Vnesheconombank’s Board Member, Export Insurance Agency of Russia Director General Petr Fradkov’s Interview to TV Channel Russia 24

HOST: At a recent Vnesheconombank’s Supervisory meeting they discussed the Export Insurance Agency of Russia’s (EXIAR) activity. They also announced the launch of a project to insure small and medium-sized enterprises. What enterprises will EXIAR support and what will the amount of support be? We’ll discuss these issues with the Agency’s CEO Petr Fradkov.

Petr FRADKOV: CEO of the Export Insurance Agency of Russia. Good evening.

HOST: What decisions have been taken? What’s the Agency’s strategy?

Petr FRADKOV: We have approved the Agency’s development strategy for a period of three years up to the end of 2014 and it was the most important decision taken. The strategy specifies basic volumes of insurance coverage to be provided by the Agency, the number of companies, customers supposed to receive this kind of support, and absolute volumes in terms of our products and insurance coverage markets.

HOST: Let’s discuss these points more specifically. What’s the amount of support during a three-year period?

Petr FRADKOV: We proceed from the assumption that by the end of 2014, the Agency is to provide insurance coverage worth up to five hundred billion dollars.

HOST: Insurance coverage, that is, the amount of export transactions to be insured?

Petr FRADKOV: You are absolutely right. Our Agency’s main function is to provide support for our exporters or banks that fund exports on foreign markets.

HOST: 500 billion dollars.

Petr FRADKOV: Rubles. 500 billion rubles.

HOST: How will you break down this sum for a period of three years?

Petr FRADKOV: We proceed from the assumption that by the middle of this year we’ll have to establish our internal regulatory framework. And starting from this summer we’ll begin to operate systemically providing our insurance coverage during this three-year period of time in approximately equal amounts.

HOST: Which line of activity is the most important for you?

Petr FRADKOV: Our strategy provides for several lines of activity. Above, all these are such sectors with high added value as electrical power engineering, transport mechanical engineering, microelectronics, aerospace industry and some others. Less priority is given to chemical industry, agriculture. The only thing we are forbidden to do is to provide support for the raw materials sector. In general, it’s quite logical.

HOST: EXIAR is trying to develop the non-raw materials segment of the Russian economy.

Petr Fradkov: The non-raw materials sector. And this is our primary objective. In parallel, we have regional priority distribution. Our unquestionable priority is CIS. The reason for it is that Russia is quite a serious player in these countries foreign trade. The second top priority region is likely to be South-East Asia.

HOST: What’s behind this choice?

Petr FRADKOV: We have traditional ties here. And exports from the Russian Federation went to this region. Objectively, it was one of sale markets. And we believe that we’ll be able on the one hand to enhance Russia’s export positions there and on the other hand to win new markets. And the third region is Latin America. Strangely enough, this region is moving to the forefront and they are expecting Russian exports there.

HOST: We are staying away from industrialized countries. Can you specify companies excluding those in the raw materials sector that could receive insurance coverage? They are unlikely to be large companies.

Petr FRADKOV: We are also trying to apply a rather innovative approach here. The fact is that as a rule large companies used to be provided with state support because of their administrative resources and competence. Our task is to create an exports market, an export infrastructure so that small and medium-sized enterprises could have access to state support measures, financing and market financing. Our task is to take these companies to new markets.

HOST: How many companies?

Petr FRADKOV: The strategy provides for us to have 3300 customers in 2014 and 3000 thousand of them are small and medium-sized enterprises.

HOST: How did you manage to precisely determine this number of 3300? What is it based on?

Petr FRADKOV: This is a sort of estimated quantity. We looked through statistics and found out the number of small and medium-sized export-oriented enterprises involved in various kinds foreign trade activities and studied prospects for growth for some sectors. We used an overlap method and projected that the number of 3000 thousand companies was a pretty ambitious but realistic target that we could reach in the near future.

HOST: Any company has the right to turn for insurance?

Petr FRADKOV: Absolutely any company. There are no formal restrictions. The most important thing is to have an agreement with a contracting party. And we’ll be ready to provide consulting services.

HOST: How can one make sure that no bureaucratic barriers will emerge as it is unfortunately often the case?

