In his interview to Gazeta.Ru Vnesheconombank Deputy Chairman Alexandr Ivanov told how sanctions imposed by the US and the EU affect the Russian economy, where VEB intends to raise foreign funds and why Asian markets are not very suitable for it.
-The European Union and the US have by now imposed rather serious sanctions against the Russian Federation and Russian companies. In this connection, how are you going to go ahead with your export transactions and what resources are you going to use?Even before the sanctions were imposed, the government believed that export support had not been sufficient.
-We also believe that we should provide more support for exports. Now Russia is among the top 10 countries in terms of exports – something about $500 billion. Unfortunately, about half of this sum accounts for raw materials. As to high-technology exports: machinery, transport vehicles, power-engineering equipment, that is high-tech value-added products, the proportion of these exports does not exceed5%. As a development institution, VEB is interested in supporting such exports and we are funding the bulk of such exports. For example, we are responsible for fundingsupplies of Superjet 100 aircraft under fixed-term contracts as well as a lot of energy and transport equipment exports, we also participate in negotiations with our leading companies that manufacture locomotives. However, we do not limit our activities to extending limits to buyers. In the past years, the total volume of export-oriented projects supported by Vnesheconombank in Russia amounted to almost 3 trillion rubles.
-What other export-oriented projects does VEB support?
-For example, Tobolsk-Polymer is the first plant of such a type – it exports about 50% of its products to China and other countries, the Yaroslavl Engine Plant “Avtodiesel”. Two billion dollars were committed for Superjet 100 aircraft when it was only in a project stage to create a production facility. Only recently have we started to build up support for exports. A relevant department was set up in June of 2013. Unfortunately, the industrial production is poorly developed and it is obvious that the state should create a more favorable general production environment. Financial support that we provide is very important but there are also non-financial measures that should be taken, industrial production and investment climate as a whole should be supported throughtaxes and preferences
-You’re talking about creating a favorable environment by the state. However, now a new joke has emerged and it says that no sanctions can harm more than our own government does in terms of creating conditions for enhancing business.
-As compared with previous years, government support is being provided. As far as a number of positions are concerned we are improving in the Doing Business rating. Tax administration has been simplified. Before sanctions were imposed we had received major investments from sovereign funds, the investments had been made together with the Russian Direct Investment Fund. After the imposition of sanctions, the investment climate deteriorated substantially. Some measures are being taken but the task is so complex that Vnesheconombank is not capable of fulfilling it alone.
-Asia does not extend many non-tied loans.
-In view of threats from the EC and the US to impose new sanctions where are you going to raise credit facilities for high technology and export-oriented projects? On the one hand, Western borrowing markets are being closed and on the other hand,I’d like to hope that Russian politicians and financiers would be wise enough not to tie themselves tightly to Chinese capital markets. Finally, the Russian budget is not limitless. Where will you get money?
- You are right; this is a serious problem for all Russian banks. Western markets are now practically closed. So far, the local market is accessible but it is less liquid. Credit tenures are not long enough and credits amounts are not sufficient there. We are looking to Asia and specifically to China. There are huge resources there.But as a rule China extends credits tied to specific projects that have Chinese content. As a rule, China does not provide non-tied money. South Korea is still ready to invest actively in Russia. So, we’ll have to rely more on our domestic market and budget. A new “road map” has established a pretty ambitiousrequirement for supporting exports: by 2018 we are to extend credits for an amount of just about 45 billion dollars. Under the current conditions, we won’t be able to raise such a sum. I think that even in the best years it would be problematic to raise such a sum.
-Russia is preparing on a wide scale for President Putin’s visit to China in May. Do decision makers understand that that there is a threat of strategic as well as financial dependence on China for many years to come?
-I can speak for us. Vnesheconombank plans to sign a credit agreement with the Eximbank of China to fund the Elginsk deposit. It is a coal deposit in Yakutia. I can’t comment on the agreement’s terms and conditions.First, it’s a commercial secret, second, the Chinese side is still agreeing upon the documentation. As far as price parameters are concerned, the money is attractive for us. It is less expensive than on American and European markets.
The Chinese link their participation to their supplying a part of equipment for the project. I’d like to stress that their part is not large, we also receive equipment from other countries. I see nothing bad in it because the demand for coal isn’t great in Russia and in China it is very high, why shouldn’t we sell our products? Imposing sanctions, Europe and the US are not doing the right thing driving us out of Western markets. Our country should be present in both Europe and Asia.
-What percentage of funds did you raise earlier on European and American markets?
-If we mean non-tied credit facilities, that is, Eurobonds, syndicated and bilateral credits on VEB’s balance, the percentage is about 80%. China and other Asian countries extend non-tied credit facilities in small amounts. They prefer to extend funds for specific projects or for equipment supplies.
-If we look at percentages of state funds and raised credit facilities, to what extent does VEB depend on the European money market?
-We have 40% of state funds and 60% of funds raised from the market. Out of them up to half accounts for capital markets, the second half is tied funding against coverage of export and insurance agencies. As far as non-tied funding is concerned, we depend for 80% on European and American investors. For example, Americans and Europeans account for 70% of our Eurobonds. And these are long-term funds, especially US funds – more than 10 years. In Europe, periods are shorter but it was the main source of capital. In China, the market is evolving seriously. We are looking to new opportunities but so far they have both different liquidity and different amounts of borrowing.
