We Welcome Projects where Enthusiasts Try to Retain Competitive Edge
Vnesheconombank has been energetically carrying out crisis-management measures for already two years. This, to a certain extent, slowed down the implementation of investment projects as the Bank’s employees had to perform additional functions besides their main ones. Nevertheless, VEB continued to build up its loan portfolio as a Bank for Development. Vnesheconombank Deputy Chairman Anatoly Ballo told Interfax-AFI about new investment projects financed by VEB, the BEMO project, a project to build a furniture production facility and innovations.
- Vnesheconombank has been implementing crisis-management measures for already two years. What impact did it have on its activity as a Bank for Development?
- Since 2008, Vnesheconombank has been the Government’s instrument in implementing crisis-management measures. In the last months of 2008 and in early 2009, the Bank’s priorities were shifted towards supporting the financial system and this slowed down the implementation of investment projects because the Bank’s specialists involved in examining investment projects had at the same time to be engaged in restructuring credits as part of crisis-management measures. They had to perform additional functions besides their main ones. I’d like to remind you that the amount of financial support provided by Vnesheconombank as part of crisis-management measures was 964 billion rubles. These funds were used to refinance Russian companies’ foreign debts, extend subordinated loans and reorganize Globex Bank and Svyaz-Bank. Moreover, under certain decisions made by the Bank’s Supervisory Board we rendered assistance to such system-forming companies such as OJSC Amurmetall, Tractornye Zavody Corporation and OJSC Sevmash.
- Did all this have any impact on financing investment projects? How many investment projects have appeared in VEB’s loan portfolio this year?
- Yes, to some extent, because the same specialists were responsible for implementing crisis management measures and investment projects. All the lines of activity I mentioned above were not included in our original priorities.
Nevertheless, in 2009 we participated in implementing 78 investment projects and at the beginning of 2010, the Bank’s governance bodies made decisions on participating in funding another 20 new projects. The Bank’s participation amount in them is about 144 billion rubles. And we have already started to finance some of them. The amount of funds made already available is in excess of 41 billion rubles, but we have long periods of using resources, we do not provide the whole sum at once. On the one hand one can say that 20 new projects are not many but on the other one should not forget that it often takes no less than a year to prepare a project. The amount of our investment, credit and guarantee activity is about 360 billion rubles. We have already formed a loan portfolio with regard to more than 100 projects. And more than 200 projects are at various stages of expert examination.
- These are large figures. What’s the effect on the economy?
- Operating in this field, we are playing an important institutional role because in the long run we form Russian clientele, which is seeking to implement long-term projects, for example on the principles of project financing. It can be said that VEB is not only a pioneer of classical project financing when credit resources are made available without a burden on other assets or a parent company but also an instrument for implementing public private partnership projects (for example concession projects and BOT (BUILD-Operate-Transfer) projects).
As a whole, in our estimate, tax revenues from implementing investment projects in the budgets of various levels would amount to 222billion rubles for a period of their implementation and more than 60 thousand new jobs would be created.
- By the way, BEMO project will be implemented on the principles of budget financing. In late July, VEB’s Supervisory Board made a decision to finance it while RusGidro and RusAl had been waiting for this sort of decision since March. Why did it take so much time?
- The Boguchan Hydroelectric Power Station is a unique project. This sort of projects have always been funded by way of using budgetary funds. This is the first experience of project financing in Russia in hydropower engineering. It takes about a year in any bank to examine a project of such magnitude, the more so, a project structured on the principles of project financing. We have tested the project’s financing model several times. At present, almost all the issues have been settled.
- Providing funds for this project VEB is to receive engineering companies’ shares as collateral. Are there any other forms of collateral?
- This is a project financing and the Bank is to receive engineering companies’ shares but as far as the Boguchan Hydroelectric c Power Station is concerned we are also supposed to receive RusGidro’s limited surety (in the capacity of a company responsible for constructing and operating the hydroelectric power station). It is to come into effect only if there are changes in the schedule, construction budget or in case of improper operation of the hydroelectric power station’s operation. The only reason for it is that we have never had project financing in the hydroelectric power engineering. We don’t have any surety with regard to the aluminum plant.