Petr FRADKOV: Our entire idea is to offer a flexible state support market mechanism. In this sense we are following best foreign practices. Above all, this is business experience of Italy’s export credit agency SACE and Germany’s export credit agency Hermes. For many years of operation these agencies developed a flexible mechanism for assessing risks, which makes it possible to assess risks rapidly through existing models, through the existing systemic regulatory framework.

HOST: You stress the fact that the Agency is registered as a joint stock company.

Petr FRADKOV: You are absolutely right.

HOST: The countries you have listed have the same form of ownership. But in some other countries it is not the case. In Great Britain and the United States these agencies are state-owned. Why did you choose a form of joint stock company?

Petr FRADKOV: It’s not even a matter of type of property here. It is important for this agency to provide state support through the existing mechanism. Here I mean sufficient capital; state guarantees for this agency’s liabilities and the existing regulatory and legal framework, above all, the internal regulatory and legal framework which is in line with international institutions’ standards – above all with OECD standards.

HOST: Can you say a few words about this internal regulatory framework? What kind of documents are these?

Petr FRADKOV: These documents are a set rules, products and payment methods that are easy to understand, transparent are accepted by contracting parties all over the world. They have been approved and recommended by such a regulator as the Organization for Economic Cooperation and Development. This organization is a global regulator of export insurance activities all over the world.

HOST: Will the Agency’s capital be formed only through using government financial resources or are there any other sources?

Petr FRADKOV: So far, capital has been formed through using government funds. And if there is a need to increase it, budget funds are most likely to be used. Now the Agency’s shareholder is Vnesheconombank and this allows it to act in a pretty flexible way. And the second and main form of state support, as I’ve already said, is a state guarantee which is granted in the name of the state and in the amount no less than insurance obligations of a company itself. Factually, we offer Russian sovereign risk to our customers.

HOST: This sounds attractive for customers. You’ve mentioned 3300 companies, an approximate estimated number. And what percentage of exports will the Agency account for in this case?

Petr FRADKOV: Our goal is pretty ambitious. I hope that in three year’s time we’ll be able to insure up to ten percent of Russian mechanical engineering exports.

HOST: Up to ten percent of mechanical engineering exports or Russia’s entire exports?

Petr FRADKOV: Mechanical engineering exports.

HOST: Even ten percent of mechanical engineering exports is quite a lot.

Petr FRADKOV: It’s a big stride forward because frankly speaking, this figure today is less than one percent.

HOST: And if we compare this figure with other international export credit agencies, what’s their market share?

Petr FRADKOV: It depends on the size of an agency, its activity history but in any case it’s thirty-forty, up to fifty percent. Our growth potential is enormous.

HOST: You started to operate as far as I know less than a year ago.

Petr FRADKOV: You are quite right. We were registered as a company in October of 2011. Just a few days from now we’ll mark our first six months of operation. But I hope we managed to do quite a lot because we had worked a lot on certain additions to the legal framework before the Agency was established and we continue to do it now. To my mind, we are moving forward pretty quickly.

HOST: As a whole, lately, Vnesheconombank has been developing its projects pretty aggressively and quickly. Now the Direct Investment Fund and the Export Insurance Agency of Russia have been established. Legal framework is scheduled to be completed by this summer as you have said…

Petr FRADKOV: Yes, our internal framework.

HOST: Is the Agency doing anything in the real economy, real business given that the framework hasn’t been fully formed? Have you conducted any transactions?

Petr FRADKOV: In principle, we have basic conditions for operating. These are pretty small projects because now we need to gain experience and establish first ties. We have first six approved projects. They are not large ones as I’ve already mentioned. But these projects’ geography is pretty wide – CIS, South-East Asia, Latin America. So, in terms of gaining experience, these are right partners. Largely, these projects deal with power engineering equipment and engine building. So, we got off to a good start.

HOST: After listing all these countries, could you tell us what risks you insure?

Petr FRADKOV: It’s a very important question. Globally speaking, we insure two types of risks. The first type includes default on obligations by a Russian partner’s contracting party. Commercial risks include project failure, a contracting party’s default or bankruptcy abroad. The second type includes political risks. Regrettably, these risks can actively emerge in the regions where Russian exports go to. These risks include expropriation, certain administrative decisions, for example, a ban on currency exchange and so no and so forth. There are a lot of them.

