Vnesheconombank Chairman Vladimir Dmitriev’s Briefing on the Results of Vnesheconombank Supervisory Board Meeting

Vladimir DMITRIEV, Vnesheconombank Chairman:

In the context of the Bank’s current activity as a development institution I would like, above all, to say that this is the third Supervisory Board meeting where we consider issues of refinancing foreign debts of Russian companies and banks.

Summing up our recent activity we can say that the Supervisory Board made decisions on refinancing in the amount about 10 billion dollars, to be more precise, 9 billion 800 million dollars, out of which 7.5 billion dollars have been already allocated for refinancing Russian companies’ foreign debt obligations.

In the near future, we expect funds to be transferred to finance a number of approved transactions. All in all, we have received applications for refinancing in the amount exceeding 76 billion dollars, to be more specific, even 78 billion dollars. Out of them, 28 billion are requested by banks and 50 billion dollars — by companies.

Decisions offered for consideration by the Supervisory Board are based on the procedure and accords approved by the Supervisory Board and specified in the Procedure for Refinancing Russian Organizations’ Foreign Debts. These decisions and proposals go through appropriate corporate decision-making bodies. They include the Investment Transactions Development Committee, the Credit Committee and the Bank’s Management Board. We work in close contact with core ministries and departments. And in this respect, today’s Supervisory Board meeting, against the backdrop of new applications submitted to Vnesheconombank, was an important stage in making required adequate decisions because, among other things, we dealt with applications received from natural monopolies. And the Supervisory Board decided to consider these applications in the context of implementing investment programs by the largest state-run companies. These programs are being examined now and decisions that will be eventually taken on refinancing should be based on the need for carrying out investment programs by state-run companies in line with decisions to be made by the Government.

Moreover, the Supervisory Board refused to accept some applications because they were not formally in line with the procedure for consideration of applications. Here I mean those companies that borrowed from foreign banks’ Russian subsidiaries or the companies that borrowed without security or with security the loss of which does not entail serious risks associated with national economic security, regional security, loss of strategic assets by the Russian Federation.

The current Supervisory Board and its decisions are important in a sense that an issue of refinancing foreign debt obligations of one of the largest Russian banks, namely, Bank-VTB was considered for the first time. And as far as the State’s support for commercial banks is concerned it’s important to underline the unanimous opinion of Supervisory Board members that we should refinance debt obligations of both companies and banks. We should refinance those debt obligations that are associated with lending real sectors of the Russian economy, the development of banking business aimed at achieving current and strategic economic objectives and supporting corporate customers in such top-priority sectors as defense industrial complex, agriculture, construction complex, a number of other sectors, small and medium-sized business and other top-priority lines of activity.

The same approach was recognized as the only correct and justified one upon considering extending subordinated loans. This theme was also discussed at today’s Supervisory Board meeting. The Supervisory Board approved applications submitted by Alfa -Bank, Nomos-Bank and the Khanty-Mansi Bank. These banks are involved in both providing retail-banking services and servicing corporate customers and play an important role at a regional level. In particular, I mean the Khanty-Mansi Bank. And here the Supervisory Board adopts quite a strict and justified approach related to the need to use state financial resources in the form of subordinated loans extended to corporate customers for them to operate in specific sectors of the real economy in line with priorities set by the Government.

At its latest meeting, the Supervisory Board also considered an issue of Vnesheconombank’s participation in rescuing Bank Globex and Svyaz-Bank. The Supervisory Board backed Vnesheconombank’s proposal for pursuing particular lines of activity with regard to each of these banks in order to take additional measures for securing their financial sustainability and further development in the interests of State Corporation ‘Bank For Development and Foreign Economic Affairs as well as in the interests of those customers, those corporate borrowers, those natural entities who are served by these banks. We know that Svyaz-Bank is a system-forming bank as 15 million pensioners receive their pensions through this bank. The Bank has its branches in 49 constituent entities of the Russian Federation as well as 5 thousand outlets selling the Bank’s services. Actually, half a million employees of the Post of Russia receive their salaries through Svyaz-Bank and the Bank works with such companies as Telecom, Svyazinvest and others. That is why the approved plan envisages further developing the services sector and providing both borrowed funds and modern banking services to corporate customers, as well as offering retail banking services. The same applies to Bank Globex. The Bank whose balance sheet as is the case with Svyaz-Bank would be cleaned up thus allowing this bank to perform functions of an auxiliary or supporting structure for achieving objectives set before State Corporation ‘Bank for Development and Foreign Economic Affairs.