- What’s the total cost of building the hydroelectric power station and the aluminum plant? What amount of funds is VEB supposed to provide?
- The total cost of building the hydroelectric power station is 72.5 billion rubles out of which Vnesheconombank is to provide about 28 billion rubles. The Bank is to provide 22 billion rubles for the construction of the aluminum plant, with the total cost of the project being 33 billion rubles.
In fact, under the investment program “A Comprehensive Development of the Lower Angara Region” the Bank finances three large-scale projects. One of them is Construction of the Boguchan Integrated Timber Processing Facility. We are planning to provide 40billion rubles to build the facility. All these projects are being implemented on the principles of public private partnership. The state provides 30 billion rubles from the Investment Fund to build infrastructure while private investors together with VEB’s funds provide about 150 billion rubles.
- At what stage is the project to build the Boguchan Integrated Timber Processing Facility?
- The Kraslesinvest Company acts as this project’s investor. It’s a very complicated project because new full-cycle pulp-and-paper plants haven’t been built in our country since the Soviet times. At present, we are seeking the help of the world’s leading pulp producer, Sweden’s Company Sodra, to develop a final concept of this timber processing facility. The deep timber processing project has already been launched. The “pulp component” is to be launched next year after completing a comprehensive mechanical timber processing stage. The Bank has started to finance the project and has already provided 2 billion rubles.
- When Vnesheconombank’s Supervisory Board made a decision to fund the BEMO project it also approved refinancing of RusAl credit worth 4.5 billion dollars obtained from Vnesheconombank by Sberbank. What’s the situation with unpaid credits obtained from VEB to refinance debts to foreign creditors?
- All companies except for RusAl have repaid their debts. Our representatives have withdrawn from all borrower-companies’ boards of directors but for RusAl‘s board of directors. The aluminum company is to repay its debt until October 29, and we do not expect any problems with the debt repayment.
- Not long ago, VEB signed an agreement on extending credits worth 1.4 billion dollars to Tobolsk-Polymer. Western banks and export agencies participated in the transaction. On what terms are these funds provided? How are the credits secured?
- It took us a year to make a positive decision on this project. The polypropylene complex with a capacity of 500 thousand tons per year will become the world’s largest plant of this kind. As to this project, VEB used only raised funds and didn’t use its own capital. All the funds were made available by foreign export agencies and banks. And it should be said that in our opinion credits are extended on very good terms. Interest rates are lower than mid-market rates on short-term borrowings.
It’s important that this project comprises a number of unique subprojects. For example, special vessels are being built and docking facilities are being expanded on the Tobol river to supply equipment of non-standard sizes. Moreover, the project’s implementation will require 4.5 thousand workers at the construction stage. 3.5 thousand new jobs will be created. Tax revenues during the project’s implementation are expected to amount to 45.5 billion rubles.
- VEB is also to provide funds to Mekran company for building a furniture production facility. What are the specific features of this project? What’s the credit period?
- The Bank has already started to finance the project. The total value of the project is 5.6 billion rubles, with our participation share being 4.3 billion rubles. The credit period is more than 10 years so the company is given a chance to repay the credit through its operating activity.
It’s important for us to boost domestic producers’ competitive edge. Do you see a lot Russian-made furniture in our shops? In order to get Russian people to buy less foreign-made furniture we should launch deep timber processing. In general, we welcome projects where Russian enthusiasts try to retain competitive edge.
- The Russian Government gives high priority to the development of the Northern Caucasus. What projects is VEB planning to finance this year in this region? Did the Bank receive any investment applications from project initiators?
- The Northern Caucasus is an absolute priority for us now; we are opening our representative office in the Northern Caucasus. We have more than 10 projects at various stages of implementation, the total amount of which is in excess of 60 billion rubles.
