Vedomosti
Evgeniya Pismennaya
15.09.2011, 173(2939)

Vnesheconombank has updated its strategy. The State Corporation promises to operate without funding from the budget but it is ready to triple its loan portfolio. VEB’s Chairman is telling Vedomosti about the Bank’s new life.

Despite an uneasy situation in the world of finances, VEB Chairman Vladimir Dmitriev is calm and confident of himself. He promises that VEB’s support for the country’s economy will amount to 2-2.8% of GDP by 2015.

- The financial world is going through uneasy times. It may or may not be a crisis but there is no doubt that volatility is high. How is VEB doing? Are you mobilizing?

- In fact, the financial market’s volatility has increased significantly since May and in July a heavy storm struck. We saw it as a signal. Our line departments are pursuing a highly balanced policy with regard to debt instruments of Russian issuers. Here I mean transactions with ruble-denominated bonds, promissory notes and eurobonds. We give preference to short-term securities usually up to one year.

- And what about the shares you bought during the crisis?

- We are pretty conservative about transactions with shares because we tend to be long-term investors and sometimes strategic partners by way of entering into capital of various companies. At the same time, we have already sold many shares we purchased on the market during the crisis generating good profits for ourselves and good yields for the National Wealth Fund. And we are still holding the most reliable shares.

- Why did you sell Gazprom’s stake”?

- What stake do you mean?

- According to Gazprom’s latest report in line with Russian Accounting Standards, VEB owned 0.86%. And there’s no information about a 2.7% stake that VEB purchased from E.On.

- The large stake bought from E.On. is still on our balance sheet.

- Could you specify VEB’s stake in Gazprom?

- I can’t say definitely, because we constantly buy and sell Gazprom’s shares as one of the most liquid instruments.

- Nevertheless, it looks like that the current uneasy situation on the world financial market can’t help influencing you. Even the Russian budget isn’t in a good condition and you depend on the budget directly? Isn’t it true?

- Now in its current and planned activity VEB does not rely on budget support as opposed to other countries’ development institutions which have either budgetary guarantees for their obligations or are directly funded from the budget. VEB’s capital base is not to be increased through budgetary allocations.

- So, you are starting a life of your own and are not counting on budgetary funds any longer? Up until now VEB has received funds from the state coffers.

- You are quite right; VEB’s capital was largely formed through using budgetary funds at a time when it was vitally important to set up a solid base for the Bank for Development to get off to a start. During the crisis our capital was also increased to take certain crisis management measures, for example, we bought out the additional share issue of the United Aircraft Construction Corporation. The measures were taken and now as you rightly said before that we are starting a life of our own. The Bank’s strategy up to the year 2015 to be discussed at our next Supervisory Board meeting does not provide for using budgetary funds to increase our Bank’s capital.

- Are you going to make money on the market?

- Yes, we are. The market we’ll be our main source of money. As distinct from commercial banks that can raise deposits among other things from individuals we don’t have such an option. As far as many banks are concerned deposits are tangible resources for conducting transactions but this is not the case with us. So, when some view us as a quasi-budgetary instrument and try to push for interest rates lower than market ones they fail to understand the nature of our resource base.

- Nevertheless, if the state extends a credit to you it always extends a credit on favorable terms. For example, credits were extended to VEB through using monetary resources of the National Wealth Fund at an attractive interest rate. And maybe it was for this reason that almost all businessmen and bankers turned to you for help.

- I think there is some psychological aspect here: as you are a Bank for Development, as you are a state-run institution you must provide support. Don’t forget that during the crisis balance sheets of many banks were burdened with bad debts. They had to be helped and not only because Russian companies’ life depended on them but also because people kept their deposits in the banks. If the crisis had struck banks, it would have immediately worsened the economic situation in the country. And what should we have done, for example, with Traktornye Zavody? It’s not just a company; thousands of workers are employed there.

- We can always substantiate such transactions. Now the crisis is over and nevertheless you are considering options of buying Raspadskaya coal company.

- Not any more. They turn to all banks for help not only to us. We have to accept a proposal or reject it. We receive many proposals which conform neither to the Law on the Bank for Development nor to our Memorandum on Financial Policies. Unfortunately, they do not always study our underlying documents that specify everything.

- But there are exceptions.

