A Bank for Development’s function can be compared with an icebreaker ship’s operation

Vnesheconombank’s Exports Financing Department Director Daniil Aguljan told in his interview to Arsenal’s correspondent Petr RUSHAILO about Russia’s exports financial support system and about how mechanical engineering production facilities can benefit from using it.

“There is a great potential in mechanical engineering”

What projects in supporting mechanical engineering exports are the most important for Vnesheconombank?

-Vnesheconombank is trying to support all exports of high technology products of Russia’s non-raw materials economic sectors. As far as mechanical engineering is concerned, there is a great potential in various sectors. As to the current projects, we are active in cooperating with Russian manufacturers of aircraft, railway carriages,construction machinery, engines and other kinds of mechanical engineering products. It should be noted that power engineering industry is one of the central growth points of Russian exports. This is true of atomic as well as of traditional power engineering – manufacturingof gas and steam turbines, equipment related to construction of thermal and hydro power stations. A potential for enhancing exports is concentrated in this sector. There are efficient by international standards manufacturers in our country with strong production and client’sties in many regions of the world. So, our power engineering industry is a very attractive sector in terms of prospects for promoting Russian exports.

What is VEB responsible for here?

-One of Vnesheconombank’s objectives is to provide financial support for domestic manufacturers in the period of a project’s implementation on the terms that can compete with those offered by other countries’ export banks.

You are talking about providing support for exports alone or projects as a whole?

-For the most part - exports. Here I’d like to highlight two aspects. The first one is direct funding of export transactions, the second aspect is providing Russian exporters with a necessary bid package for them to be able to take part intenders. Funding assurance guarantees, advance payment guarantees, performance guaranteesare needed by many Russian exporters to be able to make bids to participate in many competitions and tenders as well as to simply hold business talks. It is not uncommon that there isn’t any business transaction yet but an entire package of potential funding needs to be demonstrated so, we also attach a lot of attention to such preliminary support for Russian exporters.

How would you size up the situation in the state system of Russian exports support?

-I would say that in the last years the Russian system of exports support has made a huge step forward. A system of comprehensive exports support was created, it is comprised of credit, guarantee, insurance, leasing instruments, mechanisms for subsidizing interest rates on export credits. This system is based on the international standards and rulesthat shaped up with due regard to OECD and WTO requirements. In the past 1.5-2 years, we have made a great headwayin institutional development. We can see that Vnesheconombank’s exports financing portfolio increased by almost 10 times and its guarantee portfolio – by more than two times. VEB’s aggregate export financing portfolio amounts now to more than 180 billion rubles. If you have a look at EXIAR (The Export Insurance Agency of Russia), Vnesheconombank’s subsidiary responsible for providing insurance support for export financing, you can see that it has made evident and impressive progress. At present, an Exports Credit and Insurance Support Center is being formed up on the basis of such VEB Group’s companies as OJSC EXIAR and CJSC Roseximbank. It is designed to substantially make exports support more affordable and massive.

But if we compare Russia with such key players in his field as China, the US and Germany we have to admit that our exports support system is pretty young.

What companies can become your customers in this case, are there any limitations on participating of Russian companies in similar programs in terms of their specialization? What are selection criteria for participating in VEB’s export contracts?

-Absolutely any company can become a customer, there are no limitations and we are responsible for providing support for all non-raw materials exports. And one of the most important criteria is availability of non-raw materials exports. If a company plans to export non-raw materials products from Russia, if it is interested in receiving pre-export financing, that is, financing of a Russian company for it to manufacture products under a specific export contract we a happy to explore the possibility of cooperation.

And if we deal with products that are not manufactured at a given production facility? And if it is a case of supplying abroad spare parts and fuel and lubricants for Russian helicopters?

-It goes without saying that this option is possible. To be more specific, we are active in supporting supplies of Russian spare parts for aircraft and helicopters being operated abroad. This is a very common case of export financing.

What foreign markets are most attractive for Vnesheconombank and in what regions does VEB operate most actively?

-As part of the exports support system, we are now working with more than forty countries. And the number of them is growing pretty fast.

