our principal objective is a beneficial effect on the economy,” VEB.RF Chairman Igor Shuvalov said.
The projects funded by the development institution include as follows:
- Udokan construction and copper deposit development. The financing provided by the partner banks (VEB.RF, Gazprombank and Sberbank) was used by Baikal Mining Company to start large-scale work on building the related transport and power supply infrastructure and the processing facilities. The construction of the foundations of the main processing buildings is nearing completion; work is under way on the erection of metal structures for the future concentrator. The project is to create more than 2,000 jobs, excluding allied industries.
- Coal transshipment facility construction at the port of Vanino, Muchke Bay. The project involves building a high-technology coal terminal at the seaport of Vanino, Khabarovsk Territory. The annual cargo turnover of the terminal’s first phase is estimated at 12 million tonnes of coal. Phase I is scheduled for completion in 2020. The potential cargo turnover of the terminal totals 24 million tonnes of coal per year. The project is to create more than 600 jobs.
- Creation of Russia’s nationwide end-to-end track & trace system. The Chestny ZNAK system will make the consumer goods market transparent and ensure that genuine and high-quality goods will be sold. The technology effectively combats counterfeit goods and protects consumers and bona fide businesses.
- VEB.RF also paid a tranche for the project to build four energy-from-waste plants for municipal solid waste in the Moscow Region. Under the current turbulent conditions in the foreign exchange markets due to both the difficult global epidemiological situation and falling oil prices, the syndicate of banks, including VEB.RF, and the borrower decided to minimise currency risks at the investment stage of the project: funds were lent for conversion into foreign currency for subsequent payment for foreign long-lead equipment. This made it possible to prevent the project budget from being exceeded in the future as a result of further currency fluctuations.
- A tranche of the approved financing was paid to prepare design documents under the ethane-containing gas processing project at the settlement of Ust-Luga. The project initiators are Gazprom and RusGazDobycha.
- VEB.RF also provided financing for design documents under the project in the Tomtor rare-metal deposit, one of the largest in the world. Some of the financing will be used to do engineering work for equipment intended for the mining and processing facilities.
- The projects that received funding from VEB.RF include the construction of the Kazbek technology park in the Chechen Republic. The project involves setting up four interconnected production facilities for building materials (gas-concrete blocks and slabs, fibre-cement slabs, dry mortars, building lime).
VEB.RF Expert: ‘International Rules of Trade Finance Need to Be Adapted for New Economic Conditions’
With the participation of a VEB.RF expert, the Banking Commission of the International Chamber of Commerce (ICC) prepared and released a guidance paper on trade finance transactions subject to ICC rules for use at this difficult time. The economic pressures on coronavirus-affected banks are intense. The most important question is whether or not the force majeure provisions of ICC rules can be applied during the COVID-19 pandemic.
As specified in the paper, even where a trade finance transaction is made subject to ICC rules, depending on the applicable law it will require a court or tribunal with jurisdiction, or a government or regulatory authority to make a decision as to whether an event of force majeure is to be declared. The main recommendation made by ICC is that the parties to transactions should resolve any issues through negotiations for mutual benefit. The Commission also provided comments on how to deal with interruptions in the delivery of documents.
The principles laid down in the guidance paper can be applied not only to the uniform rules for documentary credits, guarantees, documentary collections and payments, but also to transactions that are not subject to the rules, for example lending.
VEB.RF is constantly involved with the Paris-based head office of the ICC Banking Commission, working to create the favourable conditions for international payments. ICC rules are indispensable for all kinds of trade finance. VEB.RF co-founded ICC Russia in 2000, serving the interests of the Russian business community.
VEB.RF is represented on the ICC Banking Commission by Alexander Zelenov, Senior Managing Director of Finance. He was a vice-chairman of the ICC Banking Commission for 12 years, was in charge of the Russian National Committee of the ICC Banking Commission for almost 20 years, and was a member of some of the Commission’s working bodies, including the working group that drafted the 2017 version of the Uniform Customs and Practice for Documentary Credits (UCP 600), which has governed the issuance and use of letters of credit for many years.
First Interest-Free Loans Given by SME Bank to Coronavirus-Affected Companies
SME Bank, a subsidiary of RSMB Corporation, has given the first interest-free loans to support coronavirus-affected small and medium-sized enterprises. Support was provided for three cargo carriers in the Krasnodar Territory and the Rostov Region and a freight business in the Perm Territory. The bank lent a total of 17.5 million roubles intended for salaries paid to 175 employees.
With support from SME Bank, the companies will be able to continue operations without interruption and pay stable salaries to their employees. The customers intend to adapt themselves to the new economic environment in the freight services market and maintain their current business.
As the bank’s existing customers, the companies received loans in record time, within one business day.
Russian Economic Development Minister Maxim Reshetnikov said: “Another programme we are launching this week is salary loans. The ultimate goal of our policy is to help businesses to retain and keep paying their employees. For this purpose, we’ve launched a rescue scheme: a business will be able to take out a zero-interest loan to pay a minimum wage to each employee. This will help out small and medium-sized enterprises across the industries affected during six months.”
As a reminder, SME Bank launched a new interest-free loan scheme on 1 April 2020 to help SMEs to meet the immediate needs related to supporting and retaining their employees, such as salary payments. The loan amount is calculated on the basis of the region-specific minimum wage and the number of staff members. The loan has a maturity of six months, a balloon payment and an interest rate of 0% p.a.
The new scheme is part of the Russian Government’s prompt measures to support small and medium-sized enterprises. The zero-interest loan has a limit of 5 billion roubles and is backed by a surety bond issued by VEB.RF to SME Bank. As previously noted by VEB.RF Chairman Igor Shuvalov, development institutions have all the necessary tools to react flexibly to the needs of the real economy and lend a helping hand to businesses and their employees.