Vnesheconombank Trust Management Department Director Alexandr Popov’s Interview to TV Channel Russia 24

TV Channel Russia 24
INTERVIEW,
02.05.2012, 15:37

Host Nikolai Korzhenevsky

HOST: We’ll discuss the situation with pension savings funds and pension money as a source of financing. We’ll talk about it with Vnesheconombank Trust Management Department Director Alexandr Popov. Good afternoon Alexandr.

Alexandr POPOV, Vnesheconombank Trust Management Department Director: Good afternoon.

HOST: Many corporations, many borrowers have been saying for many years that long money for them is either expensive or inaccessible. And they also say that pension money should become a source of these long-term funds. When is this going to happen after all?

Alexandr POPOV: It will probably happen when besides Vnesheconombank there appear some other long-term investors. And we believe some restrictions that we have on investing pension money were needed at some point but now we can see that they prevent us from extending long-term credit resources to the real economy.

HOST: What sort of restrictions are they?

Alexandr POPOV: These restrictions above all are applicable to our share in one issue. Under the investment declaration we are allowed to buy no more than 30% of a corporate bonds issue if they are not secured by state guarantees. And another important restriction set forth by the law: we can purchase no more than 20 % of one issuer’s all circulating bonds. And of 30% percent accessible to us now we have almost exhausted this restriction with regard to a third of them.

HOST: Do you think that this restriction proportion should be increased? Don’t you think that the borrower will become too dependent on you as a creditor and maybe the proportion of such borrowers in your portfolio will be too high?

Alexandr POPOV: To my mind, there isn’t much risk here because we do not offer to increase these proportions for successful and marketable short-term issues. But we propose it as some temporary measure for setting into motion and launching a market for long-term investments in Russia.

HOST: What sort of market?

Alexandr POPOV: A market for long-term corporate bonds with a maturity of more than five years.

HOST: What about possible interest rates? And why is this market evolving so slowly so far?

Alexandr POPOV: We are in contact with many issuers discussing the need for issuing infrastructure bonds and classifying them as a special type of bonds. In our option we shouldn’t classify them as a separate type. Many issuers say that as Vnesheconombank now is a single long-term investor on our financial market it is possible to place 30-40% of an issue: there are banks largely with state participation that have long-term liabilities. But it doesn’t seem to be possible to place 70% of an issue under the current conditions.

HOST: Your portfolio is 1 trillion 300 billion rubles if I am not mistaken. Do you have enough instruments in principle?

Alexandr POPOV: We’ve had enough so far. But the amount of funds is sure to rise. And in the most immediate future we might come up against a shortage of long-term instruments. Summing up the results of the last year we could see that we didn’t have enough time to buy new corporate short-term bonds. We don’t have enough time to buy them while they are being redeemed. They are redeemed faster than we can buy new ones. So, we’d like to increase the proportion of new high-yield instruments and buy long-term corporate bonds.

HOST: In this case, do you expect any issues intended for you? Maybe the abovementioned infrastructure bonds or maybe some others?

Alexandr POPOV: We’ve already had the right to buy new instruments for three years. And we think that the situation has changed a little. And issuers’ stand as investors has also changed a little. Issuers stopped treating pension money as an extremely cheap resource and started issuing bonds that are of great interest for us. These are bonds with floating coupon rate tied to inflation. As our goal in the capacity of the state management company is above all to generate yields at an inflation level in order to really protect pension savings funds, an instrument tied to inflation makes it possible for us to achieve such a goal.

HOST: Will these instruments be issued by a sovereign agent or will they be corporate instruments?

Alexandr POPOV: We would be very happy if the Russian Finance Ministry could issue government bonds tied to inflation. But unfortunately this issue hasn’t been on the agenda so far. 

HOST: Who is going to be among corporate borrowers? Risks are great after all. Why don’t they lend those corporate borrowers? Because banks don’t understand what is going to happen thirty years from now?

Alexandr POPOV: Now such bonds can be issued by companies, engineering companies or some infrastructure companies whose incomes often in the form received tariffs are tied to inflation. For example, last year the North-West Concession Company issued its bonds. Their yield rate was inflation plus 3%.