You support buyers rather than sellers
-On what terms does VEB extend credits to exporters? Are there any preferences for them as compared with other borrowers?
-For the most part, buyers of our products are from CIS countries, Latin America and in part South-East Asia. Their country rating is lower than that of Russia. Therefore, VEB can offer terms and conditions that are suitable for borrowers. There is an individual program of subsidizing interest rateson credits for buyers of our products. For example, a deal with Mexican Interjet.Mexico’s rating is comparable with Russia’s so, we applied a mechanism for subsidizinga short-falling delta between the cost of our funding and the cost of credit for the end borrower. As a result, we were able to participate in the syndicated loan together with Deutsche Bank and IntesaSanpaolo.
You are talking about buyers and what about exporters themselves?
-As a rule we do not fund exporters- we extend credits to buyers. We have a portfolio of pre-export financing but it’s rather small.It’s quite obvious that the exporter does not want to incur an additional debt on its account. It’s better for it when the buyer is funded. And then the buyer makes payments to us.
-As far as the subsidizing program is concerned, the terms of extending such credits are a bit lower than the market ones. Isn’t it a violation of WTO rules?
-No, it is this kind of subsidizing that is permitted.There is a special rule, under which government export promotion institutions can receive this sort of subsidizing.
Is Superjet 100 after all flying
As to Superjet 100, an emerging picture does not look very good. Providing support for high technologies is a good thing but the reality is as follows: you are asking people in Latin America to take your plane saying that it might fly sometime.
-First, it is after all flying. I agree that there are problems there for example with slats. By the way, they are not Russian made; it is a leading European supplier. Each time when Sukhoi sells its aircraft and receives sales proceeds it invests money in improving the product. Second, they have Embraeraircraft in Brazil. The Brazilian Development Bank funded it for about 40 years as well as extended credits to buyers. And today, every second regional aircraft in the world is Embraer.
-As far as I remember,everything got moving when Americans became interested in Brazilian aircraft construction and got involved in it with their money, technologies and production engineering. As a result, Brazil has become the world’s leader in aircraft construction.
-You may be right. But I still insist that Superjet 100 is our high-tech. They haven’t manufactured new aircraft in Russia since Soviet times.
-Almost 90% percent of its parts are foreign made.
-Foreign parts account for 60% in this aircraft. 30 and 30 percent - France and Italy. But basic airplane is ours.At first, we bought a part of equipment in Europe and now production is being increasingly localized. Engines are manufactured both in Russia and abroad. There were a number of problems with engines but they were resolved. We supported the manufacturer together with other banks by providing 2 billion dollars at the product development stage. We also supported such projects as Tobolsk-Polymer and the Yaroslavl Engine Plant. A lot of projects are being funded inside the country. But we are now convinced that under the conditions of globalization you find it difficult to sell even a good product because competitors are sure to offer their products as well as a financial package.
-And aftersales service.
-You are quite right. And it is very important. Superjet 100 is a new product and it has no secondary market. If you take Boeing as a collateral and your credit is not repaid you can sell the collateral on the secondary market in a week or two. This is not so far the case with Superjet 100. An issue of guarantees forfor residual cost has not been addressed and it is a very important issue in funding aviation industry. The Government is considering this issue now. But in my opinion if we do nothing, we are sure to lose what we have. Moreover, Superjet 100 provides jobs.
There aren’t any plans to suspend anything
-There is a team of optimists in the Government who say that sanctions play into our hands. Reduced incomes will force us to not only spend funds from oil and gas but deal at last with our own economy through increasing its efficiency. How do you size up the situation from a major financial institution?
-From my point of view, sanctions are more detrimental than useful. If financial markets are closed there are no investments and this affects Europe’s business adversely but our economy suffers too. Factually, any disturbance makes you think about new opportunities. In any case, Russia won’t stop producing raw materials. The raw materials export model will be in place for many years to come. There is nothing bad in it. For example, Norway exports a lot of gas. And under the current conditions there is no possibility and need to produce everything and on the Russian territory. We are not the Soviet Union and in the global world, there should be cooperation. It’s counterproductive to rely only on your own forces.
-Despite the fact that you are trying to tap Asian financial markets, you are now sure to come up against serious problems with funding. Are there any projects that are likely to be scrappedin case of fund shortage?
-At the end of the last year VEB’s supervisory Board approved a new concept of the Bank’s operation. Our entire portfolio is divided into two types of projects. The first group of project are the so-called market ones; we can see that they are profitable,high pay-back projects and you can easily raise money for them. The second group is comprised of the so-called directive projects that are submitted to consideration on the instructions of the Government and our Supervisory Board. The Bank might conclude for example that they are unprofitable or that money proceeds from them will be insufficient. In this case we request the Supervisory Board to provide us with special funding to implement such projects.As far as our current portfolio is concerned, we don’t have any plans to suspend any projects. Projects approved for funding will be funded. But we are also aware that sources of funding are becoming limited. Our balance will be additionally burdened. Liquidity gaps are already emerging. Like commercial banks, we are thinking about the possibility of limiting our loan portfolio growth. We might as well discuss new increased rates with borrowers as Sberbank and VTB do. Frankly speaking, the situation is tense now and we are preparing crisis plans at the Bank.
-When are you going to discuss them? At the next meeting of your Supervisory Board?