We agreed with the Supervisory Board that by mid next year we’d formulate and submit a comprehensive operational concept of all Vnesheconombank’s subsidiary banks activity. These banks are the Russian Development Bank, Russian Export-Import Bank, Svyaz-Bank, Bank Globex.

The prospect for consolidation is obvious; at least, for a part of these banks and here I mean consolidation of their businesses and establishment of a single major banking structure with due regard to the Post of Russia’s core activities. Bank Globex, Svyaz-Bank and the Russian Development Bank have gained considerable experience in working with major corporate customers, with natural entities. They are experienced enough in implementing wage schemes, managing pension savings funds and in supporting small and medium-sized business which is Vnesheconombank’s top-priority objective. We are going to pursue this objective not only relying on well-proven formulas cooperating with the Russian Development Bank, which in its turn is working with regional banks, but also working directly through our new subsidiary banks that have an extensive branch network. Of course, we are going to pursue this objective working directly with regional banks. That all means that we are establishing a major, core business-oriented group of banks designed to work directly and in close contact with small and medium-sized businesses through regional banks. We are putting in place a system of guarantees and a system of cooperation with regional institutions responsible for the operation of small and medium-sized businesses and guaranteeing repayment of credits extended to finance small and medium-sized business.

Thus, summing up the decisions taken I would like to emphasize the fact Vnesheconombank’s proposals were approved.

And finally, I would like to say that we submitted for consideration an issue of increasing Vnesheconombank’s charter capital with no decision on this issue having been taken. This is a very important issue because the Bank’s activity on extending subordinated loans, refinancing foreign debt obligations of Russian companies and banks, rescuing banks, diversifying the management of the National Wealth Fund, using part of resources, here I mean 175 billion rubles allocated to the Bank for operating on the Russian stock market automatically reduces Vnesheconombank’s capital base both in case of extending subordinated loans and revaluating securities and funds allocated by the Finance Ministry from the National Wealth Fund are recorded on the Bank’s balance sheet and therefore negative revaluation decreases the Bank’s capital. Building up reserves for refinancing foreign debt obligations also narrows Vnesheconombank’s capital base. And if we are to speed up Vnesheconombank’s activity as a development institution, Vnesheconombank’s capital is bound to be increased. It’s a matter of capital size. It should be adequate. In this respect, the government may take a different decision — in particular, a decision on guarantees. For example, in KfW, a German Development Bank, our peer, part of its obligations is secured by state guarantees.

— What amount of funds is expected to be allocated to refinance Bank VTB’s debt and on what terms? Could you specify the amounts of subordinated credits approved by the Bank’s Supervisory Board to be extended to Alfa-Bank, Nomos-Bank and Khanty-Mansi Bank?

Vladimir DMITRIEV: The Supervisory Board approved a proposal for allocating 950 million US dollars to Bank VTB but VTB is ready to co-finance 25% of this amount.

The Supervisory Board also approved extending credits to banks that are among the largest thirty banks: to Alf-Bank in the amount of 10.2 billion rubles, Nomos-Bank — 4.9 billion rubles, the Khanty-Mansi Bank — 2 billion rubles.

— One more point on the Bank’s capital increase. What amount do you expect to receive?

