“We Pump International Financial Institutions’ Resources into our Economy”

Die WELT
23.01.2008
Economy

Vladimir Dmitriev Chairman of Russia’s Bank for Development and Foreign Economic Affairs talks about infrastructure, the banking crisis and Western fears of state funds.

As Chairman of Bank for Development and Foreign Economic Affairs (VEB) Vladimir Dmitriev is supposed to see to it that enough capital comes into the Russian economy for ensuring sustainable economic growth. He speaks for the first time with a representative of Western press about the Russian expansion on the world market, Western fears of state funds and gigantic tasks Russia will have to address. Jens Hartmann interviewed Mr. Dmitriev.

Die WELT: Vladimir Alexandrovich, you will be a member of the Russian delegation at the Davos World Economic Forum. What issues are the leaders of the Russian economy concerned about in the current year?

Dmitriev: One of the themes on the agenda is going to be an issue of whether state funds pose any danger or not. There are a lot of themes. Probably delegates will discuss the situation in Third World countries and implications of the mortgage crisis.

Question: An issue of state funds would be a concern of yours. What would you tell those critics who are worried that Russia and China are seeking to buy up Western assets?

Dmitriev: VEB is not in charge of managing Russian state funds. It’s the responsibility of the Finance Ministry and, to some extent, the Central Bank.

Question: Nevertheless, you purchased a five percent stake of Aerospace Company EADS last year.

Dmitriev: VEB has the right to purchase foreign shares and participate as an investor in foreign corporations. In case of EADS, our goal is not to purchase a Western asset as if we were to act as a state fund. At the end of 2007, the state raised our capital from 180 billion rubles (5 billion euros) to more than 200 billion rubles. We were seeking possibilities of making investments.

Question: Was it a net financial investment?

Dmitriev: We were going to exchange this stake for a stake in the United Aircraft Building Corporation (UABC)…

Question: .. a state-owned holding incorporating all Russian aircraft builders…

Dmitriev: I mean the UABC stake that will come on the market after additional share issue. UABS has to take a decision on this matter. In our opinion the exchange would help integrate the Russian and European aerospace industries to the benefit of both sides. As you know, EADS holds Russian Aircraft Building Company Irkut’s shares. Irkut is incorporated in UABC.

Question: The China State Development Bank has become a shareholder of the British Barclays Bank. When are you going to buy a stake in a Western bank?

Dmitiev: I wouldn’t like to rule out the possibility that some day our activity would assume larger dimensions and we would start to purchase foreign assets. But at present, it is much more important to us to initiate major investment projects in Russia. There are other state institutions designed to purchase stakes abroad such as the National Reserve Fund or the National Welfare Fund.

Question: Do you know why the EU is seeking to introduce legal protection measures against such investors like you?

Dmitriev: I think that the whole debate over legal restrictions for foreign investors in EU countries is blown out of proportion. Forced regulation could become a serious obstacle to Eastern European businessmen and would eventually deliver a blow to those who initiated these restrictions. Those who try to hamper competition harm consumers. I’d like to remind you that oil sheiks that invested heavily in the West in the seventies ran into fierce resistance to become later welcome business partners.

Question: Does this mean that the West shouldn’t be afraid of you?

Dmitriev: A line in a revolutionary Russian song reads: “ We are peaceful people but our train waits in reserve” ( laughing). Our Bank for Development is designed not only to develop our domestic economy but we are also developing it for our companies to step up their efforts to enter third countries’ markets. And this means that they seek to purchase production assets. For example, we financed the purchase of an oil refinery by a Russian company in Bosnia.

Question: Russia’s former economics minister Herman Gref said that a trillion dollars should be invested in infrastructure till 2020. What is VEB going to do to make this happen?

Dmitriev: If you will, we are pumping international and Russian financial markets’ resources into our economy. We are making efforts to move our economy to a qualitatively new level by overcoming our one-sided dependence on raw materials. Innovations are supposed to be a driving force of economic growth. We help key industries in need of the state’s support such as transport, power engineering, communications, aircraft construction and shipbuilding.

