Vnesheconombank Chairman Vladimir Dmitriev. “Bank for Development is not a Guarantee but a Chance”

Izvestia
December 24, 2007, the city of Moscow
ANDREI REUT

“Infrastructure is the most vulnerable sector of the economy,” said Vnesheconombank Chairman Vladimir Dmitriev to Izvestia

Russia’s newly established Bank for Development would allow to revive what was once called “projects of the century”. In their scale they would surpass the BAM construction and the 1930s industrialization. In various Russian regions there would emerge zones of mineral deposits development, new plants, transport infrastructure and etc. Vnesheconombank Chairman Vladimir Dmitriev told Izvestia’s correspondent Andrei Reut about his brainchild’s ambitious plans.

Question: How come Vnesheconombank was transformed into Bank for Development but managed to retain its historic brand?

Answer: This happens only in exceptional cases. Half a year ago Vnesheconombank acquired status of State Corporation ‘Bank for Development and Foreign Economic Affairs’. Passing the Law On Bank for Development, the State Duma didn’t fail to see Vnesheconombank’s multiyear experience, its international image and high investment rating. You can’t help agreeing with me that if the Bank has 83 years of experience behind it, this is worth a lot. And that is exactly why our brand was retained.

Q: Why did you become a Bank for Development?

A: For a period of three years we have been pushing an idea of establishing a development bank and trying on a role of such a bank. We raised inexpensive credits abroad, financed infrastructure projects and high-technology exports in Russia. Three thirds of credits extended by our Bank are long-term ones. Vnesheconombank was one of the first banks that started to implement public private partnership by participating in the Lower Angara Area Development Project.

Q: What hopes does the state entertain having established a new financial institution?

A: Having provided the Bank with a charter capital of 180 billion rubles, the state played for high stakes. It expects that each ruble of our investment would raise a flow of capital from businessmen. It also expects that our economy would overcome its raw materials dependence, that innovations would become a pivot of economic growth and that Russia would compete on a par with world leaders and would be among the top five in terms of GDP.

Q: What tasks is the Bank charged with?

A: Above all, it’s infrastructure, which hasn’t been financed by the state on a large scale for about twenty years. Business is ready to develop a whole range of mineral deposits, build factories, ore processing plants and thermal and hydro power stations. In the companies’ plans till 2015, these projects are worth 700 billion dollars. For the most part, they are concentrated in Siberia and the Far East. But in order to get access to mineral wealth and industrial sites we have to invest in railways, pipelines, power transmission lines, public utility networks. Without investments in infrastructure, 90% of these projects would be left on paper. But additional costs in the amount of tens of billions of rubles would make projects unprofitable and discourage private companies from investing in them. The way out is clear: the Investment Fund would invest in infrastructure, as would Vnesheconombank on commercial terms. So the interests of the state and business, their projects and investments intersect. Our Bank is a bridge between them.

Q: What advantages does your Bank have over commercial banks?

A: We can extend credits for infrastructure projects for many years. For example, for roads M4 “Don” or the Western Speed diameter for a period of 25-30 years. The most important thing for investors and borrowers here is that maximum profit is not Bank for Development’s objective at all. Vnesheconombank’s main line of business and its advantage are to extend large credits for a long period of time at relatively low interest rates.

Q: Besides infrastructure Vnesheconombank has quite a few other top priorities.

A: That’s it. They also include aircraft construction, missile and space complex, atomic industry, shipbuilding, defense industry, mechanical engineering, and wood working industry. Basically, we get automatically involved in innovation projects in these industries. For example, in the aviation industry the Bank is to finance the creation of the fifth generation fighter plane in the shipbuilding – the construction of ships to develop northern mineral deposits. Standing by itself is the Bank’s support for small- and medium-sized business and insurance of high-technology exports.

Q: Besides the Law On Bank for  Development, the Government approved the Memorandum on the Bank’s Financial Policy. What does the Bank need this Memorandum for?

A: In this Memorandum the Government set forth our priorities. The Memorandum is a sort of guidebook for the Bank. The Memorandum states that the projects we participate in are to be worth at least 2 billion rubles and pay back in the sixth year. Mid-and long-term projects in the Bank’s portfolio would account for at least 80%. To put it differently, the Bank is not allowed to dissipate its energies.

The Memorandum established a system of controls to monitor the Bank’s operation, that is, the Supervisory Board headed by the Prime Minister, financial reporting in accordance with international accounting standards, internal and external audit.

While drafting the Memorandum, the Bank and the Government were seeking a fragile and appropriate balance between the Bank’s autonomous management and required control on the part of the state between bankers’ determination to select “the most palatable” projects and the state’s interest in long-term sometimes marginally profitable investments in infrastructure and innovations. The Memorandum also established a minimally acceptable risk threshold, which the Bank is not allowed to cross.

Q: The Memorandum has been approved. What next?

A: Our next move is our Bank’s strategy till the year 2012. At present, we are discussing its main provisions with the Government. We are going to state in greater detail our Bank’s role for the national economy. Over a period of five years our Bank would transform, figuratively speaking, into a pump designed to raise financial resources in international and domestic markets for Russia’s economy. Eventually, our loan portfolio would increase from 200 billion rubles to 750 billion rubles.

Q: Is this sum too small for our economy?

A: Actually, the investment shortage is huge. But look at the other side of the medal. For Vnesheconombank to increase its credit portfolio almost fourfold and at the same time maintain its financial stability it should raise from the market an average of 8 billion dollars a year. How many Russian banks are capable of raising such funds for consecutive five years?

