VEB: we are preparing to fund investment project inyuans

Alexei Bobrovsky

May 1, 2015
Vesti. Economics

The state and state institutions can manage large funds efficiently. VEB’s activity is a vivid evidence of it. Last year, Vnesheconombank became the most efficient bank on the market for managing pension funds compared with private pension funds (PF). In his exclusive interview,VEB Chairman Vladimir Dmitriev told us about how they managed to achieve such a result as well as about possible funding of Russian investment projects in yuans.

According to the financial statements, Vnesheconombank’s loss in 2014 amounted to 250 billion rubles. Vnesheconombank Chairman Vladimir Dmitriev links financial losses to a growing economic crisis and Western sanctions.

-Good afternoon Vladimir Alexandrovich.

-Good afternoon Alexei.

-I’d like to start with the Bank’s financial statements for 2014. VEB acknowledged a loss of almost 250 billion rubles. How can you explain such results?

-In fact, under the international financial reporting standards (IFRS) we posted a loss of a bit less than 250 billion rubles last year. And this figure was not a surprise for us at all. You have to keep in mind that what we mean here is VEB Group’s consolidated financial statements which includes financial, non-financial companies and banks including those located outside the Russian Federation. Therefore, the loss was formed from these institutions’ activity. But it goes without saying that Vnesheconombank is responsible for the most part of this loss. But I’d like to start with our last year’s results. They are rather impressive for us.We increased our assets by 17 billion rubles to a bit less than 4 trillion rubles.

Our loan portfolioincreasedsignificantly by more than 40% to more than two and a half trillion rubles. And I’d like to stress a higher quality of this portfolio where as compared with 2013 we changed significantly its structure in favor of extending long-term credits at interest rates that are lower than markets ones and suit our creditorswell. Now funds extended to our customers in our Bank’s assets account.for68% as opposed to 56% in the aggregated assets in 2013. This is a result of the strategy, which was approved by our Supervisory Board last year – “Vnesheconombank’s Development Strategy until the Year 2020”. It provides for a basic scenario of development in accordance with which we are to build up our loan portfolio and influence investment climate as well as key sectors of the Russian economy.

Let’s get back to our financial results. In fact, we posted a loss of 250 billion rubles under the International Reporting Standards with regard to our whole Group. Nonetheless, we shouldn’t forget that Vnesheconombank, Russia’s entire economy and banking system had to operatelast year under very difficult conditions – a growing economic crisis, sanctions implications, limited borrowing opportunities, increased credit rates, the ruble’s dramatic fall. So, we had to revaluateour expenses. We were forced to revaluate bonds, this is something about 20%, and the revaluation of foreign currency position brought about a loss of 30 billion rubles. As we have to apply the international financial reporting standards, a number of transactions including those related to entering into capital resulted in a negative revaluation. For example, a transaction with the Sukhoicompany which was conducted in the interests of supporting the Russian aviation industry, specifically, Sukhoi Superjet-100 resultedin a negative revaluation in the amount of 15 billion rubles. But the largest burden and the biggest part in this negative revaluation and in the final financial resultwere caused by the need for creating reserves. These reserves are against our loan portfolio.And here Olympic facilities account for a large share. And the negative result is also related to the situation in Ukraine.It is no secret that we have a subsidiary in Ukraine with regard to which we posted a negative result due to the reserves it created against its assets in Crimea and in the South –East of Ukraine. But having posted losses for the previous year, we are planning our activity in such a way as to halve this negative result by the end of this year by working activelywith our loan porertfolioand improving work with bad debts qualitatively.

-You’ve just said about forming reserves. You’ve got a good capital adequacy ratio, if you were a commercial bank, I would say your bank is a success history. But is this the case when we mean VEB? VEB is a special bank.

-You’ve touched upon a very important and pressing theme talking about capital adequacy ratio. In the second half of the last year, to be more exact, since autumn, measures for providing VEB with the state’s supporthave been put into effect. In fact, as opposed to commercial banks, which have their own shareholders and can raise natural and legal entities’ funds we are barred from engaging in this kind of activity by the Law “On the Bank for Development”. So, the main source of capital for us, especially under tense conditions, is the state. Epoch-makingdecisions were taken for our Bank in the second half of the last year. They include the conversion of NWF deposits into two-tier capital and at the end of the year, we received a subsidy 30 billion rubles factually a monetary contribution to Vnesheconombank’s capital. Of course, these measures allowed us to ensure financial stability of our indicatorsas well as financial strength of the Bank itself. And as opposed to the beginning of the year when our capital adequacy was less than 10.5%, we managed to reach a ratio of 14.3%. It’s a good safety cushion.But it’s not the time to relax taking into account that the market remains turbulent. So, we should pursue an exclusively conservative policy both in terms of lending and in terms of operating on stock markets.

-Is it a good or a bad thing that VEB is usually put on a par with commercial banks? You’ve got Basel-3 regulation and the Law “On the Bank for Development” as its regulatory standard which you should honor. How are you feeling here?