- You are right. We implement some projects under special decisions by our Supervisory Board including those which are not related to our core activity or are not in line with lending limits. For example, the T-Platforms project: we are to enter into capital that is lower than the lending limit provided for by the Memorandum.

- Moving back to VEB’s strategy: there will be no funding from the budget, however you are going to increase your loan portfolio.

- By late 2015, we are going to increase the Bank for Development’s loan portfolio to more than 900 billion rubles, to be more exact, it is to amount to 30 billion dollars and Vnesheconombank’s total loan portfolio to 53-55 billion dollars.

- A very ambitious goal. You are going to triple your loan portfolio, aren’t you?

- Yes, we are. We proceed from the premise that increased funding dynamics will allow us to finance new infrastructure and large-scale sectoral projects. We are expecting new large-scale construction projects. We are shifting focus on funding innovation projects: their share is to amount to no less than 20% by 2015. By the way, during the crisis we got down to implementing several large-scale projects. Three of them were recognized by European economic magazines as the best projects in the following sectors: Tobolsk-Polymer, the Khabarovsk Refinery, Pulkovo’s Airport Reconstruction.

- Don’t you think that a picture you’ve drawn is too beautiful? Given that everything is so unstable all around, you just look like a dreamer.

- What do you mean? Financial markets are going up and down; there is a problem of sovereign debts. There is no other alternative for Russia but to upgrade its economy. We have to modernize our infrastructure, build new enterprises, rebuild agriculture and we should do all this on an innovative basis.

- Is VEB growing on the basis of patriotism?

- We are growing on the basis of objective reality. It’s no use speaking ironically. At present, Russia imports a lot of foodstuffs, machine tools, planes, equipment and petrochemical products. But we can produce all these things in our country and stop importing expensive products.

- My irony is not accidental. You are talking about great plans but it is not infrequent that VEB posts losses.

- For the most part, these losses are related to revaluating securities and exchange rate fluctuations. Undoubtedly, sometimes it happens due to our credit policy. For example, a credit we extended to a seemingly growing company, namely, Tractornye Zavody is a risky credit and it makes us set up additional reserves and this results in losses. We are going to reconsider approaches to our credit policy.

- Are you going to toughen the policy?

- On the contrary, we are going to make it more liberal. Now it’s too tough. In general, we regularly discuss credit policies of various countries’ development banks with our foreign colleagues. Tougher approaches to commercial banks’ activities worry us a lot, here I mean development institutions because development institutions are all non-profit organizations and the type of our activity is principally different: we extend long-term credits taking into account the state’s objectives. And our resource base is different from that of commercial banks. Observance of general banking regulations worsens significantly our balance-sheet indicators.

-So, all over the world development banks want to change rules of the game.

- We are not after changing rules of the game. We’d like to introduce reasonable exceptions. The fact is that development banks are established by the state and they do not pursue an aim of generating profits.

- What exceptions do you mean?

- For example, development banks should be at least allowed not to strictly follow requirements for setting up reserves.

- But you don’t pay profit tax.

- You are right. Lawmakers made a provision for that. Nevertheless we do a lot of things that commercial banks wouldn’t venture to do. For example, lending limit for one borrower can be exceeded upon extending a credit. This decision by our Supervisory Board is a sort of the state’s guarantee to investors.

- Nobody doubts it. Especially given the fact that your Supervisory Board is headed by Prime Minister Vladimir Putin.

- Encouraging risky projects the state assumes certain liabilities. God forbid but if VEB fails to fulfill its obligations the state is to redress a situation. I’d like to say that at present VEB creates pretty comfortable conditions for investors. Our ratings are always in line with sovereign ones. Last year, ours were the best borrowings by all parameters even in the sense that nobody had ever issued such long-term bonds.

- VEB is automatically likened to a sovereign.

- This happens not because Vnesheconombank is a state-run bank. This is recognition of the fact that the state will always provide support for the Bank for Development.

- During the crisis everything was done very quickly you were involved in providing a lot support. Are there any things you wish you hadn’t done?

- We are quite aware of what we did. We took on our balance sheet such companies as Amurmetall, Tracrtornye Zavody, we rehabilitated Globex, Svyaz-Bank and extended subordinated loans-nobody could do it instead of us. To be honest it’s a very difficult but interesting job. We can grieve over only one thing: everything happened too fast – Vnesheconombank’s capital was formed in late December of 20087. We had hardly got down to business when the crisis struck us all.