HOST: Are these first six companies large or small and medium-sized ones?

Petr FRADKOV: They are different companies. They are medium-sized ones closer to large companies. These are not natural monopolies, these companies have been operating on foreign markets for quite a long time. Our insurance coverage allowed them to feel more comfortable in some lines of activity and conduct some transactions on more preferable terms and win tenders.

HOST: We have already talked about thousands of small and medium-sized enterprises scheduled to receive support. Is big business going to participate in this process? Are you going to support large companies?

Petr FRADKOV: Yes, we are. Formally, we have no restrictions here. And of course, we look upon hallmark, large-scale projects that will be implemented by large companies. Naturally, we are going to balance our portfolio in terms of its capacity to provide enough room for small and medium-sized enterprises. Above all, we are going to work with large Russian banks. We shouldn’t forget that besides export support measures we are trying to create an exports support market so that we could have a constantly functioning commercial mechanism to enable large Russian banks, leasing companies to support Russian exporters applying market-oriented principles.

HOST: What sort of support is it? Extending credits or providing insurance coverage?

Petr FRADKOV: Banks extend credits to exporters and we insure credits.

HOST: It’s clear now. Do you have any statistics? To what extent does your Agency’s activity promote exports?

Petr FRADKOV: We haven’t got this sort of statistics so far because we have just started operating. And we didn’t even want to make any estimates because we had to understand dynamics of development. We set a goal to insure ten percent of Russia’s entire mechanical engineering exports. In our opinion we’ll be able to reach this target in three year’s time.

HOST: Petr, I am sure that you have assessed systemic risks. The Agency might have to make a lot of payments if something goes wrong in the global economy. As you are an expert in insurance business I’d like to ask you the following question. How do you size up risks in the global economy, in the global demand?

 Petr FRADKOV: Paradoxical as it may sound, in crisis situations this kind of insurance activity is a sort of life line for national economies because it’s a direct measure of state support for producers that enables them to get access to third markets, foreign markets, to rapidly reorient production if problems emerge on domestic markets. And we proceed from the assumption that this insurance activity would encourage the development of economies even under crisis conditions. And the 2008-2009 crisis demonstrated it.

HOST: But the Agency didn’t exist at the time yet.

Petr FRADKOV: I’m not referring to Russia now. I’m talking in terms of a global approach when tied loans against world export credit agencies’ insurance coverage provided the only opportunity for companies and banks to raise financial resources on the absolutely moribund capital market. And their role increased dramatically during these years.

HOST: Does the Agency run any risks or are its risks equal almost to zero?

Petr FRADKOV: The Agency’s entire activity is a sort of mathematical model that assumes the emergence of some turbulent situations both on a national and international level.

HOST: What do Russian exporters say? Have you received any applications for participation?

Petr FRADKOV: The interest is great. There are interested companies that turned to us. We have received about fifty applications. I wouldn’t say there is a massive demand now because we haven’t offered this product to the market to the full extent. Not all have a clear idea of our activity. Our objective is to show, tell and explain and in the regions too. I think that as we develop our product line the number of interested companies will rise.

HOST: What are the criteria for refusing applications?

Petr FRADKOV: It’s very important; it’s a very good question. Our main criterion is that we should support top-quality, competitive products. We should provide support for truly innovative companies.

HOST: Thus, you can cut off a lot of companies if you evaluate their activity critically and seriously.

Petr FRADKOV: If we support an inefficient transaction that fails to meet market conditions we’ll increase the risk of default on this transaction for us.

HOST: And this will affect your image.

Petr FRADKOV: There’s no doubt about it.

HOST: Is there any progress in the insurance sector, are there any specific competitive projects that look attractive on the world arena?

Petr FRADKOV: Yes, and there are quite a few such projects. This is our aviation industry and this is also the Sukhoi Superjet project in which we participate. This is MS-21. This is undoubtedly our power engineering equipment as well as microelectronics and many, many others. And Russia’s high-tech exports potential is not limited to the said sectors.

HOST: Petr, thank you very much. I hope that a slip of the tongue about five hundred billion dollars you made at the beginning is not a mistake but an ultimate goal. Thank you.

Petr FRADKOV: Thank you very much.