Very important markets for us are naturally in South-East Asia and South Asia. Our potential here is substantial in terms of all kinds of mechanical engineering products. Here I mean aviation industry, power engineering industry and transport mechanical engineering. South and Central America are regions with potentially strong demand for Russian products. A good example here might be a large-scale project to supply SSJ110, which is funded by Vnesheconombank a part of international consortium. An interesting example is also VEB’s funding of the construction of power stations in Ecuador. We are also cooperating closely with our Brazilian and Argentinian partners.

As of today, Africa accounts for about a third of Vnesheconombank’s export portfolio. Here we have decades old well-functioning ties between African and Russian enterprises in mechanical engineering. We also participate in a project on supplying a satellite system to Angola. Algiers and the Middle East?

-Yes, of course, they are our old-time partners. Talking about the African continent, I also meant North Africa. We are working very closely on a great number of projects with both Egypt and Algiers. A global exports support system has been already formed at VEB. In this respect,I’dlike also to mention Central and Eastern Europe–now more and more projects related to this region are emerging.

“A Bank for Development’s function is to go with national manufacturers to foreign markets”

Many commercial banks are involved in supporting exports including non-raw materials exports, a great number of them are accredited under EXIAR. What’s the difference between VEB and a commercial bank if we are talking about funding export transactions?

-Vnesheconombank is a financial development institution and its operating principles differ from those of commercial banks, specifically upon supporting export transactions. The fact is that funding of foreign projects is traditionally regarded as a high risky and complicated business. And if we talk about non-raw materials exports, about high-technology products it is often a matter of long financing periods. So, as a rule commercial banks do not consider this sort of transactions as attractive as for example standardized financial banking products inside the country.And this is typical not only for Russia but also for all other countries. And under these conditions a bank for development’s function is to go with national manufacturers to foreign markets and try to create conditions for financial cooperation between countries making it possible in the future to engage commercial banks for cooperation. In this case, a bank for development’s function can be compared with an icebreaker ship’s operation.

By funding Russian exports, Vnesheconombank performs this very function. It’s task is to tap new markets, establish ties and show that projects can work efficiently. And then commercial banks would be interested in joining the process. And I’d like to say it once more that this is common international practice. For example, if you take Germany, there is the KfW Banking Group which is a financial development institution responsible for providing financial support and there is also a very strong banking sector there.

The principle is the same: first the state represented by the Bank for Development helps commercial financial institutions and then they themselves operate actively on foreign markets. The same is typical for France, the United States and other countries.

It’s quite clear in terms of ideology. But what does it mean in terms of financial indicators? Longer credit tenures, lesser interest rates?

-Yes, of course. In the first place – longer projects’ funding periods and as a rule - competitive interest rates on credits.

What are criteria for selecting projects besides a requirement for exports to be high technology products?

-Naturally, a borrower’s credit quality.As of today, our main products are credits to foreign buyers. We are trying to ensure competitive interest rates and funding periods that would help our producers to be on equal footing with foreign ones. Nevertheless, Vnesheconombank is a financial institution, which assesses risks, analyzes its borrowers and uses its banking and financial competence upon evaluating projects. We want not only to fund a project –we also want toget back the money invested in it.

Who are your main foreign borrowers? Are they private companies, governments, private companies guaranteed by their governments ?

-It’s different each time. We don’t have any clear-cut preferences here. There are, for example, private companies whose credit ratings are substantially higher than those of state-run companies. We analyze each project separately and try to form such a credit security package that would allow us to manage our risks most efficiently. There aren’t any limitations in this respect.

How does everything happen from technical point of view? For example, an exporter has found a counterparty abroad and brings it to you…

-If we mean a buyer’s credit there are two main options. First, our exporters often come to us and say that they plan to conduct a transaction and we start to establish contacts with buyers. But there might be a contrary situation. There are large foreign companies, which traditionally use Russian products. Having experience in working with VEB, they come to us and say that they intend to buy various products from a Russian producer. There is another separate line of activity when we extend tied loans in line with very common international practice to foreign banks for buying Russian exports. A local bank can often better assess prospects for business and quality of a local borrower - due to the regional specifics of doing business and financial reporting. It’s easier for us to assess a local bank’s credit quality because banking reporting is standardized as a whole all over the world.