- Did VEB develop its muscles during the crisis?

- Yes, it did. We did a lot of exercising (laughing). But we were involved not only in taking crisis management measures. VEB started to implement serious development projects.

During the crisis you started to rehabilitate banks but of course it’s not your mission.

- Don’t forget that we didn’t get Globes and Svyaz-Bank free of charge. We haven’t so far received any dividends from them but we promptly pay interest on the Central Bank’s deposit and this is 8.5 billion rubles per annum.

- How are Globex and Svyaz Bank doing now?

- As compared to their condition when we took them on our balance sheet in the time of the crisis they are doing pretty well. Now Svyaz-Bank is a profit-making bank. Its return-on-capital ratio was 25% year-on-year in the first half-year, and this a positive indicator for the Russian banking system. As of July 1, the bank generated a profit of 2.5 billion rubles. The bank’s assets are 176 billion rubles. Globex’s capitalization is on the rise and it is expanding its business. Within three years since the crisis the bank has increased its loan portfolio by 850% from 9 billion to 87 billion rubles. Globex doubled its assets: as of July its assets amounted to 145 billion rubles. In the current year, the bank is to generate a profit of more than 1 billion rubles and this is a good result taking into account the fact that the bank largely services corporate customers.

- Are you going to sell these banks?

- Yes, we certainly are, but not now. Although there are some who want to purchase these banks on the cheap. But we tell them to take the Central Bank’s deposit we are serving and bad assets we received, that is, all these uncompleted and never-ending construction projects.

- Is this information circulating on the market or do they come to your Bank?

- They came to our Bank. And we are still receiving proposals.

- They want you to keep all the bad things for yourselves sell all the rest on the cheap.

- Exactly.

- How much money do they offer?

- Ridiculous figures.

- Approximately how much?

-At least, less than one capital. And sometimes they tend to say: let’s work out appropriate schemes. So, they don’t have money but they are hungry.

- When are you going to sell them?

- Before the crisis, banks were sold with a multiplier of three-four capitals, the latest transactions – a bit more expensive than one capital. So far, Globex and Svyaz-Bank have not required significant expenses. We’ll capitalize them, wait until favorable market conditions emerge and sell them. After selling them we’ll be able to repay the Central Bank’s deposit account and compensate expenses on paying interest on it.

- Do you want to sell the banks at a profit?

- At least, we would like to sell them on a break-even basis. And we should consider selling assets we took on our balance sheet when we rehabilitated the banks (especially Globex). The situation is different with Svyaz-Bank. Its bad credits amount to 100 billion rubles – a huge sum of money for such a bank. A part of them were written off and we took some bad loans with a significant discount. Now VEB Capital is responsible for selling bad assets and sometimes I should admit that it has to wring out debts.

- The word on the markets is that you are going to sell the two banks to foreigners. Allegedly, there are no buyers in Russia except for Sberbank and VTB.

- Now it makes no sense talking seriously about selling the banks. The situation is not right. But I discuss this issue informally with sovereign funds and solid investors. I ask them if they are ready in the future to enter into capital of these banks. And I should admit that their reaction is positive. And maybe because they can see that the banks are making good progress and are supported by VEB. Investors are sure that they won’t find any skeletons in the cupboard. But I’d like to stress we are not talking in practical terms about selling the banks.

- Would you tell us about setting up a Postal Bank? There was a lot of noise but now silence set in.