HOST: It turns out that all are happy in this situation. But what’s the volume of such market then? How great is these companies’ need for borrowings?

Alexandr POPOV: So far, in the absence of such government bonds tied to inflation the corporate market will be unfortunately limited only to issuers whose incomes are also tied to inflation. Although ROSNANO has made an issue of bonds lately they also issued bonds tied to inflation.

HOST: Would you like to invest more in companies with state participation?

Alexandr POPOV: Our investment declaration’s requirements are requirements for credit quality, this is a credit rating. If an issuer has an appropriate credit rating we can buy its bonds whether it is a state-owned or private company.

HOST: I’d like to ask another question about infrastructure bonds. What’s the amount of funds available for such long-term instruments?

Alexandr POPOV: You know, so far we have invested an insignificant sum of about 60 billion out of our portfolio of 1.3 trillion in the bonds of infrastructure and engineering companies. We can see that with a developed market for long-term instruments, we could easily invest up to 300-400 billion rubles in infrastructure in the coming several years.

HOST: Moreover, as far as I know there is a demand for such credits, especially on the part of electric energy companies, there are a number of interesting players there. There is another market I’d like to talk about. I mean the mortgage market. Vnesheconombank is an active participant in this market and the Bank’s role in its development is evident. What are you planning to do on this market? W hat are your plans for 2012-2013?

Alexandr POPOV: In the first place, Vnesheconombank is implementing a mortgage program worth 150 billion rubles, in which 12 banks and the Housing Mortgage Lending Agency participate. Factually, we are responsible for preferential refinancing of mortgage credits extended by banks.

HOST: What’s the preferential rate?

Alexandr POPOV: Preferential refinancing is 11% (a maximum rate of banks) for end borrowers. This is an effective rate; everything is included in this 11%. This is our program’s requirement. We do not accept other credits in mortgage coverage. So, banks are refinanced at 7%. As far as long-term borrowings are concerned 7% percent is still an attractive rate.

HOST: You’ve mentioned 150 billion rubles. How much of these funds have you already spent?

Alexandr POPOV: Our program is to be completed till the end of 2013. We have already bought out bonds of the program’s participants in the amount of 9 billion rubles. This year we’ll bring this sum to 10-15 billion and the remaining funds will be spent in 2013.

HOST: It will be more than a hundred billion rubles.

Alexandr POPOV: You are right. Of these funds one hundred billion is pension money to be invested on the basis of market profitability alone. There will be no preferential lending here. Preference is ensured by Vnesheconombank’s investing its own funds at a rate of 3%. This makes it possible to bring an average rate to 7%.

HOST: A mortgage credit rate of 11% in rubles is of course not bad. Nevertheless, I’m sure that many Russian would like to buy this product at lower prices. Are you planning to take any steps? What are the obstacles on the way of making mortgage lending less expensive using a large amount of funds?

Alexandr POPOV: Factually, given issues made by participants in the mortgage bond program we’ve got about twenty billion. It’s not much of course. But this market is developing slowly. Undoubtedly, we have problems with legislation. Not everything is perfect because here the fight is taking place between American and European ways of funding mortgage lending.

HOST: After all, American or European models?

Alexandr POPOV: In fact, during the crisis years the Housing Mortgage Lending Agency was basically the only mechanism for funding mortgage credits for regional banks but now we are approaching a European level when banks themselves can issue mortgage bonds both from their own balance and through a mortgage agent.

HOST: And now the main question again. When will additional funds that get into the mortgage system result in reduced rates? What prevents rates from going down?

Alexandr POPOV: The reason for it is the general level of market rates. Mortgage is a credit facility and it is of course secured. But in any case it is a credit facility. And you can’t grant a credit at rates that are substantially lower than market ones. And where can we get funds on preferential terms? We found some. Factually, Vnesheconombank invests all its profits in the amount 50 billion at a rate of 3%. But others do not have such funds. And mortgage credit rates are sure to go down but they will go down together with market rates.

HOST: Here we are coming up against a fundamental problem of inflation.