OREANDA-NEWS. August 12, 2009.
HOST: This year about 116 thousand profit making businesses have been registered in Russia. This is almost down by half from last year. Moreover, about a quarter of a million of businessmen closed down their companies. The crisis severely affected small and medium-sized enterprises, experts say. They also say that state support, namely, tax reduction and preferential lending has not worked so far. What should be done to help private business? This is an issue my colleague Evelina Zakamskaya is talking about today with Vnesheconombank Chairman Vladimir Dmitriev. I’m giving the floor to the Fifth Studio.

Hello, Evelina.

Reported by Evelina Zakamskaya

CORR: Yes, Dmitry, hello, thank you. At present, applications from banks that want to participate in Vnesheconombank’s program of lending to small enterprises are being selected. VEB is supposed to extend credit resources to banks at enviable interest rates of about 10.5% per annum. And banks in their turn would extend credits to small and medium-sized enterprises. As many as 75 banks have already expressed their readiness to work with VEB. In the coming twenty minutes we’ll try to find out about the cost of borrowing for business and the number of small and medium-sized enterprises that might be covered by a new program.

CORR: Good evening, Vladimir Alexandrovich. Thank you for coming to our studio today.

Vladimir DMITRIEV: Good evening.

CORR: We’ve mentioned 75 banks but you said that 160 Russians banks were ready to cooperate under Vnesheconombank’s new program. There have been always a lot of those interested in working with your banks. In what way do small and medium-sized enterprises benefit from the new program, will Vnesheconombank be able to help to rectify the situation at the time of the crisis? In what way does the new program differ from the old one, why did you have to change it? What sort of program is it?

Vladimir DMITRIEV: In fact, we have already started to implement the new program of supporting small and medium-sized business and its main difference from the old one is that it is bigger in size. It’s not 9 billion rubles that were earmarked last year although more than10 billion rubles were made available. Now it’s 30 billion rubles. But a new scheme will make it possible to multiply this program’s effect. By our estimate, small and medium-sized enterprises would receive about 100 billion rubles. A new feature of this program is that we extend credits, to be more exact, the Russian Bank for Development through which funds are made available lends regional banks against an already existing loan portfolio of credits extended to small and medium-sized enterprises. Moreover, the Russian Bank for Development can use credits extended to regional banks as agreed upon with the Central Bank as collateral for obtaining new ruble resources at the Central Bank and these resources will also be used for extending credits to regional banks against the existing package.

CORR: To put it simply, you commit money to the Russian Bank for Development and it in its turn distributes it among regional banks.

Vladimir DMITRIEV: You are absolutely right.

COR: At what interest rate do you lend money?

Vladimir DMITRIEV: We lend funds at the same interest of 8.5%, at which we receive them from the National Wealth Fund. We also made an arrangement with the Russian Bank for Development and this arrangement was agreed upon with the Ministry of Economic Development that regional credits would be extended to banks at a rate lower than a refinancing rate. We proceed from the premise that on average an interest rate would be 10.5 percent. And end borrowers would receive credits at an average interest rate of 17 percent.

CORR: 17 percent is a guaranteed interest rate and it can’t be higher.

Vladimir DMITRIEV: Yes, this is a rate to be strictly monitored by the Russian Bank for Development and the Bank will be accountable to us for this monitoring.

CORR: You should maintain a certain balance between regions in order to distribute the money evenly across the country. Have you got regional limits, how do they operate?

Vladimir DMITRIEV: As far as applications submitted to the Bank under the new scheme are concerned, there are regional limits. At present, we have applications from regional banks located in 75 regions of our country. Regional limits are set depending on the extent of a region’s socio-economic development, banks’ participation share in lending to small and medium-sized enterprises and in fact on the degree of small and medium-sized enterprises’ development. There are also a number of other criteria used to set regional limits.

CORR: Which regions were lucky?

Vladimir DMITRIEV: I’ve already said that 75 regions are among those that can count on receiving significant funds to finance small and medium-sized enterprises. By the way, there are regions where the amount of applications is many times higher than the regional limits set. As a rule, these are the regions which both on their own and due to the federal financial support programs  and as well as financial resources extended by the Russian Bank for Development are actively involved in working with small and medium-sized enterprises. This is the Volga region where Tatarstan is an undisputed leader. This is also the Central region; this is the Urals Federal District. We are launching our pilot projects in Kamchatka and in a number of areas of the Far-Eastern Federal District. In principle, our program covers almost the whole country.

CORR: What sort of enterprises do you select for financing? What economic sectors do you give top priority to?