- When a new issue emerges it tends to cause a lot of noise and then the noise abates. It’s quite normal. I’d like to remind you of the issue’s prehistory. VEB’s Supervisory Board took a decision to set up a Postal Bank on the basis of Svyaz-Bank with the participation of the Post of Russia and a partner bank. We chose Bank Russian Standard and Nomos Bank as candidates for a partner bank. The candidates worked out in great detail various models of implementing the project and agreed them upon with the Post of Russia. In its turn VEB cleared problem assets from Svyaz-Bank’s balance sheet. A final decision on choosing an operational model of a Postal Bank and on engaging a partner bank in the project depends directly on the way the Post of Russia will enter in the capital of Svyaz-Bank. A decision on the amount of the Post of Russia’s share in Svyaz-Bank’s capital and sources to pay Svyaz-Bank’s shares is to be taken by the Government as it affects the country’s interests. Without Post of Russia’s participation in Svyaz-Bank’s capital it makes no sense setting up a Postal Bank. At present, the Post of Russia is selling on contractual basis services of 22 commercial banks including Svyaz-Bank through 9000 branch post offices. It’s impossible to provide banking services to the Post of Russia’s entire network of 42 000 post offices because of the Post of Russia’s commercial partners’ selective approach to searching for profitable sales outlets. It’s obvious that in remote and sparsely populated districts these outlets are sure to be unprofitable. But it was for the sake of these districts that the establishment of a Postal Bank was scheduled. The Postal Bank’s social function is to provide services in remote areas. Losses here should be compensated for by incomes from selling services in post offices more accessible for communications channels with a lot more customers. But competition with commercial banks in other outlets won’t make it possible to generate incomes sufficient for subsidizing money-losing post offices and paying back the project as a whole.

- Is Vnesheconombank still participating in the project or have you changed your plans?

- We are considering our participation. We have studied the world’s practice in establishing postal banks. It demonstrates efficiency of exclusive partnership between a postal service and a postal bank where the post participates in the postal bank’s capital and receives additional incomes in the form of dividends and increased capitalization of its share. The second efficient option provides for agency relations between the post and competing commercial banks whose services the post sells in sales outlets chosen by the said banks. But none of the countries implemented both options at the same time. Thus, if the Post of Russia continues to maintain agency relations with other commercial banks the project to establish a Postal Bank will fall through. A social objective of providing banking services to all branch post offices of the Post of Russia can be achieved but we won’t be able to pay the project back. A decision of exclusive relations between the Post of Russia and a Postal Bank is to be taken by federal government authorities as it affects anti-monopoly regulation.

- Under what conditions are you going to participate in the project?

- Since February, we have been asking government authorities to address an issue of the Post of Russia’s sources to pay contribution to a Postal Bank’s charter capital. A decision hasn’t been taken so far. Nevertheless, the Post of Russia continues to develop an alternative project of agency relations with two dozens of commercial banks and financial institutions. According to the Post of Russia, communications channels technological readiness makes it possible in the near future to provide banking services to 24 000 branch post offices without significant capital investments. For VEB, the Postal Bank Project’s implementation is tied to the Strategy of Svyaz-Bank’s Development for a period of 5-10 years. To rehabilitate Svyaz-Bank and restore its solvency we raised deposits of the Bank of Russia in the amount 125 billion rubles. Out of this amount 90 billion rubles were directly contributed to Svyaz-Bank’s capital to restore capital adequacy. The amount of Svyaz-Bank’s bad assets after a lapse of three years can be estimated at about 100 billion rubles. The claims worth 24 billion rubles were written off Svyaz-Bank’s balance sheet, rights of claim worth 75 billion rubles transferred to Vnesheconombank’s balance sheet were estimated by a an independent appraiser at 6.3 billion rubles, another 8 billion rubles represent credits transferred to Vnesheconombank’s balance sheet extended to the Don-Stroi Group of companies that do not have sources to service and repay debts. Debt service cost at ½ of refinancing rate rests on Vnesheconombank and it is 5 billion rubles per annum. Svyaz-Bank’s goal is to increase its capitalization for the purpose of sale at a horizon of about 10 years, given favorable market conditions. So, Svyaz-Bank’s strategy should be based on increasing its value substantially. As I have already said proceeds from selling Svyaz-Bank’s stake should be sufficient to repay the principal to the Bank of Russia and repay interest paid by Vnesheconombank for the whole period. This is about 150 billion rubles. With a realistic multiplier of 2.5 capitals, a value of Svyaz-Bank’s net assets due to Vnesheconombank’s share in its capital is to amount about 60 billion rubles.

- This means that you do not rule out the possibility that a Postal Bank won’t be established.

- I’ll say diplomatically: a decision on implementing the Postal Bank project is a condition precedent for formulating a long-term strategy of Svyaz-Bank. If the Government argues against the Post of Russia entering in Svyaz-Bank’s capital and makes a decision to provide retail banking services in a different way, Svyaz-Bank will develop as a universal financial institution. It looks like the problem is being slowly addressed. The government considers transforming the Post of Russia into a joint stock company as well as it considers a format of its entering in Svyaz-Bank’s capital. And I think that now it’s clear to everybody that the establishment of a Postal Bank should not be a philanthropic gesture on our part.