Vladimir DMITRIEV: I am not ready to give exact figures because they are to be agreed upon with the Finance Ministry, the Ministry of Economic Development and the Central Bank as well. But I mentioned the factors that worsen our Bank’s balance sheet indicators. I became increasingly confident that our approach had been heard and Vnesheconombank really needs the stated amounts to address the tasks it is currently fulfilling. Problems are piling up, become more complicated and comprehensive and require tremendous efforts. It’s clear to everybody. Nevertheless, we believe that the Bank must and can continue its core activity as a development institution. By the way, an increase in the Bank’s capital is required not only for major projects which were announced but also for working with small and medium-sized business. We plan that 30 billion rubles in additional capital would be allocated to small and medium-sized business and these 30 billion rubles will be included into the total amount of the Bank’s capitalization. We expect to receive several hundreds of billions of rubles.

— Vladimir Alexandrovich, you outlined a program of rehabilitating the two banks, namely, Bank Globex and Svyaz-Bank. Do you need additional money to rehabilitate them?

Vladimir DMITRIEV: In our opinion, the financial resources we received from the Central Bank are sufficient to rehabilitate the banks and get them to operate normally.

— Don’t you need any additional funds?

Vladimir DMITRIEV: This issue is under consideration, but today’s decisions were based on the amount of resources, which has already been allocated to Vnesheconombank.

— You’ve said that these additional resources will be somehow used to render assistance to the Post of Russia. Could you explain in more detail how you are going to use them?

Vladimir DMITRIEV: So far I can’t say anything because today’s decision states Vnesheconombank’s readiness to prepare a comprehensive Plan of Business Consolidation and a program to develop our subsidiary banks by mid next year. And here I mean not only Bank Globex and Svyaz-Bank. One of scenarios is to establish a structure similar to the German Post Bank. This concept is now being developed at the Post of Russia. We have already studied the concept and think it is worthwhile. But I’d like to reiterate that we are supposed to prepare a comprehensive plan by mid next year so that we can study various scenarios and among other things learn from international business experience. And I’d like to emphasize that the current situation in the banking community makes it necessary for us to consolidate business and enhance capital base.

— So, you haven’t made up your mind yet which banks will be incorporated into this new post holding or a post bank?

Vladimir DMITRIEV: From our point of view, Roseximbank is a specialized financial institution responsible for implementing a system of guarantees to promote Russian industrial exports. But as far as three other banks — the Russian Development Bank, Bank Globex and Svyaz-Bank — are concerned we believe that they should be consolidated and a financial structure should b be established on their basis.

— Is this going to be Vnesheconombank’s subsidiary?

Vladimir DMITRIEV: If we decide to establish this sort of financial structure, it’s going to be Vnesheconombank’s subsidiary for a certain period of time. Then it’s up to the Supervisory Board to decide whether we should attract strategic investor or transform them into joint stock companies. These are possible options. But above all should secure sustainable development and operation of Svyaz-Bank and Bank Globex and should not negatively impact to these banks’ current activities.

— Thus, their main line of activity would the Post of Russia and small business.

Vladimir DMITRIEV: There is no doubt about it.

— Thank you. And one more thing. You said that you would reconsider some of investment projects you had already approved?

Vladimir DMITRIEV: Among other things we may…

— You’ll quit some projects?

Vladimir DMITRIEV: I do not rule out the possibility of reconsidering decisions on those projects, which have been approved but not accepted for financing. So, in the most immediate future, actually, in the coming two weeks (our experts have already agreed upon many things with line ministries) we have to examine our loan portfolio in the most serious way for making final decisions and for the Supervisory Board to approve them with regard to projects already approved and, more so, accepted for financing but with regard to which no corporate decisions have made.

— This applies to projects, which were approved by your Bank as a Bank for Development rather than a «Rescuer Bank».

Vladimir DMITRIEV: You are quite right. And as to our rescue efforts, there is no other way out — we have to rescue.

-Thank you. It is too early to say what projects you are going to quit, isn’t it?

Vladimir DMITRIEV: Yes, it is.

— Thank you.