Vladimir DMITRIEV: You asked a very good, relevant question. Our priorities are industrial. And this is what distinguishes our and the Russian Bank for Development’s program of supporting small and medium-sized enterprises from that of commercial banks. About 60 percent of funds committed to support small and medium-sized enterprises account for the production businesses. We also operate in transport, communications and service sectors. And less than 20 percent accounts for trade. Nevertheless, only five years ago the proportion was opposite, with about 60 percent accounting for trade where you can make fast money, where small and medium-sized enterprises’ activity is not associated with innovation, industrial and production sectors. Now, we have succeeded in redressing this imbalance.

CORR: Hence, banks are supposed to report to you on to whom and for what purposes they lend money.

Vladimir DMITRIEV: Of course, they are. It’s a very strict requirement. It’s one of criteria for obtaining Vnesheconombank’s money. By the way, not only banks and businessmen are well aware of it by also our foreign partners who have already joined our program.

CORR: How are you after all going to exercise control? What sort of control is it going to be: annual reports, half-year reports? Site visits by your specialists?

Vladimir DMITRIEV: We created a pretty strict and in our opinion an effective system of control and monitoring over small and medium-sized enterprises’ activity over credits extended by regional banks. This is a remote monitoring based on quarterly reports submitted by regional banks. And these are also site visits that enable us to communicate directly with representatives of small and medium-sized enterprises, examine their loan portfolio and discuss methodological aspects. So, we exercise full control over financing small and medium-sized enterprises.

CORR: Vladimir Alexandrovich, you’ve stressed repeatedly that Vnesheconombank is not a profit-making business entity and many regard Vnesheconombank as a big wallet out of which you can get money and boast to everybody that you have borrowed money from Vnesheconombank and this means that they trust you. Do they actually repay your credits? Do you expect small and medium-sized enterprises to repay your Bank’s credits?

Vladimir DMITRIEV: Strange as it may seem and maybe it’s quite symptomatic that the bad loans problem affects not only the Russian Bank for Development but also regional banks and major commercial banks. And the fact is that the percentage of bad loans among small and medium-sized enterprises is lower than in ordinary loan portfolios intended for implementing industrial projects, financing construction, trade and etc. And in principle, in innovative small and medium-sized enterprises the percentage of bad loans is even lower. Now that the crisis has also affected small and medium-sized enterprises we have to provide them with constant, everyday support.

CORR: Under the program, 100 billion rubles are to be committed to small and medium-sized enterprises. Which percentage of businessmen will be able to get the money? By experts’ estimate, it’s only about one percent of businessmen.

Vladimir DMITRIEV: I find it difficult to give you exact figures and indicators. I’d like to mention that the previous program in the amount of about 10 billion rubles covered 4 thousand small and medium-sized enterprises. We believe that the new program would cover more territories and more enterprises.

CORR: Now I’d like to give you some more data from experts. The fact is that only twenty percent of Russian small and medium-sized businessmen know that the state is ready to support them. Obviously, they should be told about it for a long time and in great detail. How is Vnesheconombank going to popularize its program?

Vladimir DMITRIEV: We place great emphasis on this program’s public relations element. You know that in spring, we, together with the Ministry of the Economic Development, held an All-Russian Conference on Small and Medium-Sized Enterprises. It caught attention not only of small and medium-sized businessmen but also of the government. Russian Prime Minister Vladimir Putin spoke at the conference. He used harsh words saying that we had, above all, to break down administrative and bureaucratic barriers on the way of small and medium-sized enterprises’ development.

The conference backed the program of extending credits to small and medium-sized enterprises through regional banks that can refinance these credits at a later time at the Central Bank thus increasing lending amounts. Of course we have some problems here. If we look in regional banks’ internet sites we can see that there is no information on their readiness to implement the program of supporting small and medium-sized enterprises through the Russian Bank for Development and Vnesheconombank. In this respect, we have made great progress. In cooperation with the World Bank we designed a special site, the RBD’s site, where we posted information on our methodology, main principles and approaches, opportunities the program of supporting small and medium-sized enterprises opens up. Judging by the number of the site’s visitors we can see that the program generates interest. But a lot remains to be done.
CORR: Can I have the address of this site?

Vladimir DMITRIEV: I don’t remember the address but you simply need to enter the site of the Russian Bank for Development, there is a special section there devoted to providing support for small and medium-sized enterprises.

CORR: BY the way, Vladimir Alexandrovich, don’t you think that the chain comprised of Vnesheconombank, the Russian Bank for Development and regional banks is too long to provide support for small and medium-sized enterprises as soon as possible. Why do you need it why do you need this intermediary?