- Why is Vnesheconombank jointly with IFC participating in establishing a capitalization fund for small and medium-sized banks?

- The International Finance Corporation (IFC) is the World’s Bank structural subdivision which is well aware of regional banks’ problems. It is common knowledge that these banks’ insufficient own capital resources hinder investments in the regions. In order to alleviate the problem they got in touch with us and turned to the Finance Ministry requesting to set up a Capitalization Fund for Russian Banks (CFRB) to support Russian regional banks – but support not all banks but only leaders in lending to the real economy and driving forces of economic growth.

- How much is VEB going to invest in this Fund?

- In the course of talks between the Finance Ministry, IFC and VEB we agreed upon a joint mutually conditional participation in the Fund. Vnesheconombank’s and IFC’s contribution might amount to $50 million and the Finance Ministry’s – to $50 million. We’d also like to engage foreign institutional investors in the Fund. VEB’s participation in the Fund aims to create additional incentives for raising large foreign investments for the Russian real economy through efficient regional banks. Using capital resources raised by the Capitalization Fund for Russian Banks (CFRB) to fund the real economy through advanced banks is expected to have a greater influence compared with direct investing. By IFC’s estimates, multiplier effect will amount to 3:1. So, upon selecting banks it’s very important to take into account their day-to-day credit activities. This means in particular a significant proportion of credits extended to the real economy in a bank’s total assets, its strong regional presence and active participation in funding small and medium-sized enterprises.

- Are you going to insist that your representatives be included on a mandatory basis in a board of directors of each of the banks participating in the program?

- No, we are not. The Asset Management Company is to be responsible for day-to-day management of CFRB. The Asset Management Company is IFC’s 100% subsidiary. But I promise that we are not going to be passive onlookers. We’ll monitor and select jointly with IFC those banks in which the Fund will invest.

- The Russian Direct Investment Fund (RDIF) that you set up not long ago has already got off to a start. They say it does not try to navigate difficult paths but is going to invest in large-scale projects.

- I’d like to warn you against using usual clichés. It’s small wonder that we are focusing on projects that are in line with our core business, for example, in the timber industrial sector, pharmaceutics or agriculture.

- My understanding is that VEB’s former customers might be financed by RDIF.

- In fact, we are proposing a number of projects that we know well. We know them well because our Bank and other banks funded them. You have to know a project well, especially at an initial stage when we are launching the Fund. As the phrase goes the best oftentimes is the enemy of the good.

- Could you tell us about the first transactions?

- I would do with pleasure but at the moment RDIF executives are in talks with foreign investors about the first transactions. It takes about 6-9 months to analyze a project thoroughly. And before transactions are closed, RDIF is to favor no-disclosure agreements. Potential projects are related to the agricultural sector, energy efficiency and medicine. The Fund will invest not only in state-run companies but also in many promising private companies. The Fund should not seek as many transactions as possible now. Now it’s important for the Fund to develop procedures for working with projects and mechanisms for making investments. It’s not the speed that matters now; we need top quality high-yield transactions.

- When will the first transactions be closed?

- I hope 1-2 transactions will be closed till this year end. But it remains to be seen. I believe that transactions will be conducted in 2011-2012. I think Kirill Dmitriev, we happen to have the same family name, goes along with me.

- It’s funny that you have the same family name.

- It is. By the way I call Kirill my younger brother. But in fact we are not relatives. In general, family name Dmitriev is popular in VEB. When I left the Finance Ministry and started working in VEB in 1997 I looked through a directory of employees and Dmitriev was the third most popular family name.

- Persons with family name Dmitriev like to work in VEB

- They just like to work in general.

- How are things with the Export Credit Insurance Agency? They intended to establish it for a long time and finally the State Duma approved amendments to applicable legislation to institutionalize the Agency.

Russian companies need this Agency badly. We made a request and many exporter companies sent us applications for insuring their export credits. For the coming three years they need tens of billions of dollars. Given these needs, the Agency will have a lot of work to do. Now regulations and various decisions are being prepared to launch this new Agency.

- Haven’t you appointed Director of the Export Credit Insurance Agency?

