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Russia’s state development bank, which traces its roots to a lender formed in 1922 under Soviet founder Vladimir Lenin to raise capital and facilitate trade for the fledgling Bolshevik regime, is now turning to government funding, Asian investors and asset sales three months after European and U.S. penalties over Ukraine curtailed its access to foreign markets, Chairman Vladimir Dmitriev said.
“Times have changed, and access to previous sources of financing is practically closed for us,” Dmitriev, who’s headed the bank for a decade, said in
an interview in Moscow. “Still we aren’t feeling like a downed pilot. Sanctions just pushed us to revise our credit and investment activity.”
The bank, which has lent $40 billion to back projects from Olympic construction to agriculture and the manufacture of airplanes, is pivoting toward state funding to cut its reliance on debt financing. VEB, as the bank is known, is cut off from some foreign capital markets after the U.S. and the European Union zeroed in on individuals and companies to punish Russia for the annexation of Crimea in March and President Vladimir Putin’s alleged support for the separatist insurgency in eastern Ukraine.
Government Support
With the country walled off from foreign funding and sapped by capital outflows, state companies including Russian Agricultural Bank and oil producer OAO Rosneft are increasingly looking to the government to offset their shrinking funding base.The U.S. Treasury Department imposed sanctions that prohibit transactions in, provision of financing for, or other dealings in new debt of greater than 90 days’ maturity for a range of companies. For banks, the debt financing restriction covers maturities greater than 30 days. The EU later joined the U.S. in tightening sanctions, restricting five state-owned Russian lenders in their ability to sell bonds or shares within the bloc.
Life under sanctions is testing the flexibility of VEB, which was revamped by Putin in 2007 to promote investment and finance long-term infrastructure projects. During the following two years, it also managed the government’s bailout program at the height of the financial crisis, helping rescue troubled companies and banks and buying domestic securities to support financial markets.
Mission Unchanged
Its mission to boost investment and diversify the Russian economy remains unchanged in the face of limited access to global capital markets, according to Dmitriev. That means the role of state funding, which was “secondary” in importance for VEB, will grow.VEB’s supervisory board, headed by Prime Minister Dmitry Medvedev, on Oct. 16 approved the bank’s strategy through 2020. It set targets including increasing VEB’s loan portfolio to at least 2.5 trillion rubles ($58.5 billion) from 1.7 trillion rubles, Dmitriev said. The bank will also channel 750 billion rubles to support exporters and issue as much as 265 billion rubles of loans to small businesses until 2020.
To support the plans, the government and the central bank are discussing measures to prop up the bank’s finances, according to Dmitriev. The supervisory board agreed on an annual capital boost of 30 billion rubles, which is possible in the form of a cash infusion or sovereign securities that can be used to get liquidity from the central bank, Dmitriev said, adding that he’s hopeful to get the first transfer by year-end.
‘Comfortable’ Cushion
The government will also convert $5.9 billion from VEB deposits that hold cash from the National Wellbeing Fund into its subordinated deposits, bringing capital adequacy to a “comfortable” 14.9 percent, according to Dmitriev.Other support measures include the central bank’s decision to raise its limit on VEB’s borrowing. The development lender will also get 310 billion rubles from the government next year to repay foreign debt and finance already approved projects.
It has to pay back as much as 70 billion rubles to international lenders next year, according to Dmitriev. VEB wants to avoid using state aid to pay down 107 billion rubles in domestic debt in 2015, he said.
Chinese Option?
Dmitriev says he’s hopeful that China will step in as an alternative source of funding if it eases access to its capital markets. Financing in offshore yuan is now limited to $300 million, which isn’t enough for VEB, he said. This month, the Russian lender agreed to borrow $2 billion from Export-Import Bank of China.
To ease the pressure on its balance sheet, VEB is also working to sell off assets such as the Novinsky Passage shopping center in Moscow. Its other holdings, which include a stake of about 3.6 percent in Russia’s natural-gas exporter, OAO Gazprom, and 3.1 percent in United Co. Rusal, can be only sold when their market price recovers, Dmitriev said.
The lender paid about 30 billion rubles in 2010 for its Rusal stake that’s now valued at about 11 billion rubles.
VEB uses shares of companies like Rusal to get funding in repurchase transactions with the central bank, he said. It’s in talks with the regulator on using American depositary receipts of Gazprom as collateral, according to Dmitriev.
Court Challenge
As the bank is adjusting to the new limitations, it’s also challenging them in court. Last week, VEB and Russia’s two biggest banks, OAO Sberbank and VTB Group, filed claims against the EU in a bid to lift the punitive measures.Dmitriev acknowledges feeling “upset” when he first learned in July that sanctions against his bank were possible.
“I understood perfectly well that we’ll have to work while facing limited opportunities,” he said.
The fallout from the standoff over Ukraine has hurt many longstanding business relationships, he said. Still, banks in Australia and New Zealand were the only ones to close VEB’s correspondent accounts, according to Dmitriev.
“Not a single American or European bank has done that,” he said. “We’re trying to maintain relations with international partners even as business has become impossible.”
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