Vnesheconombank’s Chairman Interview to TV Channel Russia 24

TV Channel Russia 24
OPINION
23.12.2011, 19:23

Host Evelina Zakamskaya

HOST: Good evening Vladimir Alexandrovich.

Vladimir DMITRIEV, Chairman of State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’: Good evening.

HOST: How and to what extent did Vnesheconombank participate in the development of Russia’s real economy in the outgoing year?

Vladimir DMITRIEV: In the outgoing year, Vnesheconombank participated above all in investment projects being implemented by Russian companies in the real economy. We have been building our loan portfolio dynamically. It increased by forty percent. And Vnesheconombank’s loan portfolio as a bank for development is now close to 500 billion rubles. As before, we gave top priority to key economic sectors, especially to those five sectors that correspond to five main lines of modernization, namely, energy efficiency, space, supercomputers, public health care. We also financed projects that are being implemented in such basic economic sectors as aircraft construction, petrochemestry, auto industry and a whole number of other sectors including agriculture.

HOST: These sectors are strategically important for the country’s development but were they cost-effective for the Bank?

Vladimir DMITRIEV: You asked a very good question about cost effectiveness. In our activity we are guided by the Law on the Bank for Development and it stipulates that all the Bank’s projects must be breakeven. And at the same time our activity’s main aim should not be to generate profits. So, we balance between these main indicators or criteria of our activity.

And in this sense, Olympic facilities are good examples. On the one hand they are important for implementing this ambitious project aimed at creating comfortable conditions for holding the Olympic Games and for accommodating Olympic participants and spectators in the Sochi Winter Olympics and on the other hand all these projects are on the verge of profitability. And unfortunately, we have to state that some of them are predictably unprofitable projects and here the state and Vnesheconombank assume a large share of responsibility for their further future because we should view these projects not only in terms of staging the Sochi Olympics but also in terms of Olympic facilities’ operation after the Olympics. So, payback periods go beyond the year 2014. So, on the one hand this is a very interesting socio-political project and it’s very important in terms of Russia’s international image but on the other hand in terms of normal banking logic it’s obviously not attractive. Hence, it’s Vnesheconombank that participates in such kind of projects rather than commercial banks.

On the other hand there are projects that are rather acceptable in terms of profitability although interest rates are significantly lower than market rates. But in terms of their real contribution to certain economic sectors these projects are pretty important. I would like to single out among them such projects as the Ford-Sollers project aimed at setting up a joint venture between Sollers and Ford to manufacture cars, commercial automobiles and engines for Russia’s automotive industry.

This is also the Tobolsk Polymer project which is nearing the end of its final investment phase. A large-scale and maybe the largest propylene production facility in Russia and in the former Soviet Union based on associated petroleum gas utilization is being built in Tobolsk. We’ll continue to implement our project in Kaluga. We established the Kaluga Region Development Corporation. We created massive infrastructure together with the local government and the local authorities in order to build a serious auto cluster on its basis. There are also a number of other projects in key sectors of the Russian economy.

HOST: What are the terms on which credits are extended and how do you differentiate credits with regard to specific sectors?

Vladimir DMITRIEV: Of course, we see to it that credits extended by Vnesheconombank for this kind of projects are affordable for project initiators, for investors. We lend at market or lower than market rates. But the most tangible difference is seen when we finance small and medium-sized enterprises because here interest rates offered by Vnesheconombank above all in sectors associated with innovation technologies are substantially lower than standard market rates.

HOST: What rates do you offer?

Vladimir DMITRIEV:  If we talk about innovations and modernization, rates amount to about ten percent. And here we shouldn’t overlook the fact that up until now, small and medium-sized enterprises have taken credits at rates of about 15 and even 20 per cent. So, innovations sectors and innovative small and medium-sized enterprises are provided with serious privileges.

HOST: Ten per cent for what period of time?

Vladimir DMITRIEV: Most credits (you know that we are implementing this program through SME Bank) are extended for a period of more than three years. So, our services  differ greatly from mid-market ones because most credits are extended to small and medium-sized businesses operating above all in the trade sector with short payback periods.