I’d like to specially stress the project to build the Arkhyz all-season mountain-climatic resort in Karachaevo-Cherkessia, which was initiated by Sinara Company. The project’s general concept provides for the construction of four village-complexes to accommodate more than 25 thousand people and a network of 69 ski lifts and cableways. We engaged French Bank CDC for this project.
- VEB has repeatedly said that it would increase a share of innovation projects in its loan portfolio. How many innovation projects is VEB funding today? What sort of projects are they?
- Most of our projects are of innovative nature - be it a cement plant construction project or a turkey-growing industrial complex project.
To tell you the truth, it’s pretty difficult to implement high-technology projects. One of such projects was the one aimed at building a submicron semiconductor production faculty. We also planned to participate in the project aimed at manufacturing Glonass/GPS navigation receivers. M2M Telematica was responsible for implementing the project. We were ready to start financing the project, when corporate changes took place in the company. The project’s structure has changed now –it incorporated AFK Sistema. Thus, we are examining a large-scale, updated ERA Glonass project being implemented by the Navigation Innovation Systems Company. The project provides for creating Glonass/GPS navigation receivers and user terminals as well as creating an emergency urgent response system on their basis. A requested amount of financing is 3.1 billion rubles
In the near future, we are supposed to submit a project to create supercomputers to consideration by the Bank’s Supervisory Board. I wouldn’t disclose the name of the company responsible for implementing this project but I can say that it is a leading player on the Russian market.
Vnesheconombank Deputy Chairman Mikhail Kopeikin’s Interview to TV Channel Russia-24
HOST: Why are small and medium-sized enterprises so poorly developed in Russia, why do banks extend credits to businessmen at such high interest rates, how is the state going to support businessmen – this what Vnesheconombank Deputy Chairman Mikhail Kopeikin told my colleague Irina Matjushenko about in his interview.
Reported by Irina Matjushenko
CORR: At present, the share of small and medium-sized enterprises (SMEs) in the Russian economy is evidently insufficient. For example, in European countries 60 and even 80 percent of budget revenues might be generated by small and medium-sized enterprises. Tell us why small and medium-sized enterprises are so poorly developed in our country?
Mikhail KOPEIKIN, Vnesheconombank Deputy Chairman: The main reason is that our small business is only 22 years old. I’d like to remind you that in 1988 a law on cooperatives was passed, which made it possible for cooperative movement and then small and medium-sized enterprises to develop. Over these 22 years the number of small and medium-sized enterprises as well as individual enterprises amounted to more than 5 million 600 thousand. Thus, their total number increased by more than 40 times. As far as this period is concerned, it’s a pretty good dynamics.
CORR: Vnesheconombank commits money to support small and medium-sized enterprises including monetary funds from the National Wealth Fund. Will you tell us how much money will be provided to small and medium-sized enterprises in 2010?
Mikhail KOPEIKIN: I’d like to start with the year 2009 because in terms of supporting small and medium-sized enterprises it was a critical year and the state committed a significant amount of funds to finance programs of supporting small and medium-sized enterprises. In particular, Vnesheconombank received 30 billion rubles from the National Wealth Fund, and moreover, Vnesheconombank contributed another 10 billion rubles to the Russian Development Bank’s charter capital. 30 billion rubles were also provided to the Russian Development Bank to implement the program of supporting small and medium-sized enterprises. So, 40 billion rubles were committed for supporting small and medium-sized enterprises.
CORR: And if we mean 2010?
Mikhail KOPEIKIN: We plan that only under the program of providing the state’s support for SMEs 55 billion rubles will be committed by the end of 2010. The total amount of funds to be provided to SMEs is scheduled to reach 100 billion rubles by the end of 2010.
CORR: You’ve said 100 billion rubles. Is this a large or a small sum of money on the national scale?