-We are holding a dialogue with our Supervisory Board, the Government and the Russian Finance Ministry. Moreover, we have to link everything to the dates of our capitalization. It was planned originally that the Bank would receive capital at the end of the first –at the beginning of the second quarter. Now we are talking about the third quarter. We should know for sure when additional capital will come because we are supposed to meet capital adequacy standard, which is higher than 10%. If we build up our loan portfolio actively, and there will be a delay in receiving capital for some reasons, we risk coming close to the standard’s critical value.
-Besides your efforts to raise capital on Asian markets, can you see any other sources of borrowings? Will you be able to raise funds, for example, from the budget?
-Besides Asian markets, we can see no alternatives except for the budget and the Central Bank. VEB has a limited mandate and we are not entitled to raise deposits from natural entities. Now we are working with our colleagues from the Central Bank in order to refinance our credits, for example, those credits that are extended for implementing investment projects against guarantees. Our proposal is to refinance credits to be extended for supporting exports.
-You mean not only credits that were extended for construction in Sochi?
-Yes, I do. By analogy with the way commercial banks do it. But VEB can’t use this mechanism because it is not a bank in the classical sense of the word. So, we are holding a dialogue with the Central Bank for us to be connected to a mechanism of refinancing.
How do you think major investment projects will be funded in Russia in the near future? Through bond issues or other mechanisms?
-I think that above all they will be funded by way of using financial resources of the National Wealth Fund. Then,don’t forget about such mechanisms as the Russian Direct Investment Fund (RDIF). There is a resolution by the Russian Government under which funds intended for government programs that have not been used until a certain point are to be transferred to RDIF. And RDIF is working not only with Western investment funds but also with Asian funds and funds from the Persian Gulf. They are still ready toinvest in Russia.
Software and Hardware for Export
-You’ve said that industrial production is not at a very high level in Russia. Do we have any new projects to be exported?
-We can see a rather great demand for assistance in supplies of software. Our companies are active in IT sector and we are already working on a number of transactions to fund supplies of software or hardware to third countries’ markets.
-What sort of software and hardware?
-For example, one of our leading companies on the market plans to supply dactylographic equipment designed to scan fingerprints, retina for access control and people movement control. And this equipment is widely used, for example, in airports.
-Is there a need for legislative changes to support exports? The committee headed by First Vive Premier Igor Shuvalov is now involved in working on such proposals. What are legislative barriers that stand in the way of exports?
-As to VEB, we have already submitted some of our proposals to our Supervisory Board. For example, we want VEB to be given the right to issue customs guarantees and VAT refund guarantees. We were not allowed to do it but exporters we are working with need such guarantees. The proposals are ata final stage of consideration in ministries. As far as the committee on exports and foreign economic strategy under VEB’s Supervisory Board headed by Igor Shuvalov is concerned we believe that such issues will be discussed there on a wider scale because besides VEB there are other participants in the Group such as EXIAR, Roseximbank, VEB-Leasing. We have also to address issues associated with non-financial support for exports; for example, customs administration. Some issues to be addressed will be associated with small and medium-sized enterprises, as they do not receive sufficient support.
-How did the events in Crimea influenceVEB’s activities in international institutions?
-If you mean our relations with international financing institutions we in fact didn’t feel any influence. The 37th session of theAssociation of Development Financing Institutions in Asia and the Pacific (ADFIAP)was held in late April in Moscow. This year, the session is chaired by VEB. Undoubtedly, the events in Crimea and Ukraine affected us. We have a subsidiary in Ukraine, namely, Prominvestbank, which operates in Kiev. Like other subsidiary banks with Russian capital, we can see there a certain outflow of depositors’ funds and this of course requires our support. As shareholders,we’ll provide such support.
-Will you tell us about your successes in your current position? Did you start last spring?
-Yes, I did if you mean exports. Because I’m also responsible for raising financial resources. I can say that we are proud that VEB has significantly intensified its activity on supporting exports for less than a year. The amount of our export-financing portfolio is about 160 billion rubles for the first quarter of 2014. Using various instruments, we provide financial support for export contracts of our domestic enterprises for a total amount of 710 billion rubles. Only in the course of the first quarter of this year, we extended credits worth 31 billion rubles to fund exports.As to the number of credits, we extended 18 export credits in the first quarter. I think that under the conditions when foreign markets are factually closed this is a good result.
Moscow, April 23, 2014
The number of financial instruments to support high-technology companies is on the rise.
Since the second half of 2013, Vnesheconombank has significantly increased its financial support for exports. For example, from the start of 2013to March of 2014, VEB has increased export financing by 3.2 times to 160 billion rubles, the amount of its loan portfolio has increased by more than 8.5 times and the guarantee portfolio – by almost three times. The Bank supported export contracts of Russian enterprises in the total amount of 728.3 billion rubles. At present, the Bank is considering several dozens of large and medium export projects, with the Bank’s expected participation share totaling more than 300 billion rubles. The Bank’s plans for 2014 are more ambitious – VEB Group hopes to increase its portfolio of export contracts to a trillion rubles. Director of Vnesheconombank’s Export Financing Department DaniilAlgulyan toldRG how they were going to achieve this goal.
Is a trillion rubles a realistic figure in the current economic situation?