HOST: And if we talk about innovation sectors, they normally need long-term credits there. What’s the maximum credit tenor?

Vladimir DMITRIEV: Our maximum tenor of credit is fifteen years. And eighty per cent of Vnesheconombank’s loan portfolio accounts for credit resources extended for a period of more than five years.

HOST: Are you going to change interest rates upward, given economic conditions abroad?

Vladimir DMITRIEV: It goes without saying that we respond to the general situation on the market, to borrowing costs. As opposed to commercial banks our sources of funding, our transactions are limited. These sources above all include contributions to our capital and the market. Unlike commercial markets, which extend credits through using great amounts of natural and legal persons’ deposits in their accounts we are limited in raising such deposits. We simply do not have the right to take deposits from individuals. So a bank margin generated by Vnesheconombank differs substantially from that of ordinary commercial banks. A margin is the difference in borrowing and lending rates. Our average margin is a bit more than two per cent, while large commercial banks with state participation have a margin of five – seven percent. So, our capabilities to generate profits are also limited.

HOST: Is the interest rate on credits for businesses going to increase next year?

Vladimir DMITRIEV: It is bound to increase, given the fact that we raise funds on the market. So, if the market responds negatively to Vnesheconombank’s and other financial institutions’ risk exposures, borrowing rates are sure to increase and we can’t help responding to it by increasing lending rates.

HOST: On the other hand, Vnesheconombank has a good international standing and reputation. Will it help you to raise funds abroad on international markets? The foreign capital market is completely closed for commercial banks.

Vladimir DMITRIEV: Unfortunately, it’s common knowledge that we are in the same situation. Foreign investors’ and creditors’ approach to Vnesheconombank does not differ much from their approach to other Russian banks.  Nevertheless, I’m happy to say that Vnesheconombank credibility and risks are perceived adequately. Our ratings are in line with sovereign ones. Transactions on the interbank lending market and on capital markets this year demonstrated a minimum interest rate compared with other Russian banks at which Vnesheconombank raised funds. Here I also mean our debut loan at the beginning of this year worth more than five hundred million francs where the interest rate was minimal compared with other Russian borrowers that borrowed in francs. We raised a large syndicated loan worth almost two and a half billion dollars at an interest rate that was minimal among similar level banks.

In fact, we do not overindulge in foreign borrowings as we extend ruble-denominates credits to Russian companies and avoid foreign exchange risks by raising funds on the Russian market as well. This year we have placed two loans in the total amount of about thirty billion rubles for a period of ten years at interest rates of 7.9 and 8.5 per cent – very good indicators for the Russian market.

This year end has seen a significant volatility and an unstable situation both on capital markets and on interbank lending markets. So, it’s not a secret that we decided not to place a bond issue for this reason. Nevertheless, we are still planning to enter into markets next year. I don’t rule out the possibility for raising funds on foreign markets. Of course, markets should calm down and the situation should stabilize and undoubtedly a lot depends on political decisions in the euro zone. But to be honest, I’m not very optimistic. But let’s see how the situation will develop. We’ll wait till February. I think that the situation isn’t going to change dramatically in January. And we’ll discuss this issue again in February.

HOST: As you have already mentioned, Vnesheconombank gives high priority to small and medium-sized enterprises. And when I talk to small and medium-sized businessmen they always say that it’s very difficult to get insight into various support programs. Where should businessmen turn to? Should they turn to RUSNANO, there is also the Russian Venture Company, there is Vnesheconombank.

Vladimir DMITRIEV: A year ago we agreed to closely coordinate with key development institutions that provide support for SMEs operating in the innovative sector. A relevant agreement was signed between Vnesheconombank, RUSNANO, the Russian Venture Company and the Fund for Supporting Entrepreneurship in the Innovation Sphere.

HOST: You mean all the development institutions.

Vladimir DMITRIEV: In fact, all the development institutions. Recently the Skolkovo Fund has joined the program. Factually, all important development institutions providing support for small and medium-sized enterprises that focus on assisting innovative development and modernization are united by the said agreement. We have been already involved in coordination efforts for a bit more than a year. We have already more than a hundred projects which otherwise would have never been started for the reason you’ve mentioned. People simply didn’t know where to turn to for money.

