Vnesheconombank PPP Center Director Alexander Bazhenov’s Interview to TV Channel Russia 24

16 may 2012 года

TV Channel Russia 24
16.05.2012, 18:15

Host Nikolay Korzhenevsky

HOST: Let’s go on discussing economic issues, namely, development of the Far East and the Baikal region. Our guest in the studio is Vnesheconombank Public Private Partnership Directorate Director Alexandr Bazhenov. Good evening Alexandr. There is a special corporation to be responsible for this region’s development. Could you tell us about what sort of institution it is and about its functions.

Alexandr BAZHENOV, Vnesheconombank Public Private Partnership Directorate Director: I have to explain here. We have the Far East and the Baikal Region Development Fund. It was set up by Vnesheconombank last year under its Supervisory Board’s decision. We spent a lot of time with the regions to launch this Fund and work out its business concept. And idea of establishing a state corporation was put forward by Sergei Shoigu last January and it was presented to the Prime Minister. And it took a lot of time to develop a potential special draft law on special conditions for economic management and development of the Far East and Siberia as the center of economic activity was moving to the Pacific Region.

HOST: What did this discussion result in the end?

Alexandr BAZHENOV: It’s still going on. We’ll find out pretty soon.

HOST: What are the preliminary results?

Alexandr BAZHENOV: Nevertheless, we know that at a meeting of the United Russia faction when Dmitry Medvedev was being approved as Prime Minister he said that at this stage we had to form mechanisms for managing the Far East and the Baikal region similar to those that already existed in the North Caucasus. We know that in the North Caucasus one person holds the post of Presidential Envoy and Prime Minister of the region. There is also a special government commission headed by the Prime Minister. At the same time, there is also the North Caucasus Development Corporation – a special institution created by Vnesheconombank to support investment processes and a whole number of special instruments also designed to support investment processes, for example, such as mechanisms of state guarantees for investment projects in the North Caucasus and a special mechanism of state guarantees for investment projects to be implemented in the Chechen Republic. And a special program of the North Caucasus development is being drawn up now by the Regional Development Ministry. There is also a special institution there which is responsible for creating a whole number of special economic zones designed to develop tourist activity in North Caucasian resorts and Vnesheconombank is also represented in this institution’s management. As applied to the Far East, it means that we also should take into account its specifics and develop appropriate instruments. My understanding is that a special corporation responsible for development of such macro region that accounts for 49% of the entire Russian territory is of cause a challenge and this challenge should not undermine the whole economic and political management system.

HOST: To my best knowledge, there were ideas of setting up a Direct Investment Fund in this region. Why did the ideas fall through?

Alexandr BAZHENOV: Some time ago, Presidential Envoy Victor Ishaev proposed that  the Government should appoint Vnesheconombank as general investor in the development of the Far East. He made this proposal during the crisis when it became evident that it was quite difficult to ensure the development of the Far East through using only budgetary funds to finance capital investments. This is quite obvious because in the time crisis most of funds are channeled to the most populous areas with highly advanced economy to ensure economic and political stability and the Far East has a sparse population and an undeveloped economy. So, in the time of crisis we could have sustained development through non-budgetary financing. So, Vnesheconombank came into play. Vnesheconombank’s Supervisory Board instructed us to develop a concept of setting up a Direct Investment Fund of the Far East. And we dealt with it for almost the whole last year together with Russian constituent entities, the Economic Development Ministry, the Regional Development Ministry and the Finance Ministry. What conclusion did we arrive at? We decided to determine the kind of projects, their status and a potential for making direct investments in them as well as investors’ attitudes and the kind of investment base. As far as projects are concerned the situation there is pretty complex. There is a huge demand for investments there. It exceeded 10 trillion rubles and there were about 2800 project initiatives at a time of developing a program aimed at the Far East development. And we always have problem understanding where we have an investment project and where we use budgetary funds to finance capital investments. An investment project is based on the following principles: a project period, interest payments on credits and recoverability of used funds. 12 Russian constituent entities that are included in the region offered us about 195 projects. Out of these 195 projects only about 20% projects could be good for project financing and for financing in the form of direct investments, that is, for entering into capital of relevant engineering companies.

HOST: What amount of funds is needed for 20%?