DaniilAlgulyan: Of course, a lot will depend on the general economic situation both in Russia and on foreign markets. But it’s not only a matter of the number of contracts. We are seeking to substantially increase the number of exporters and export transactions being supported. At the same time, export financing geographical coverage is increasing. Nowadays, projects with our assistance are being implemented in 40 countries. Our key regions are CIS, Latin America, South-East Asia and Africa.
Last year, the national Russian industrial exports support system started to operate in full swing: it includes VEB, Roseximbank, the Export Insurance Agency of Russia (EXIAR), VEB-Leasing. Will any additional mechanisms be launched this year? It’s not a secret that demand for export support on the part of business is a lot greater than the state can provide.
DaniilAlgulyan: You’re absolutely right mentioning the export support system. As part of this system, we can offer exporters a whole range of financing instruments: from credits, guarantees, insurance to leasing structures. Being a parent company,VEB performs functions of a coordinator and a single window. VEB Group’s total export support portfolio exceeded 210 billion rubles out of which 160 billion rubles account for export credits (they are extended to foreign buyers of Russian export products) and guarantees extended by VEB itself. As a development institution, VEB participates in funding a number of major investment projects in such top-priority industrial sectors as oil and gas chemistry, smelting industry, construction materials manufacturing, timber processing, transport mechanical engineering, aviation. The portfolio of Russian export-oriented projects is more than 250 billion rubles. Here I mean funding of Russian enterprises whose products are to be exported.
We are actively involved in working on the further institutional development of the export support system and on boosting synergy from its operational components. Here I mean Reximbank, EXIAR, VEB-Leasing,transport mechanical engineering’s foreign subsidiary banks and financial companies. Our main objective is to provide Russian producers with both individual financing solutionsin implementing complex structured projects and with mass batch credit products above all in the SME sector. Now, new joint products of EXIAR and Roseximbankare being developed to support the exports of small and medium-sized enterprises.
Having joined the WTO, Russia refused all measures to financially support exports with the exception of those allowed withinOECD. As a result, in 2013 exporters were left without such type of support as subsidizing of interest rates under targeted credits. Now the process of Russia’s joining OECD has been suspended. Could export support measures be reviewed in this context?
DaniilAlgulyan: There is a whole range of government export financial support measures including certain types of subsidies that do not run counter to Russia’s international commitments and that are successfully used to support Russian exporters. In the last months alone, we have approved more than 20 credits for foreign buyers of Russia’s high-technology products with the use of such instruments. And our task is not a price damping but creating a level playing field for Russian exporters with their foreign competitors in credit financing.
How did sanctions against Russia affect export support? Did you suspend the implementation of any export projects, specifically, in Europe?
DaniilAlgulyan: The deterioration of the international situation did not stop the implementation of export projects we are working on now including those in Europe. But the main markets of Russia’s non-raw materials exports are CIS, Asia, Africa and Latin America.
In what sectors do export contracts predominate (aircraft construction, rocket-space industry, power engineering, mechanical engineering, defense industrial complex)?
DaniilAlgulyan: In the last year, our key export sectors were aircraft construction, mechanical engineering and power engineering. As far as supporting exports of Russian aircraft are concerned,we’ll continue to fund export supplies of SukhoiSuperjet 100 aircraft. We have made a decision to fund the supplies of 26 SukhoiSuperjet -100 aircraft to various airlines in Latin America and South-East Asia. In fact, a national aviation export financing competency center is being established on the basis of VEB. We are working with all segments of non-raw materials market and we can see a huge yet unrealized potential in most of them. We are actively involved in a number of projects in engine building, railway and automotive mechanical engineering and information technologies.
How is VEB going to increase the number of producers-exporters and credit transactions that it will support?
DaniilAlgulyan: Above all, we are trying to significantly boost producers’ awareness of our support system and existing financial instruments. Unfortunately, Russian producers are often unaware of the current export support opportunities. This poses a serious problem for us and shows us that we have to step up our efforts in boosting producers’ information awareness. We should hold workshops, conferences, especially in the regions, and work with mass media. Moreover, we attach much importance to offering consulting services. We are also making strenuous efforts to improve our decision-making processes. We are developing new financial products to adequately respond to Russian exporters’ needs.Over the last months, we have significantly reduced an average time of handling applications and increased the number of transactions being handled and approved. We are pursuing flexible policy with regard to projects we support andwe also fund a wide range of non-raw materials supplies the value of which ranges from several hundred thousand dollars to billions of dollars.
What new products to financially support export transactions in view of Russian exports needs will be developed in the n ear future?
DaniilAlgulyan: We are giving top priority to developing standardized products and financing programs, which will make it possible to significantly boost accessibility and efficiency of export support for Russian producers. As an example, we can give a system of framework agreements with foreign banks on target funding of Russian exports, which we are trying to create now. Such financing structures reduce the time of handling applications substantially.
Under the draft law of the Economic Development Ministry, VEB is to be given the right to extend guarantees for paying taxes for taxpayers.What should be done to exercise the right to extend guarantees for paying VAT?
DaniilAlgulyan: Now, the Russian legislation does not provide for an opportunity for VEB to extend guarantees for refunding compensated VAT in favor of tax authorities and guarantees in favorcustoms agencies. These guarantees are used by Russian taxpayers to reduce time periods to compensate for VAT from the federal budget as well as to secure their obligations on paying customs duties. We have prepared a package of amendments to the federal legislation providing for giving banks the right to issue guarantees for refunding compensated VAT and guarantees in favor of Russian customs agencies. Granting powers to issue such guarantees will make it possible to boost efficiency of the comprehensive export support system, reduce customers’ expenses and help to implement new projects needed for the Russian economy.