Vladimir DMITRIEV: Unfortunately, the Law “On the Bank for Development” and our Financial Memorandum stipulate that Vnesheconombank as a state corporation is not entitled to directly lend small and medium-sized enterprises. And perhaps, it’s not the right time now for Vnesheconombank to assume the function of lending regional banks at present performed by the Russian Bank for Development. The fact is that the Russian Bank for Development had performed this function before State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’ was established; before the program in the amount of 9 billion rubles I told you about was implemented. The Russian Bank for Development already performed the exclusive function of supporting small and medium-sized enterprises when it raised 300 million dollars on the markets against the state’s guarantees and used these funds to lend small and medium-sized enterprises. The bank has already built infrastructure and developed techniques for supporting small and medium-sized enterprises. So, perhaps it makes no sense to swap horses while crossing a stream. As the saying goes – the best is the enemy of the good. We believe that the current system of supporting small and medium-sized enterprises is optimal.

CORR: On the other hand, with fewer intermediaries, it might be possible to reduce the interest rate.

Vladimir DMITRIEV: I think we need to address this issue. Upon implementing the current program, Vnesheconombank receives funds from the National Wealth Fund at an interest rate of 8.5 percent and it extends funds to the Russian Bank for Development at the same interest rate. So the parent company does not cash in on small and medium-sized enterprises.

CORR: Nevertheless, Vnesheconombank started to search for investors capable of investing Russian small and medium-sized enterprises.

Vladimir DMITRIEV: Yes, it did. I think this process was of mutual interest.  National and international financial development institutions were the first to respond to our large-scale program of supporting small and medium-sized enterprises.

CORR: I’m glad to hear that they take an interest in our small and medium-sized enterprises abroad.

Vladimir DMITRIEV: I’d like to say that there is not only an interest there but this interest is growing despite the crisis. Their interest in Russia is also growing both in terms of investments and in terms of maintaining and promoting normal trade-economic, financial and investment relations. As far as investors are concerned, we signed our first agreement associated with foreign partners’ support for Russian small and medium-sized enterprises with the German Development Bank KfW. This bank is our long-time partner; we have been cooperating with it for decades. In fact, we cooperated with it while implementing major investment projects in Russia.

But the bank is also Vnesheconombank’s partner in supporting small and medium-sized enterprises which is this bank’s core activity too. Our German partner earmarked 200 million euros for supporting small and medium-sized enterprises. Under the lending scheme, the bank is to extend credits to Russian banks against Vnesheconombank’s guarantee. Funds are to be committed exclusively for supporting innovation activities of small and medium-sized enterprises, energy-saving technologies and other top-priority lines of activity. The first such agreement was signed just two weeks ago with Russia’s Promsvyazbank for an amount of about 30 million euros against Vnesheconombank’s guarantee. And in this case, being aware of the need for stringent monitoring, we and our German partner established a system of control over the targeted use of these funds.

CORR: Therefore, this money is committed in addition to those 100 billion rubles.

Vladimir DMITRIEV: Yes, of course, these are new funds. Now we are in talks over a similar issue with the European Bank for Reconstruction and Development. On their part they said that were ready to earmark about one billion euros for supporting small and medium-sized enterprises. We are also in similar talks with the International Finance Corporation. This is one of the World Bank’s institutions. Therefore, it is not only our government and our bank that are interested in enhancing Russian small and medium-sized enterprises but also our international partners.

CORR: Is money expensive in the West? And what impact could foreign credit resources have on an interest rate of lending to businessmen?

Vladimir DMITRIEV: Actually, this is a key issue that hinders speedy completion of…

CORR: Do you mean extension of monetary funds?

Vladimir DMITRIEV: Both extension of money and speedy completion of talks. International financial institutions are coming up against the problem of currency risk. At a time when devaluation expectations…

CORR:  You mean that devaluation expectations  are always present.

Vladimir DMITRIEV: They are always present. And unfortunately, in reality the ruble’s behavior is not always in line with our desire to have a reliable, strong and stable currency. But I think that our monetary authorities would cope with the problem after all and our Western partners’ attitude to the ruble would change for the better. But in any case, we have to address this problem. And taking into account high currency risks, our foreign partners build an excessively high interest rate into their currency resources. While talking about our foreign partners I’d like to say that with the German Development Bank we managed to agree on pretty acceptable parameters for end borrowers which are in general are in line with the program that is being carried out now through the Russian Bank for Development.

CORR: Could you specify the parameters?

Vladimir DMITRIEV: These are the same 17 percent that the end borrower pays to a regional bank.

CORR: Are credits to be extended in foreign currency or in the national currency, in rubles?

Vladimir DMITRIEV: Credit resources are made available in foreign currency at least as far as the German bank I’ve mentioned is concerned. So, preference is given to companies that are in a position to bear currency risks and are sufficiently profitable and adequately able to repay foreign currency credits.

CORR: So, these are not very small companies and are not the weakest ones.

Vladimir DMITRIEV: They are at least medium-sized enterprises. And as to a thirty-billion credit, it is intended not for a single borrower but for a whole number of enterprises operating in the innovation sector.