-All the organizational matters and the Agency’s Head are to be approved at the next meeting of VEB’s Supervisory Board. I think that the first insurance transactions will be conducted in the 1^st quarter of the next year.

- How many people will be employed by the Agency?

At least one hundred. I personally meet candidates. They are young but pretty well-known representatives of the insurance market. Some are insurers and some are mathematicians.

- Do you succeed in hiring away specialists from private companies?

- Yes, we do. And not only from Russian companies but also from foreign ones. We are happy that sometimes candidates agree to work for us for less money.

- Probably you win them over by the virtue of patriotism…

- By an interesting job. Sometimes it comes to paradoxes. Today I came to work in the afternoon – a young man came up to me at the entrance and said “I’ve been long dreaming about working in VEB. And he gave me his resume.

- Have you read it?

- I took it to our personnel department. But I think that it’s quite a deed – he had to wait for half a day and handed his resume to me personally.

- You should give him a job.

- My point is that you have to work hard in our Bank. Without any envy I can say that our salaries are lot lower than those in commercial banks.

- Do you feel bad for paying lower salaries?

- Frankly speaking, I feel sorry for people, they have to work for less than market-rate salaries.

- Maybe they agree to work in your Bank for career purposes, they work for small money for some time and then find a highly paid job and it’s a god think to write in their resume that they worked in Vnesheconombank.

- Unfortunately, I have to admit that some of our employees are hired away. We have to work with commercial banks and they can see that our employees are highly qualified.

- Were you assigned to deal with the newly established Strategic Initiatives Agency (SIA)?

- We haven’t determined any parameters so far as it was not long ago that the Government instructed Vnesheconombank to be a basic financial institution responsible for supporting SIA projects. So far, we have established a special department at the Bank to cooperate with SIA. We’ll provide support for the Agency in two forms: sponsor’s contributions to run SIA – so far they amount to 100 million rubles and providing SIA with the Bank’s investment infrastructure to assist the Agency in conducting expert examination and preparation of projects. In the future, this will help to receive funding for projects at commercial banks and VEB. Unfortunately, we have a week feedback with federal authorities which are supposed to give clear-cut instructions to development institutions. I think that SIA executives should be more active in working with federal authorities.

- If public servants worked properly you would not have exert pressure on them.

- Exerting pressure is against our rules. But we hope to cooperate closer with line agencies which will allow us to be on a par with world leading development institutions. Let me cite an example of the Brazil Development Bank. It succeeded in supporting almost from scratch the Brazilian aviation industry which is now competing on a par with leaders in the aviation industry. And the situation in our country is not that good. Not long ago I became Board Chairman of the United Aircraft Construction Corporation and I see that the Corporation is developing in a somewhat different way.

- Now you’ll be able to put the house in order. You are in charge now.

- In order to do it you don’t have to be Board Chairman you have to pursue a well-defined policy that provides for the Bank for Development to implement specific projects of national significance. Let’s remember that in the times of the USSR there was Promstroibank which employed bankers and engineers and constructors. They were responsible for funding large-scale construction projects and exercised control over the targeted use of financial funds. In my opinion VEB could become a proper instrument that would replace many targeted programs implemented through using budgetary funds with programs to be funded on a repayment basis.

- We had the Investment Fund which is almost nonexistent now.

- I won’t say anything about the Investment Fund. But take my word for it, it would be more difficult to spend a budget of a construction project funded by VEB, given our stringent technological control and our control over the proper use of funds. We are well aware how money, especially budgetary money is spent.

- You mean how money is misappropriated.

- I wasn’t there in person.

- Will you outline your mid-term strategy?

- Keeping in mind all the difficulties and downsides of the Bank’s activity for more than four years, we introduced serious changes in VEB’ strategy up to 2015 which we are going to submit to consideration and approval by VEB’s Supervisory Board at its next meeting. I can say that we reconsidered to a large extent the Bank’s role and place in the Russian economy and lay down qualitatively different approaches to its strategy. The new strategy’s main feature is to expand Vnesheconombank’s transactions in its capacity of the bank for development, increase its role in the country’s investment policy, participate actively in modernizing the economy and shift emphasis on innovation projects.

- What’s in your opinion the most important indicator for the Bank?

- We set ourselves the following objective: we should bring the amount of our support for the national economy by 2015 to 2-2.8% of GDP.