Vnesheconombank's Trust Management Department Director AlexandrPopov:“The more diversified your investments, the lower the risk to lose everything and the better the chance to increase your savings”
Information and Analytical Portal
The Laboratory for Pension Reform
Vnesheconombank's Trust Management Department Director Alexandr Popov told in his interview to the Laboratory for Pension Reform about the results of 2013 and plans for 2014. He told the Portal’s readers about the role of the new pension system for Russia’s investment market and for ordinary citizensand advised would-be pensioners on how not to become solely dependent on the state.
At the end of the last year a new pension law was enacted in Russia, a mechanism of the third pension reform was launched. How do you size up this development?
First of all, in my opinion the development was not a pension reform, I would call it a counterreform – a move away from the changes made in 2002. At first, they reduced the age of citizens entitled to funded part of pensions and now a process of destroying the funded part of pensions is under way.
Do you believe that the funded part of pensions will be eliminated?
It’s hard to say but in my opinion this is most likely to happen. Given the current economic situation under the conditions of growing budgetary expenses, it is very tempting to freeze the funded part of pensions next year. By the way, they say in the press that the funded part of pensions is 240 billion rubles. I doubt this figure. Even in 2013, funded pension contributionsamounted to more than 400billion rubles. There are no signs that in 2014, they will be lesser, the more so, wages will grow in 2014 and therefore funded contributions will grow too.
In 2002, when the pension reform was being launched its authorsbelieved that it was necessary to introduce funded part of pensions for the following reasons. It was estimated then that as early as in the mid-twenties of the 21stcentury,a ratio between pensioners and the employed would be 1:1 and the funded part of pensions was supposed to significantly reduce the state’s financial burden. How? The funded component was supposed to increase and the distribution component – to diminish thus allowing to reduce the state’s role as a distributor of pension funds and the state’s responsibility to citizens.
Now representatives of the Russian Labor Ministry say that according to their estimates we’ll achieve a ratio of 1:1 only in the 40-ies or even in the 50-ies and therefore we’ll be able to rely on the distribution component for a long time. I do not challenge these estimates but they look a bit strange. The demographic situation has improved but not that much. I think that it is an attempt to improve the budget by way of using pension savings funds.
But this is a short-term assistance?
Yes, and the Finance Ministry is of the same opinion. The situation has not changed at all and is not going to change. Trillion-ruble transfers from the budget to the Russian Pension Fund have taken place, are taking place and will take place.
What are the consequences of the 2013 pension reform?
The timing was good. So far, not so many people have become aware of the need to form their future pensions. Most people used to rely on the state and are relying on it now without understanding that the amount of their future pension depends above all on them themselves. In the case that mandatory contributions to the funded part of pensions account for less than one third of all contributions to the Russian Pension Fund, they are not likely to form a good pension. The funded pension system launched in 2002was some kind of demonstration system. People were made to save e money for pension. And at firstwhen balances on their accounts were insignificant, most people didn’t care about them, they received happiness letters notifying them that they had only 500 rubles in their accounts. But when their balances increased to 20 or even 50 thousand rubles they became a lot more interested.
And under the conditions of total financial illiteracy of Russian people, mandatory funded savings were supposed to play an important educational role. People saw that the system was working and that their savingsdid not disappear but even increased. And later on this started to generate interest in voluntary pension savings. And if we had worked in this system for another five-six years this would have become a significant impetus for increased voluntary pension savings and a basis for life insurance. Now this factor has been removed.
I believe that for would-be pensioners who haven’t made any choice, the 2013 pension reform was an extremely negative development, which makes them totally dependent on the state. And the state – the government – makes decisions above all on the basis of government finances condition rather than personal finances of would-be pensioners.
What are potential consequences for the investment market?
As to the investment market, consequences will be a lot graver.
Pension savings funds have always been, are, and will be the only source of long-term investments, especially in Russia. As a result of the reform the long-term investment market will almost die.
We can give up on VEB as a long-term investor. We haven’t been present in this market since 2014. As far as nongovernmental pension funds (NPFs) and private managing companies are concerned we have to monitor the situation here. Will they be able to become a source of long-term investments? So far I haven’t seen any economic conditions for this to happen. It’s common knowledge that the longer a bond’s duration the greater the influence of yield changes on a bond’s price. For example, if market yield growth is 1%, a ten-year bond’s price will fall a lot more than that of a three-year bond. Thus, the longer bonds’ duration the greater the risk of a negative bond revaluation. Earlier, NPFs were obliged to annually compensate to customers for losses from investing by way of using assets designed to ensure NPFs statutory activity but now, with the introduction of a system to guarantee funded contributions, NPFs are still obliged to compensate to customers for losses first through using their own funds and only then to have recourse to the guarantee fund. To tell the truth, this system is not applicable to all customers but only to those who decided to move to another fund or those entitled to the funded part of pensions. The year 2013 shows that risks of significant churn of customers are quite high and therefore risks of long-term investing are high too.
There is no doubt that government state companies are open to all kinds of changes in terms of market revaluation influence.But we have also non-revaluated instruments, for example, GSB (government savings bonds), which under bond issue terms are not subject to secondary circulation on the market. These instruments tend to somehow level market influence; they prevent yields from growing but also prevent them from falling through. The extended portfolio was quite big and sufficiently diversified, so we could afford to make long-term investments.