Is there any specifics of funding supplies of military hardware?

-No, there isn’t as a whole in terms of financial instruments.

“High technology exports are custom-made products”

Funding is not enough to get on international market -you have to be able to work on it. Are you involved in consulting, do you help enterprises to tap markets andexecute transactions adequately?

-High technology exports are custom made products, this sort of projects are not standard. So, training process is going on continuously. We ourselves are learning a lot as part of these projects and try to share experience we gained working on a specific market with exporters.

As opposed to such traditional export powers as Germany, France or the United States a great number of Russian producers are not experienced enough in manufacturing products for exports. And we try to help them to tap new markets. Naturally,we can’t substitute specialized consulting firms we do not have competences related to, for example, industrial production and engineering technologies. But we try to provide financial support. Vnesheconombank is cooperating closely with Russian representative offices abroad, with the Economic Development Ministry and the Ministry of Industry and Trade. We are interested not only in ensuring volumes of products to be supplied, we are also keen to maximally increase the number of companies working for exports.

How did sanctions affect the situation related to supplies of equipment and lending?

-Naturally, sanctions exacerbated the situation. On the other hand, it should be noted that main consumers of Russian technological exports are not among countries that joined the sanctions regime. Nevertheless, there is no doubt that opportunities for international funding of Russian projects have diminished. In terms of financial transactions, the situation also worsened in a technical sense. Quite often, projects in in which partners from EU countries and the US participate are rescheduled. But this damage hasn’t been catastrophic so far.

And what about borrowing costs? Because of the sanctions, money has become more expensive for all. Did it become more expensive for you?

-If global changes are taking place in the worldwe can’t remain uninvolved. But if we talk about exports support from exporters’ point of view this problem hasn’t been so acute so far as it is in the domestic market for most banks and companies and this results from subsidizing interest rates. We have been so far competitive on the world’s market.

Are there enough attractive high technologyprojects that could be sold on the world’s market?

-We have enough projects. There is a problem that I have already mentioned – a great number of enterprises do not have considerable experience in working abroad. Therefore, these projects require additional monitoring and preparation. We have to do a lot of information and consulting work for them to enter the market.

VEB is usually associated with major state projects. What is your smallest project?

-If it is a matter of guarantees, the smallest projects related to supplies of mechanical engineering products were worth about several thousand dollars. The smallest credit facility agreement signed this year was worth about 900 thousand dollars, the largest – 500 million dollars.

This means that medium-sized enterprises can participate in Vnesheconombank’s programs?

-They participate actively. At present, we are cooperating intensely not only with the largest companies but also with medium-sized enterprises.

How do you form your portfolio of projects? What does an enterprise need to do to get into Vnesheconombank’s program?

-Here, standard banking procedures are used. An enterprise is to apply to Vnesheconombank and submit a request. We analyze it, examine financial statements, a business plan and a financial model. Then we submit required information to consideration by VEB’s corporate governance bodies authorized to make a decision on a transaction. Recently we have succeeded in accelerating considerably a decision-making process.As far as more or less standardized products are concerned a decision-making process takes now 40 business days and this is in line with a level of western countries’ development banks.

Quite recently, we have launched a new electronic platform, which enables us to ensure advanced online interaction with customers on all export services of Vnesheconombank Group in a single window format.

Who participates in this “single export window”?

-First, Vnesheconombank itself of course with its exports financing department. The Bank extends export credits to buyers and pre-export financing to sellers, conducts documentary operations as well as extends guarantees. Second, our subsidiary EXIAR,which is responsible for insuring credits. Third, VEB’s subsidiary Bank, namely, Roseximbank, which acts as an agent for state guarantees. And finally, VEB-Leasing, Russia’s largest leasing company which we actively use as a leasing instrument upon structuring transactions. Moreover, Vnesheconombank hassubsidiary companies and representative offices abroad. Thus, by connecting to Vnesheconombank’s electronic platform yon get access to resources of this entire system. It’s very important for us as the new systemwould ease the workfor both Vnesheconombank Group’s institutionsand for our partners.