-You are right. Sometimes they try to compare VEB with commercial banks. But we are not a commercial bank at all. Because we are a development institution, we are a special bank. As far as a number of operations are concernedwe vary substantially from commercial banks. It is known that last year our loan portfolio was divided into two parts: development projects proper and the so called special projects where credits are not in line with requirements for usual credits that are extendedon condition of reimbursement, serviceability and tenor (our activity’s main principle is breakeven). These credits do not comply with certain standards. But on the other hand, they are aimed at implementing key projects that are marginally loss-making. But the state does this consciously being aware that no other institution can fund these projects.

-Is this an adaptation to new realities? Or was it a planned strategy?

-Most probably, these are the consequences of the crisis in 2008 and 2009. At that time, we had to rehabilitate commercial banks on an ad hoc basis in the absence of relevant legislation and save enterprises that were in a pre-default state but they played an exclusive role for some industrial sectors and socio-economic situation in various regions. Vnesheconombank played a positive role at that moment. This year the situation with regard to the enterprises we rehabilitated is optimistic. As far as Vnesheconombank’s loan portfolio as a bank for development is concerned, it varies significantly from commercial banks’ portfolio. The difference is that these are long-term credits and interest rates we offer to our customers are in line with their financial model and this is usually project financing where there are risks associated with the lack of collaterals, a project proper and a project’s initiator. The practice shows that in most cases commercial banks are not willingto implement such projects. Vnesheconombank is an institution whose mission is to fund such projects.

-Traditionally people believe that everything that is associated with the state, for example, financial resources, state administration is not efficient. It’s quite the opposite in case of VEB. This proves that the state and government institutions can manage large funds efficiently, for example, pension savings. They are managed by Vnesheconombank and it’s one of its main lines of activity. VEB was the most efficient bank on the market for managing pension funds compared to commercial banks. I hear that the year ended rather successfullyWhat can you say about managing pension funds?

- Yes, we achieved a positive result as compared with many non-governmental pension funds and managing companies and we posted an income of a bit less than 3% with regard to our extended investment portfolio. Of course, we should keep in mind that we were in an increased turbulent market zone and a serious uncertainty associated with debates about a reform of the pension system.Thank goodness, the Government made a decision that the funded portion would be retained, we sent our recommendations and now we are actively involved in in discussing the future of our pension system. And we would like contributions to the funded portion cancelled in 2014 to be returned to the pension system. It should be also kept in mind thatuntil the end of 2015 would be pensioners will have the right to choose either non-governmental pension funds or a state management company, that is, Vnesheconombank. And if Vnesheconombank’s proposals are accepted andimplemented we’ll be able to have 300 billion rubles of long money in our portfolio annually. This money will be invested in real sectors of the Russian economy. We should keep in mind that in the past years we formed a significant portfolio of long money that was invested in the Russian economy. Last year, 200 billionrubles worth of bonds were bought out from such issuers as the Russian Railways and a number of other corporate issuers.

-What’s going on foreign markets? It’s natural that under the conditions of sanctions Russian companies’ access to foreign capital markets, the more so with state participation is severely limited. Nevertheless, in the foreseeable future we’ll have to enter them. What are the prospects here?

-We should admit honestly that foreign markets are closed for us as well as for other banks and companies that are affected by sanctions

-That is, Western and Eastern ones in general?

-No, I’m talking about the countries that imposed relevant sanctions against us. You know that our subsidiaries are operating in the Persian Gulf zone - they are raising funds from national wealth fundsof respective states. We are actively operating on the markets of South-East Asia above all with our Chinese partners. We have strong long-time relations with the China State Development Bank. Our Chinese partners honor obligations under agreements concluded earlier and they are readyto fund us against specific projects with Chinese content. I’m sure that in the near future we’ll sign the first investment agreement on financing a project in Russia inyuans. So, we are acting actively. But taking into account that a large amount of funds in our loan portfolio were raised on Western markets - on the markets of the US And Europe. We do not hope that in the near future we’ll be able to refinance our credits on these markets. But on the other hand we realize that we have to form our own market for borrowings and fund our customers in rubles so that they buy equipment, manufacture products for export and for the domestic marketand make payments to Vnesheconombank in rubles.

-What do you expect of the year 2015, and will it be difficult for VEB to post profit?

-I think that we’ll post a loss for this year, because the situation remains volatile and uncertain. It will be less than in 2014. Many credits are in the process of refinancingand this creates additional risks to forming reserves. Nevertheless, we’ll be building up our loan portfolio and we’ll expand our presence on the stock market. And the main thing we expect from 2015 is a launch of the projects we started to fund as soon as we became a Bank for Development.

-Vladimir Alexandrovich thank you for finding the time coming to us.

-Thank you Alexei.

The interview was conducted TV Channel Russia 24 host Alexei Bobrovsky.