Q: What’s the total volume of investments inflow?

A: In terms of plain figures, at least 30% percent of projects to be financed by the Bank would be implemented within public private partnership. And in this case, investments by private companies and other investors would account for 70%. So in our projects we can expect outside capital inflow to double as a minimum.

Q: Private investors are above all after profits and you are after promoting the state’s interests.

A: Actually, as a nonprofit organization we do not give high priority to generating profits. But nobody will understand us if most of our projects are unprofitable and in this case the Bank will simply start using up its capital. Hence, the bank’s mandatory criterion is its breakeven. This is required from us by the Law, the Memorandum and the Supervisory Board. So we should use our heads not only while we work on each individual project but also keep in mind all the Bank’s business deals in order not to allow any losses in general.

Q: What is the central pivot of the Bank’s investment policy?

A: Of course territories development projects. The comprehensive development of Southern Yakutia, the Trans-Baikal area, the program “Ural Industrial – Ural Polar” are entirely based on PPP and supported by the Investment Fund. For us it is like the state’s go-ahead to move forward. An in one form or the other we are already becoming integrated into these projects. Their total value is over 1.2 trillion rubles, with the state’s share being 239 billion rubles. From our experience in participating in the Lower Angara development project we can see that it is these development projects that can change the regions’ economy and speed up its growth. The construction of the Boguchan hydropower station, metallurgical and wood working production facilities and a cement plant would not only create additional 12 650 new jobs but would provide people with modern professions at the most advanced production facilities. They would allow people to gain a new perception of their life in Russia.

Q: The above-mentioned projects are well-known. And what new projects are in the pipeline?

A: In the said projects Vnesheconombank is playing what is called the second number by joining the projects that have already reached the federal level and are tied to the Investment Fund. But we are not marking time. The Bank is determined to initiate a project to develop the North-Siberian Railway territory, which will have a dramatic impact on the economy of the Khanty-Mansi area, the Tomsk and Irkutsk regions, the Krasnoyarsk territory. This project involves the construction of a 2 thousand kilometer long railway and the implementation of at least 20 investment projects in the adjoining territories, that is, gas production and processing, ferrous and nonferrous metallurgy, nuclear and hydro power engineering, chemistry and timber industrial complex. The value of the North-Siberian Railway territory development project under various schemes ranges from 30 to 50 billion dollars. The very substance of the project necessitates public private partnership.

The North-Siberian Railway territory development project was discussed in Krasnoyarsk a month ago. They discussed how to further develop transport infrastructure at a meeting of the State Council chaired by President Vladimir Putin.

As far as the North-Siberian railway territory development project is concerned, Vnesheconombank is ready to finance the earliest stage, namely, project structuring in order to coordinate efforts by RZHD Bank and administration of four regions across which territory the railway will run. Primarily, this would deal with the financing needed to prepare industrial enterprises’ business plans and appraise the value of infrastructure facilities construction.

Q: When are we supposed to know the names of the projects Vnesheconombank is going to support?

A: I think that during the coming three months Vnesheconombank will be able to agree upon with ministries a list of projects in such sectors as power engineering, metallurgy, missile and space industry, aviation industry, shipbuilding, transport and energy machine-building, wood working and defense industry. I believe that we’ll be able to raise funds to finance a number of projects without any delay. We have already gained this sort of experience and at present, for example, we have open credit lines of foreign banks for the amount of 2.4 billion dollars. We’ll also agree upon a list of companies manufacturing high-technology products whose export ambitions will benefit the state and Vnesheconombank.

Q: Is public private partnership possible in infrastructure alone?

A: I am sure that in industrial projects there will also a proper place for PPP and this place won’t be the last one. The simple fact is that today infrastructure is the most vulnerable sector in our economy. The more private and state banks’ capitals come here the better. There will be enough room for all – for private companies and banks and foreign development institutions.

We have a plan to establish a National Public-Private Partnership Center. There is no doubt that we should make efforts to upgrade public-private partnership legislation. For the partnership to operate at its full capacity we have to introduce amendments based on experts’ opinions into the existing regulatory acts and approve another 128. The Center would propose models for raising Russian and foreign capital for PPP projects.

Q: When will the money invested in Bank for Development yield tangible results?

A: Nowadays a national system of development institutions is coming into being. This system embraces the Investment Fund, special economic zones, state corporations including Vnsheconombank. The state has already invested more than 1 trillion rubles in development institutions. And this is not a charitable activity. This is a sober consideration and our understanding of what each project can benefit us in terms of thousands of kilometers of roads and power transmission lines, new production facilities, new jobs and GDP percentage growth and an atmosphere in which the country lives, given its transformed economy.

As far as Bank for Development is concerned a number of experts complain about the loss of property that was transferred to its charter capital. But is this property really lost? The state can’t lose it because a state corporation can neither be privatized nor artificially bankrupted. This property works and increases.

I think that those who are skeptical about Bank for Development’s prospects have no grounds for their skepticism. It remains to be seen who is right and who is not. But to my mind, it’s even worse to be indulged in wishful thinking and hope for immediate results. We should clearly understand that Bank for Development is not a short-term but a strategic instrument. Over the first years of its operation the Bank, for the most part, will invest in “long” projects. It will take several years for tangible results from its activity to appear. Bank for Development is not a guarantee but a chance.