Mikhail KOPEIKIN: Compared with the year before last, or two, three years ago this is a huge sum of money, many times more than in the past. But if we mean support for SMEs in general this is a small sum. By various estimates, it’s about 2-3% of the amount of funds used to finance SMEs. In my opinion, a development institution’s goal is not to take the whole market or a significant part of it but, for example, to encourage those sectors of SMEs, which are not attractive for commercial banks and where risks are high. So, one of the most important lines of activity now is to provide support for SMEs operating in the innovative and high-technology sector.
CORR: Which companies are supposed to receive the said money in the final analysis? You’ve mentioned innovation business. And if we talk in general terms, which SMEs can receive the money in the first place? Are they trade or construction companies?
Mikhail KOPEIKIN: As far as SMEs are concerned, most of the funds are intended for wholesale and retail trade. Over the recent years about 40-42 percent of total credit resources have been committed for this sector. And I’d like to stress that 3.5 million people work in it. The manufacturing sector accounts for about 10 percent of funds. Two million people work in this sector. This is a structure that has remained unchanged for several years and banks lend to it.
CORR: At what interest rate are credits extended to businessmen?
Mikhail KOPEIKIN: I can say that two years ago an interest rate for the end borrower was about 19 percent, last year it was 17 percent and this year the interest rate ranges from 13 to 15 percent for a number of regions but not for individual borrowers and, of course, we are quite aware that SMEs, which start new businesses or implement projects related to innovations, high technologies or to monitoring these projects, run the highest risks. For this reason, we commit a part of funds to finance this sort of projects. We have already prepared several banking products. One of them is called “Innovation and Modernization”. To my mind, it is a very attractive banking product. The product provides for extending credits at an interest rate of 10 percent per annum. I’d like to draw your attention to the fact that there is a high demand for this product because credits are extended for a period of up to 5 years. This is a pretty long period of time, which creates favorable conditions for SMEs to develop successfully in the innovation sector.
CORR: 15 percent - this is a very high interest rate, isn’t it?
Mikhail KOPEIKIN: I think that a rate of 15 percent is pretty high. But I can say that a lot depends not only on Vnesheconombank but also on a specific region, borrower and many other conditions. As far as we are concerned, we firstly recommend the Russian Development Bank to set a minimum margin that is largely linked to monitoring a credit product. On the other hand, we limit regional banks’ margin to about 3-4 percent when we provide credit resources to them to support SMEs financially.
CORR: Business community has its own view on lending. For example, such organizations as Delovaya Rossia or OPORA ROSSII have repeatedly said that commercial banks are reluctant to lend to SMEs and even if they do, they extend credits to SMEs at extortionate interest rates and maybe it makes sense not to commit huge sums of money to fund SMEs but create a mild tax climate by way of reducing tax rates for businessmen?
Mikhail KOPEIKIN: To a large extent, a lot depends on the borrower’s financial standing. You’ve just mentioned the point of view of Delovaya Rossia and OPORA because they promote interests of SMEs. And I can express banks’ viewpoint. Banks would like very much to extend credits to a great number of borrowers on very favorable terms. But they believe that there are no good borrowers. And in many cases it’s not a matter of a bank that sets a margin of 25-30 percent it’s first of all a matter of the borrower’s quality. If it’s not clear if the borrower will return the money or not it will be refused a loan. But if there is a chance that the borrower will fail to repay a credit, a credit might be extended to it at a high interest rate.
CORR: This means that banks believe that risks are very high and credits might not be repaid?
Mikhail KOPEIKIN: Yes, risks are rather high especially in a period of crisis. Moreover, things associated with modernization and for the most part with innovations carry high risks. As I’ve already said, credits are extended for a period of up to 5 years and it’s not always clear what is going to happen to a certain project in 3-4 years and whether products to be manufactured by an innovation company will be in demand in the long run.
CORR: When do you think we’ll have interest rates on credits of 3-4 percent like, for example, in Europe? And what conditions should we create to this end?
Mikhail KOPEIKIN: In my opinion, we’ll be able to extend credits to SMEs at European interest rates when we have the same conditions like in Europe.
CORR: Mikhail Yurjevich, thank you very much for your interview.
Mikhail KOPEIKIN: Thank you.