Alexandr BAZHENOV: About 350 billion rubles. About 10% of projects with the stated amount of funds is currently in the advanced stage and can be supported by Vnesheconombank and other investors. And 60% of projects, given their current structuring status, can’t be financed by private investors or funded with non-budgetary funds because they are not structured properly. They do not provide for recoverability of funds.

HOST: 10 trillion rubles – how much time is needed to invest these funds? How much money out of this sum can be in fact invested in projects?

Alexandr BAZHENOV: Some research has been done by the Academy of Sciences and Moscow State University (MGU) on investment potential for this region’s development till 2030. Their estimate is 20 trillion till 2030. We are talking about 195 projects worth 3.5 trillion rubles that regions regard as realistic ones. One project in this list is worth 800 billion rubles, it is aimed at increasing BAM’s throughput capacity to ensure the development of all territories to the north and east of Siberia. This is a huge amount of funds. But even 3.5 trillion is a justified demand. Projects worth 1.5, 2.5, 8 billion rubles associated with comprehensive development of territories, infrastructure and industrial development are implemented every year throughout the world and we can offer them to the market but we have to structure them in such a way that they are attractive to the market.

HOST: If we are talking about 3.5 trillion rubles, how much money out of this amount can Vnesheconombank invest using various mechanisms? How are you planning to fund these projects in the near future, I mean those 195 projects that are in a rather acceptable condition?

Alexandr BAZHENOV: Using its set of instruments Vnesheconombank is already participating in funding investment projects in the Far East and our participation share is about 270 billion rubles and earlier we assumed obligations worth 195 billion rubles. And now we understand that 3.5 trillion rubles are a huge amount of funds and one institution can’t provide this amount of financing. We have to create conditions for engaging other investors. In this respect, VEB’s Supervisory Board took a decision that provides for Vnesheconombank to create special conditions for its participation in funding projects in the Far East. A principal condition provides for Vnesheconombank’s participation in funding investment projects in the Far East in the form of subordinated credits provided that 20% of projects’ value is to be funded by private investors. Up to 20% of a project’s value can be funded by Vnesheconombank’s credits that would be subordinated with regard to other credit from commercial sources, maybe from international sources, maybe through using pension funds. Thus, we reduce risks for these other sources of funding.

HOST: So, there is some concession, some privilege for other creditors. In this respect, won’t Vnesheconombank be particularly demanding in selecting projects? That is, VEB will be afraid that this money might be lost and will be reluctant to extend credits because you will be responsible for losses above all.

Alexandr BAZHENOV: First of all, our Bank is a development institution and it is designed to promote appropriate projects. Undoubtedly, we are not designed to lose money but there should be a reasonable balance because for the most part we represent the state. Therefore, we should create mechanisms for managing risks. Having a chance to participate in managing risks we can assume somewhat greater risks than traditional financial institutions. Assuming these risks we do not wait for them to become a reality or not to become a reality. And it’s not a privilege. It’s standard practice of many development institutions and, for example, the International Finance Corporation has two categories of loans, that is, those intended for standard commercial projects and those intended for projects where they assume somewhat greater risks.

HOST: You’ve mentioned foreign investors. And what about Russian money? Are you going to use pension funds to finance these projects? What should be done to ensure the use of these funds?

Alexandr BAZHENOV: A lot of people talk about how these funds should be used to fund infrastructure development, for example, to upgrade BAM. A very important meeting was held in January. Vnesheconombank signed an agreement with many consignors of Russian railways on how to increase throughput capacity of Russian railways. OJSC RZHD’s idea is to issue special government bonds in which both pension funds and international funds can be invested. And these bonds should be redeemed through general economic growth which occurs to some extent because transport makes it possible to develop many various industrial sectors. We can use this pattern with regard to projects in the Far East. The most important thing is that projects should be structured properly so that pension funds can be invested in them. And we can use such mechanisms as concession, state guarantees and Vnesheconombank’s guarantees.

Our participation in projects, our capacity to manage risks will enable us to create such mechanisms.

HOST: Alexandr, we’v got only one minute left and I’d like to ask you the following question – what projects and in what sectors do you think will be most attractive for investors?