What’s VEB’s major risk in 2014?
As I have already mentioned we can give up on VEB as a long-term investor. We won’t have any inflow of pension savings funds. Of course, some people will choose our portfolios. But the amount of funds will not be as much as it was in the past. We received annually almost 300 billion rubles and now we’ll be receiving almost nothing. On the contrary, the amount of pension savings funds to be transferred to NPFs and managing companies according to the results of 2013 will amount to at least 200 billion rubles. This means that since 2014, there will be no inflow of pension savings and there will be a significant outflow of pension savings funds. This is the way things will be in the future. But it was new funds that allowed us to make long-term investments.
So, a main risk we’ll have to tackle this year is the liquidity risk. We are already involved in reducing our portfolios duration and we are moving to short-term investing and creating a liquidity safety net.
How can VEB’s investment portfolios change by this year-end? And are investment declarations likely to change?
The extended portfolio has already been diversified to a great extent and it is highly stress-resistant. There is no need to change anything so far. As to this portfolio, only limitations on a minimal share of government securities pose a serious threat in terms of liquidity. So far, we have been able to handle these limitations. Such regulators as the Russian Finance Ministry and the Bank of Russia are aware of this problem and we manage to resolve itthrough their helpand from now on it remains to be seen how the situation will develop.
Is VEB doing anything to make “undecideds” to choose VEB as a managing company?
VEB is severely limited by law in terms of disclosing information, in terms of selling itself, to say nothing of advertising itself. The more so, we have never competed with NPFs and private managing companies. We have different objectives and therefore different investment declarations, different capabilities. As opposed to nongovernmental managing companies or funds that are aimed at generating profits our aim is to protect pension savings funds. And here we do not compete. As opposed to NPFs, we don’t know our customers, we are not working with them, with their network of agents, advertising and etc. We are just one of the companies of the Russian Pension Fund, although our company is the largest one.
How would you assess VEB’s investment yields and average investment yields for the past three years”? Were they in general higher (or in line with inflation as they were last year). They say these were good years for the Russian economy. Was there a chance to achieve better results?
I think that 2013 was better than 2012, although in 2012 we had yields at a level of 9% and inflation was 6.2%. We showed results that were a lot higher than inflation but here we should understand the reasons for such results. It’s pretty easy to earn from the market growth. It’s more difficult to show good results when the market is falling (and in 2013 this was the case, bond prices stopped growing in the middle of the first quarter of 2013). We are happy most of all that we managed to post yields higher than inflation under such conditions.
In 2013, two thirds of private managing companies posted yields higher than VEB.
They did really well!But we should not forget we have different investment goals – VEB’s goal is to protect pension savings funds and NPFs’ and managing companies’ goal is to generate profits. But even in view of this, we achieved decent results.
I’m sure that we managed to achieve decent results in 2013 through investing funds in long-term bonds of so-called infrastructure companies (RZHD,FGC, Gazprom)and it’s unfortunate that we are losing this opportunity. These issuers have an international credit rating in line with Russia’s rating; their bond yields are undoubtedly higher than inflation, so such bonds are good instruments for investing pension funds long-term. In 2013, we invested about 280 billion rubles in such bonds and if nothing had changed we could have increased our investments in them to one trillion rubles.
By the way, when we are talking about some sort of benchmark for the investment market for pension funds, we can regard our extended portfolio as a benchmark. As a rule professional managing companies post yield better than ours because their investment declarations are more flexible than ours.
Could you forecast average pension funds’ investment yields for the current year?
We can’t forecast such indicators here, VEB is limited by terms of disclosing information. But I think we won’t be able to find an expert in the market who would give such a forecast. It’s almost impossible now.
As far as the first quarter is concerned, I’m afraid that given the current market conditions and the significant market fall in March, nobody will achieve good results.Furthermore, inflation rate started to grow, so in the first quarter our yield rates will be a lot lower than inflation. These are objective, outside circumstances beyond our control.
Some experts believe that yields that are regularly made public byVEB and other managing companies are not net yields because NPF customers’percentage yields transferred into their accounts are lower than those made public by managing companies for the accounting period. How would comment on this situation?
There are yields from investing funds and they are relative, average indicators calculated in percentage terms per annumthat reflect efficiency. An d there is a calculated growth coefficient which is used to determine the sum in rubles (that is, an absolute value) transferred to personal account of an insured citizen. Insurance contributions go to the Russian Pension Fund and it transfers them for management within a whole year. If a main sum of contributions of a concrete individual is transferred to a managing company in the fourth quarter, the managing company has few chances to manage them and in this case, a growth coefficient, which is seen by a customer, might be very small. And it won’t have any tangible effect on the managing company’s annual mean profitability. So, yields and growth coefficients are absolutely different things and you can’t determine your personal income on the basis of yield rates.
Since 2012, VEB has been forming “payment portfolios” to invest those funds which the Russian Pension Fund transfers for management for persons who have retired on a pension.Year after year, these funds will grow significantly. How would you describe the State Managing Company’s investment strategy with regard to these funds? Are you satisfied with the results already achieved?