HOST: If I came up with an idea to start a nano or some other business, where I should turn to?

Vladimir DMITRIEV: Fortunately, they now know where to turn to.

HOST: Is this a principle of “single window”?

Vladimir DMITRIEV: You are absolutely right. If they turn either to the Russian Venture Company or the Bortnik Fund or to RUSNANO they are sure to receive an answer. This means that there are many windows but all this is channeled through one and the same mechanism. If they turn to us for credits in this or that field they we’ll say to them: come on guys, we are ready to provide you with money but you should go to Chubais or to the Russian Venture Company, because we already know quite well thanks to such a close coordination where a given customer can promptly and quickly receive required quality assistance   with minimum administrative costs.

HOST: We must stress that all this involves innovative products.

Vladimir DMITRIEV: There’s no doubt about it. It would look pretty strange, if a florist would turn for support to RUSNANO or to our Bank. We are working only with small and medium-sized enterprises involved in innovation business.

HOST: How did the Bank perform this year in terms of managing pension savings funds of Russians?

Vladimir DMITRIEV: To my mind, we performed pretty well, especially compared with private non-government management companies. There’s of course room for improvement. The amount of funded portion of savings pension funds under the management of the state management company is a bit less than one and a half trillion rubles. Huge funds that we should use (we have been trying to do it for a long time) in the real economy. Fortunately, we managed to do a lot in this line of activity. But I’d like to say once more that there’s still a lot that can be done. You know that our investment declaration has been expanded. Now we can invest in the bonds of reliable borrowers, that is, bonds backed by state guarantees and in mortgage-backed bonds. By the way, the requirement for guarantees was cancelled. We can invest in debt instruments of international financial institutions. But unfortunately, on the one hand, the system of issuing this sort of instruments is not perfect and on the other hand we obtained a large package of government bonds and we can’t withdraw from it because of markets’ volatility without placing bonds on a balance of losses. Nevertheless, our figures for this year, at least for the first three quarters are 5.7-5.8 per cent (depending on the loan portfolio). On average, they are better than those of non-government management companies. Of course, they fall short of inflation rate but we believe that we performed well in the current situation.

HOST: Pending the second wave of the crisis and in some experts’ opinion it has already started – there is more talk about new additional assistance to various economic sectors, specifically, to the banking sector. Is Vnesheconombank ready to lend a helping hand as it did in 2008 to Russian banks? Will there be such a need for it?

Vladimir DMITRIEV: We are ready. We are quite experienced in it. You remember that in 2008-2009 seventeen banks received more than four hundred billion from Vnesheconombank, from the National Wealth Fund.

HOST: Have they already repaid these credits?

Vladimir DMITRIEV: No, they haven’t. These credits remain to be on the balance of commercial banks as a subordinated debt. As far as some banks are concerned they are exploring the opportunity for transferring subordinated debt to first-tier capital. But I don’t think it’s a form of support in a crisis situation, I view it as a need for increasing capital, above all, in order to expand the funding of the Russian economy. I’d like to say it once more that we are ready to help if the state deems it necessary to provide such support to banks and corporations. But from my point of view, such mechanisms that were set in motion as the Finance Ministry’s auctions, deposits that can be raised from the Central Bank, mutual bank guarantees than can be used as a security instrument upon obtaining credits from the Central Bank are fully sufficient for securing the banking system’s liquidity. Nevertheless, the problem remains and it is associated not only with the current volatile and uncertain situation. The main problem is long money. And banks should address this problem only together with monetary and financial authorities. The country needs long money. To be more exact, the economy needs long money. And such money is available. There are pension funds and funds of insurance companies. And thank goodness, the first infrastructure projects have emerged where these funds are involved. These are the projects being implemented on the principles of public private partnership: Moscow-Saint-Petersburg, the Odyntsovo Bypass. In general, these are the first projects that got off to a good start.