Alexandr BAZHENOV: We received 2635 initiatives in the regions. We should adopt a reasonable balanced approach to build a balanced economy. As we can see today, investors are more interested in projects in such sectors as tourism, agriculture and construction materials industry. These are not large-scale projects. Large-scale projects are related to developing mineral resources deposits. Great demand in this sector is not met due to problems related to infrastructure development. So, we believe that our participation in projects should focus on developing transport and power engineering infrastructure and to some extent social infrastructure. These sectors will make it possible to unlock these regions’ potential for economic growth.

HOST: Alexandr thank you very much. I’d like to remind you that our guest today was Vnesheconombank Public Private Partnership Directorate Director Alexandr BAZHENOV.


Vnesheconombank Trust Management Department Director Alexandr Popov’s Interview to TV Channel Russia 24

2 may 2012 года

TV Channel Russia 24
02.05.2012, 15:37

Host Nikolai Korzhenevsky

HOST: We’ll discuss the situation with pension savings funds and pension money as a source of financing. We’ll talk about it with Vnesheconombank Trust Management Department Director Alexandr Popov. Good afternoon Alexandr.

Alexandr POPOV, Vnesheconombank Trust Management Department Director: Good afternoon.

HOST: Many corporations, many borrowers have been saying for many years that long money for them is either expensive or inaccessible. And they also say that pension money should become a source of these long-term funds. When is this going to happen after all?

Alexandr POPOV: It will probably happen when besides Vnesheconombank there appear some other long-term investors. And we believe some restrictions that we have on investing pension money were needed at some point but now we can see that they prevent us from extending long-term credit resources to the real economy.

HOST: What sort of restrictions are they?

Alexandr POPOV: These restrictions above all are applicable to our share in one issue. Under the investment declaration we are allowed to buy no more than 30% of a corporate bonds issue if they are not secured by state guarantees. And another important restriction set forth by the law: we can purchase no more than 20 % of one issuer’s all circulating bonds. And of 30% percent accessible to us now we have almost exhausted this restriction with regard to a third of them.

HOST: Do you think that this restriction proportion should be increased? Don’t you think that the borrower will become too dependent on you as a creditor and maybe the proportion of such borrowers in your portfolio will be too high?

Alexandr POPOV: To my mind, there isn’t much risk here because we do not offer to increase these proportions for successful and marketable short-term issues. But we propose it as some temporary measure for setting into motion and launching a market for long-term investments in Russia.

HOST: What sort of market?

Alexandr POPOV: A market for long-term corporate bonds with a maturity of more than five years.

HOST: What about possible interest rates? And why is this market evolving so slowly so far?

Alexandr POPOV: We are in contact with many issuers discussing the need for issuing infrastructure bonds and classifying them as a special type of bonds. In our option we shouldn’t classify them as a separate type. Many issuers say that as Vnesheconombank now is a single long-term investor on our financial market it is possible to place 30-40% of an issue: there are banks largely with state participation that have long-term liabilities. But it doesn’t seem to be possible to place 70% of an issue under the current conditions.

HOST: Your portfolio is 1 trillion 300 billion rubles if I am not mistaken. Do you have enough instruments in principle?

Alexandr POPOV: We’ve had enough so far. But the amount of funds is sure to rise. And in the most immediate future we might come up against a shortage of long-term instruments. Summing up the results of the last year we could see that we didn’t have enough time to buy new corporate short-term bonds. We don’t have enough time to buy them while they are being redeemed. They are redeemed faster than we can buy new ones. So, we’d like to increase the proportion of new high-yield instruments and buy long-term corporate bonds.

HOST: In this case, do you expect any issues intended for you? Maybe the abovementioned infrastructure bonds or maybe some others?

Alexandr POPOV: We’ve already had the right to buy new instruments for three years. And we think that the situation has changed a little. And issuers’ stand as investors has also changed a little. Issuers stopped treating pension money as an extremely cheap resource and started issuing bonds that are of great interest for us. These are bonds with floating coupon rate tied to inflation. As our goal in the capacity of the state management company is above all to generate yields at an inflation level in order to really protect pension savings funds, an instrument tied to inflation makes it possible for us to achieve such a goal.

HOST: Will these instruments be issued by a sovereign agent or will they be corporate instruments?

Alexandr POPOV: We would be very happy if the Russian Finance Ministry could issue government bonds tied to inflation. But unfortunately this issue hasn’t been on the agenda so far. 

HOST: Who is going to be among corporate borrowers? Risks are great after all. Why don’t they lend those corporate borrowers? Because banks don’t understand what is going to happen thirty years from now?