Question: You need Hercules’ strength to achieve these objectives.

Dmitriev: Gaps in infrastructure, in which the state has not invested on a large scale in the past 20 years, hamper the economic development. Businessmen are ready to develop new mineral deposits, build factories and electric power generation stations in Siberia and the Far East. But we have to build railways, bridges, pipelines, power transmission lines and communal networks for them to reach mineral resources and production sites. Private business can’t do all this. The only way out is for the state and VEB to finance these infrastructure projects.

Question: What can and should private business do?

Dmitriev: In our estimate, each ruble invested by the state would raise up to 3-5 rubles in private investments till 2012. We see ourselves as a link between the state and private business and we’d like to become a national expert center for public private partnership.

Question: The USSR was involved in mega projects, which had no chance of being profitable. Is there any danger that billions would be thrown down the drain again?

Dmitriev: Of course, we have learnt lessons from our history. Both the Law “On Bank for Development” and the Memorandum on the Bank’s Activity stipulate that the projects financed by the Bank should be both environmentally and economically feasible.

Question: What are VEB’s advantages over commercial banks?

Dmitriev: We carry out the projects, which are financially unfeasible for commercial banks or go beyond their capability. These are, for example, the long-term projects with a duration of at least five years. They need to be financed on the most favorable terms and are designed to boost our economy. Commercial banks’ goal is to generate profits. Our goal is to address social and economic tasks.

Question: Does it make sense to refuse to generate profits?

Dmitriev: We are not philanthropists. While our founding documents stipulate that generating profits is not our central principle they specify that we should operate on a break-even basis. As far as competition is concerned, in Germany, for example, the state guarantees all KfW’s loans, in our country we are exempted from paying profit tax. This enables us to borrow money on more favorable terms than other banks and lend at lower-than-market interest rates.

Question: One of the main issues at the coming Davos Forum will be the mortgage crisis in the US. How do you think this crisis affected Russian banks?

Dmitriev: The crisis didn’t have any negative effect on VEB as we didn’t borrow on a large scale on international markets. There is no doubt that on the whole borrowing costs will be higher but we’ll be able to take new credits because we have sovereign rating and don’t have to pay profit tax.

Question: Are there any reasons for Russian banks that used to bankroll their development through using major Western credits to be afraid for their future?

Dmitriev: To my mind, the situation in the Russian banking system is by and large pretty stable.

Undoubtedly, Russian banks were active players in the international interbank market but, for the most part, they didn’t use highly risky financial instruments. If some difficulties emerge they would be able to address them by way of borrowings, consolidations, mergers and acquisitions in the banking sector.

Chairman and Bank

• In his capacity of VEB Management Board Chairman Muscovite Vladimir Alexandrovich Dmitriev is one of the most powerful bankers in Russia. Dmitriev has been in leading positions in VEB for eleven years. He has been VEB Chairman since 2004. He did a course in international economic relations and defended Master’s thesis. After graduation he was on diplomatic service. 53 year-old Dmitriev is seen as the Kremlin’s banker.
• If you want to enter the Bank’s Moscow headquarters, a massive Soviet-era fortress, for starters, they will place you into a glass capsule and screen from all sides. State-run VEB has always been reputed to be a secretive financial institution heavily guarded from the outside world. In the past, the Bank was largely responsible for managing Soviet-era foreign debt but in 2007, it took on a new responsibility for financing the modernization of the Russian economy and seeking out interesting assets abroad.
• The Kremlin formed the basis for the Bank’s activity by contributing 202 billion rubles to its charter capital, which is to be raised to 250 billion rubles in 2008. Next year the charter capital is bound to increase. VEB is a state corporation, that is, a non-profit institution. Although the Russians modeled their Bank on German KfW, the Russian state is not responsible for VEB’s obligations and credits. The Bank’s total assets were 8.3 billion in euro terms as of January1, 2007.