We have been managing payment portfolios for already a year and a half. And now we know the extent of their liquidity. These portfolios volumes are rather small and they do not influence the market as much as trillion portfolios of pension savings funds do. They are a lot easier and simpler to manage. One portfolio of time payments is 160 million rubles; the second one is 1.7 billion rubles. In order to ensure real protection of these payment portfolios’ funds we have to manage them in a very active way
But so far investment declarations of these portfolios are almost identical with the declaration of the extended portfolio and the share of government bonds is limitedas well as the share of corporate bonds.Jointly both payment portfolios account for only 0.1% of the extended portfolio.
So, VEB proposed to change investment declarations of the payment portfolios in order to eliminate a minimal share of government bonds and increase the share of corporate bonds. Specifically, we have sent relevant proposals to the Russian Finance Ministry together with calculations. This issue is under consideration now. We hope to receive regulators’ approval by mid-year.
We are not of course satisfied with the results of managing the payment portfolios. But we understand that the results are objective. When we started to work with them nobody could forecast liquidity and we had to maintain it at an instant level. For this reason, yields were petty low. In fact, we started to work with them more efficiently only in the second half of 2013 but we failed to reach inflation rate. The payment reserve portfolio’s yields were 5.52% and the time pension payments portfolio’s yields – 5.51%.
How do you feel about the Central Bank’s idea to create different portfolios for citizens of different age?
Ideologically, it’s a right idea, but each person should make a decision on which portfolio is better fit for him.It’s easy to understand that when you are young and have many years ahead of you and your savings are so far rather small it’s better to choose a risky investment strategy and if you are nearing retirement age it is better not to risk.
Everybody should make decisions on his own. If someone decides to rely on government bonds why should we make him run risks, if someone lost some of his savings because of the crisis just several years before going on a pension – why should he be denied a chance to win back what he lost?
I think that the best option is for each fund including the Russian Pension Fund to offer three-four investment strategies on a mandatory basis from a maximally conservative to aggressive one.And one-two managing companies will be responsible for implementing each strategy. In this case a citizen will able to choose a strategy to invest his pension saving and not only NPF or a managing company of the Russian Pension Fund.
There are many would-be pensioners among readers of the Laboratory for Pension Reform. What would you as a specialist of investment market recommend them to do to receive a larger pension?
There is no universal strategy –largely it depends on the amount of would-be pensioners’ incomes. I think that in our country with low personal incomes mandatory pension savings model would be of overriding importance.
My only advice is to leave mandatory funded part of pensions intact. We can compare two systems and prove their correctness or incorrectness but both of them should be in place. There is one principle above all else: diversification. The more diversified your investments, the lower the risk to lose everything and the better the chance to increase your savings.”
In the First Half-Year VEB is to Present its Loan Portfolio Divided into Two Parts - Vladimir Dmitriev
January 24. INTERFAX-AFI – At the end of the last year VEB’s Supervisory Board considered criteria for dividing the Bank’s loan portfolio into projects of the Bank for Development and special projects. In his interview to Interfax VEB Chairman Vladimir Dmitriev told about how the portfolio would be divided as well as about the Bank’s performance for the last year and plans for 2014 and the progress of implementing a number of concrete projects.
-What does the portfolio division mean? Is this VEB’s balance division into two parts or a special mechanism for approving non-market projects?
-There are a number of parameters including those related to funding and if a project is not in line with one of these parameters, it falls into a category of special projects. And in this case without going beyond the framework or the format of the current balance we’ll raise the question of creating special conditions for funding such no-market projects. Criteria for dividing the portfolio were approved by our Supervisory Board and in the near future and here I mean the first-second quarter of this year we’ll present an already formed portfolio divided into two parts in accordance with these criteria.
-In view of potential additional capitalization through deposits of the National Wealth Fund, aren’t you planning to reduce your activity on raising foreign funds?
-Basically, our capital won’t be increased because it’s not a matter of any new money. These are the deposits placed in Vnesheconombank and they were used to fund certain projects. So, our borrowings program both inside Russia and abroad will remain almost intact. We are not going to reduce our activity both on eurobonds markets and in terms of raising tied credits or syndicated loans. The basket of currencies is likely to remain the way I was. So, answering your question I can say we won’t reduce our activity.
-Aren’t you going to use in your borrowings program any hybrid instruments, specifically, subordinated bonds that can be included in the Bank’s capital?
-The fact is that our Bank is not a commercial one and it is not a joint stock company so we are not going to offer convertible bonds to the market because they are applicable to commercial banks but are not applicable to us. So, we are not keen on exotics. In the world’s practice there are absolutely proven ways of capitalizing and supporting development banks on the part of the state, we have already discussed them at our Supervisory Board’s meetings and we’ll use them. The Bank’s Supervisory Board and the Russian Government are fully aware of the ways to ensure Vnesheconombank’s dynamic development and enhance its role in funding the Russian economy.
-VEB’s net profit for nine months proved to be a lot higher than expected. Was it for the most part the result of selling EADS shares?
-Yes, it was for the most part. Moreover, we have reviewed our attitude to several projects that attained a good payback level.
-What projects do you mean?
-I can’t just say. I haven’t seen the latest data. And we are now talking about preliminary figures. We’ll get audited financial statements in the second quarter.
-Have you sold EADS shares in full? Was it a strictly market sale? Or were there any major investors-buyers?