Alexandr POPOV: Now such bonds can be issued by companies, engineering companies or some infrastructure companies whose incomes often in the form received tariffs are tied to inflation. For example, last year the North-West Concession Company issued its bonds. Their yield rate was inflation plus 3%.

HOST: It turns out that all are happy in this situation. But what’s the volume of such market then? How great is these companies’ need for borrowings?

Alexandr POPOV: So far, in the absence of such government bonds tied to inflation the corporate market will be unfortunately limited only to issuers whose incomes are also tied to inflation. Although ROSNANO has made an issue of bonds lately they also issued bonds tied to inflation.

HOST: Would you like to invest more in companies with state participation?

Alexandr POPOV: Our investment declaration’s requirements are requirements for credit quality, this is a credit rating. If an issuer has an appropriate credit rating we can buy its bonds whether it is a state-owned or private company.

HOST: I’d like to ask another question about infrastructure bonds. What’s the amount of funds available for such long-term instruments?

Alexandr POPOV: You know, so far we have invested an insignificant sum of about 60 billion out of our portfolio of 1.3 trillion in the bonds of infrastructure and engineering companies. We can see that with a developed market for long-term instruments, we could easily invest up to 300-400 billion rubles in infrastructure in the coming several years.

HOST: Moreover, as far as I know there is a demand for such credits, especially on the part of electric energy companies, there are a number of interesting players there. There is another market I’d like to talk about. I mean the mortgage market. Vnesheconombank is an active participant in this market and the Bank’s role in its development is evident. What are you planning to do on this market? W hat are your plans for 2012-2013?

Alexandr POPOV: In the first place, Vnesheconombank is implementing a mortgage program worth 150 billion rubles, in which 12 banks and the Housing Mortgage Lending Agency participate. Factually, we are responsible for preferential refinancing of mortgage credits extended by banks.

HOST: What’s the preferential rate?

Alexandr POPOV: Preferential refinancing is 11% (a maximum rate of banks) for end borrowers. This is an effective rate; everything is included in this 11%. This is our program’s requirement. We do not accept other credits in mortgage coverage. So, banks are refinanced at 7%. As far as long-term borrowings are concerned 7% percent is still an attractive rate.

HOST: You’ve mentioned 150 billion rubles. How much of these funds have you already spent?

Alexandr POPOV: Our program is to be completed till the end of 2013. We have already bought out bonds of the program’s participants in the amount of 9 billion rubles. This year we’ll bring this sum to 10-15 billion and the remaining funds will be spent in 2013.

HOST: It will be more than a hundred billion rubles.

Alexandr POPOV: You are right. Of these funds one hundred billion is pension money to be invested on the basis of market profitability alone. There will be no preferential lending here. Preference is ensured by Vnesheconombank’s investing its own funds at a rate of 3%. This makes it possible to bring an average rate to 7%.

HOST: A mortgage credit rate of 11% in rubles is of course not bad. Nevertheless, I’m sure that many Russian would like to buy this product at lower prices. Are you planning to take any steps? What are the obstacles on the way of making mortgage lending less expensive using a large amount of funds?

Alexandr POPOV: Factually, given issues made by participants in the mortgage bond program we’ve got about twenty billion. It’s not much of course. But this market is developing slowly. Undoubtedly, we have problems with legislation. Not everything is perfect because here the fight is taking place between American and European ways of funding mortgage lending.

HOST: After all, American or European models?

Alexandr POPOV: In fact, during the crisis years the Housing Mortgage Lending Agency was basically the only mechanism for funding mortgage credits for regional banks but now we are approaching a European level when banks themselves can issue mortgage bonds both from their own balance and through a mortgage agent.

HOST: And now the main question again. When will additional funds that get into the mortgage system result in reduced rates? What prevents rates from going down?

Alexandr POPOV: The reason for it is the general level of market rates. Mortgage is a credit facility and it is of course secured. But in any case it is a credit facility. And you can’t grant a credit at rates that are substantially lower than market ones. And where can we get funds on preferential terms? We found some. Factually, Vnesheconombank invests all its profits in the amount 50 billion at a rate of 3%. But others do not have such funds. And mortgage credit rates are sure to go down but they will go down together with market rates.

HOST: Here we are coming up against a fundamental problem of inflation.


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