CORR: Does the Russian Bank for Development’s program and the program with the German Bank provide for the maximum amount of credit?

Vladimir DMITRIEV: At least, our 30-billion program provides for the maximum amount of credit. AT the moment it’s a 30 billion ruble program but believe that it would eventually transform into a 100 billion one. And even this amount could be increased due to a potential multiplier effect. And we reduced substantially the maximum threshold from 150 million to 60 million rubles believing that it would increase the number of participants in our program. We also reduced the credit period in order to involve more businessmen. The current minimum period is half a year.

CORR: Taking into account your active talks with the European Bank for Reconstruction and Development, with the German bank, does this mean that Vnesheconombank in its turn takes interest in German and Western business? Do you make any investment there?

Vladimir DMITRIEV: We are active in working with our foreign partners from the real economy. We can’t boast so far that this activity is associated with…

CORR: With multi-million infusions?

Vladimir DMITRIEV: With small and medium-sized enterprises. And as far as multi-million infusions are concerned, we have achieved a certain amount of success. The latest state visit to Germany, the talks and an agreement signed in the course of the visit demonstrate that German companies are ready to supply modern equipment and German banks are ready to bankroll these transactions. We signed a credit agreement worth 500 million euros with our partner, the German Development Bank KfW. The agreement provides for the German bank to finance supplies of modern German equipment for a number of projects financed by Vnesheconombank. They include the construction of the Tobolsk associated petroleum gas utilization plant, the first in the last thirty years pulp and paper mill to be built in the Lower Angara Area and a number of other projects in need of foreign equipment including German equipment.

CORR: Vnesheconombank is joining the Long-Term Investors Club. What sort of club is it? Why do you need to join it?

Vladimir DMITRIEV: Actually, not long ago Vnesheconombank was for the first time invited to participate in a conference of the Long-Term Investors Club. The Bank was offered to join this club as a development institution as a bank that gives high priority to long-term and large-scale investments in the economy of our country. The Club’s participants are our partners, development banks from France, Germany and Italy. Their intention to promote long-term investment business is backed by government insurance agencies, and we regard our membership of this prestigious club as a clear sign of trust in Vnesheconombank as a development institution in the Russian Federation and as an opportunity to raise major foreign investments for our economy. The most important thing is that we are confident that foreign investments are coming into our country and this confidence is based on our relations with our Western partners.

CORR: And now my last question for today. It deals with Vnesheconombank’s recently expanded investment declaration and the Bank’s new opportunities for managing pension savings funds of the so-called “undecideds”. What can “undecideds” do now, how is the portfolio formed, how else can you diversify the management of these funds?

Vladimir DMITRIEV: In the first place “undecideds” need to decide if they want to remain in the conservative declaration or remain in the status of ‘undecideds”.
CORR: Should they take risks?

Vladimir DMITRIEV: The best policy is to take moderate risks. Our main operating principle is to ensure optimal risk to profitability ratio. Moreover, we think that “undecideds” at least conscious “undecideds” will undoubtedly be interested that their investments yields are not lower than inflation but even in this sense they should not blame Vnesheconombank but…

CORR: It’s now clear whom they should blame. It would be nice to have lower inflation.

Vladimir DMITRIEV: You are quite right. In my opinion our “undecideds” should know that by expanding our Bank’s investment declaration the government is also opening up new opportunities for a large-scale and long-term financing of our economy. We believe that from November when we might form not quite a conservative portfolio we’ll have about 80-90 billion rubles for financing the real economy. These are bonds issued by reliable Russian issuers, these are sub-federal bonds issued by constituent entities of the Russian Federation, and these bonds are also issued for implementing regional investment projects. These are also deposits with commercial banks which will allow us to address liquidity issues, expand the resource base of our banks and finance our real economy.

CORR: But you don’t rank these instruments as high-risk ones?

Vladimir DMITRIEV: Of course we don’t. The investment declaration and the law boil down to the fact that by expanding our investment declaration the authorities assume that criteria we should follow upon choosing borrowers must minimize the risk of investing funds of would-be pensioners.

CORR:  And what about those who want to protect themselves and maintain a conservative policy, are they supposed to write an application?

Vladimir DMITRIEV:  You are absolutely right.  Would-be pensioners wishing to remain in the former conservative sphere of investing must write an application stating their intention to remain in the former conservative declaration. And those who won’t state their intention will be included in the extended investment declaration.

CORR: Again we have to choose between a bird in the hand and two birds in the bush.

Vladimir DMITRIEV: Nevertheless, in all these years Vnesheconombank has been demonstrating maximum efficiency in investing pension funds under the former investment declaration. And we believe that even one bird in the hand might be the best choice.

COR: Thank you very much for coming to our studio today. Vnesheconombank Chairman Vladimir Dmitriev answered our questions today. Thank you.