-Yes, in full. It was an absolutely market sale and we looked at similar transactions at the same period and the price at which we sold EADS stake was higher than the price at which transactions were conducted by other shareholders who wanted to withdraw from the capital. So, strenuous efforts by a whole number of brokers during this year to offer relevant services to Vnesheconombank for a significant commission fee failed because of actions taken by our professional managers who sold them at a good profit without negative implications for the price movement of EADS shares.
-So, investment banks offered you their services wishing to make money on this transaction?
-Yes, they did. But we demonstrated once again that Vnesheconombank had a professional team and that we were competent enough to conduct transactions without moving the market significantly on the most favorable for VEB terms.
-As far Gazprom’s block of shares (MOEX: GAZP) owned by VEB is concerned you said repeatedly that a criterion for making a decision to sell it is a break-even condition for VEB. But you also mentioned such factor as state control which is guaranteed due to abovementioned VEB’s block of shares. Which factor is primary here? For example, if you see that the market allows you to sell Gazprom’s block of shares at a significant profit will you be free to act on your own or state control will come to the fore?
-A decision to purchase Gazprom’s block of shares from a German company was taken by the Bank’s Supervisory Board and a part of the block of shares was purchased as part of managing Vnesheconombank’s liquidity. So, a decision on selling the block of shares should be also taken by the Supervisory Board.
As VEB’s Supervisory Board is in fact the government – it is headed by the Prime Minister, state control factor will be taken into account upon making a decision.
This means that given the most favorable market conditions, you won’t automatically raise a question of selling the block of shares and generating profit as it is up to the government to make such a decision?
-Why not? We’ll raise this question before our Supervisory Board to generate profit to fund transactions of the Bank for Development.
-To what extent did VEB’s loan portfolio grow last year?
-Our loan portfolio grew significantly. It is safe to say that it increased by about 30 percent. Our loan portfolio and guarantee support for industrial exports increased significantly by 120 billion rubles. And credits to support exports increased by six times. And as a whole credit and guarantee support increased by about three times.
And I’d like to stress that due to our credits and guarantees worth 120 billion rubles Russian industrial exports amounted to about 700 billion rubles. Here I mean guarantees for advance payments, advance repayment guarantees, due performance guarantees, tender guarantees, that is, all those mechanisms that made it possible for Russian enterprises to compete on a par with foreign suppliers and increase Russian industrial exports.
-What portfolio growth do you look to in 2014?
-Approximately at a level seen in 2013.
-It means about 30%?
-According to our strategic benchmarks we are supposed to increase our portfolio to 3 trillion rubles till the year 2020.
-What was its amount in 2013?
Now it’s about 1.5 trillion rubles.
-During the 2008-2009 crisis VEB extended subordinated credits to banks for them to maintain comfortable level of capital. Given that since then inflation slowed down and lending terms changed, didn’t the banks turn to you with proposals for prior repayment of credits?
-No, they didn’t. Our portfolio remains unchanged with the exception of Gazprombank (MOEX:GZPR) where the credit was converted into capital. As far as other banks are concerned grace period is applicable to them during which they don’t make interest payments and do not repay principal. I have no information that somebody wanted to early repay the loan.
-What’s going to happen to infrastructure bonds of large companies, given the changes in VEB’s activity as a state managing company caused by the pension reform?
-We informed the Government that we would not have free financial resources to buy out infrastructure bonds. We fulfilled our conditions; we placed 280 billion rubles in bonds of RZHD (MOEX: RZHD), Rosseti( MOEX: MRKH) and several more issuers, but we can’t count on substantial amounts next year. The only possibility is that if the government considers some options to replace funds invested in government bonds or bonds backed by state guarantees we’ll use received funds to buy out infrastructure bonds or bonds of Russian natural monopolies. But so far we have to follow the rule in accordance with which our extended portfolio is to be composed of at least 50% of government securities or those backed by state guarantees.
-Is there any progress on the issue of project financing of Yamal SPG with potential participation of VEB and the Russian Direct Investment Fund (RDIF)?
-In accordance with its declaration and its mission RDIF can participate in funding projects only on the basis of co-financing with other investors. This means that the project should be attractive for Russian or foreign investors. So far, RDIF has been exploring the possibility of participating in a joint venture which will be involved in transporting liquefied gas, constructing and operating vessel fleet. This JV might be for example created by Sovcomflot and RDIF. NOVATEK (MOEX: NVTK) might be responsible for transporting liquefied gas using outsourcing alone. Other potential investors might also join the JV.
In this case, it is important to ensure guarantees of sustainable supplies at a fixed price as this gives RDIF a reliable guarantee mechanism for return on capital.
As to funding Yamal SPG project itself we have been actively discussing this issue with NOVATEK. We assume that a syndicate of banks will be created because it is a large-scale project. For us it is in line with criteria for a development project.
Moreover, we have been working with a team of NOVATEK’s beneficiaries on a whole number of other projects: they include Rosneftbunker (Ust-Luga)and Tobolsk-Polymer. RDIF is closely cooperating with them. We are happy to work with them and they are well aware of requirements they have to meet to turn to Vnesheconombank or its subsidiaries for funding.
-How are Globex developer projects going and in particular Slava project.
-The project is agreed upon with Moscow’s government. Last year we raised 800 million dollars from the China Development Bank to fund a project on the construction of a polyfunctional complex on the territory of the Slava plant. We don’t rule out the possibility of engaging well-known Chinese companies for contract and construction work as it is one of the conditions (a preferential but not mandatory one) for extending a credit to us by the China Development Bank.