The Kremlin ended years of rivalry between Russia’s most powerful financial organs by deciding at the end of May to create a national development bank, which will back investments into infrastructure projects, support economic growth and bolster Russia’s exporters.
The government has turned to Germany for help, signing up its state-owned development bank Kreditanstalt für Wiederaufbau (KfW) as adviser. KfW has been instrumental in supporting the reform effort of governments, banks and enterprises throughout central and eastern Europe.
Change of focus
The decision comes as Russia is feeling particularly confident and has moved on from putting out economic bushfires to focusing on the long-term problems that have stymied faster economic growth. With more than $200bn in hard currency reserves, Russia is now the fourth richest country in the world. Economic growth is averaging more than 6% a year; the fight against inflation is going well; and foreign investment is pouring into the country.
Yet despite all this good news, fixed investment is still too low and, after nearly 20 years of neglect, the need for investment into infrastructure is becoming pressing. For example, in June Anatoly Chubais, CEO of Russia’s power utility United Energy Systems, said that a shortage in generating capacity is now costing Russia 5% of additional growth a year, after which the government committed billions of dollars to building new capacity.
“All the macroeconomic numbers look very rosy but, if Russia is going to repeat the experience of the Asian Tigers and avoid going down the road Latin America took to stagnation in the 1980s, it needs to invest more,” says Peter Westin, chief economist at MDM Bank. “Russia has averaged a level of 10% of gross domestic product fixed investment since the 1990s and more recently this rose to about 15%, but this is still less than both south-east Asia and Latin America were investing two decades ago.”
Domestic issues
President Vladimir Putin visibly changed gear this year to focus on long-term slow-moving problems. His state of the nation speech in April was almost entirely dedicated to domestic issues, such as increasing the low birth rate but he had already singled out the banking sector in January for special attention.
The first initiative has been to create a pan-Commonwealth of Independent States (CIS) development bank together with Kazakhstan, which boasts the region’s best banking system. At the start of June, the Russian parliament ratified a decision signed in January to create a Eurasian Bank for Development (EBR), based in the Kazakh commercial capital Almaty and with a branch in St Petersburg.
The new bank will provide loans to members of the Eurasian Economic Community, which was created in 2001 and comprises Russia and Russian-friendly countries among former Soviet republics, such as Belarus, Kyrgyzstan, Tajikistan and Uzbekistan, in addition to Kazakhstan.
Under the agreement, Russia will contribute $1bn, while Kazakhstan will add another $500m to the charter capital, although the Kremlin will control two-thirds of the votes on the bank’s board.
National initiative
Because of institutional rivalries, Mr Putin’s second initiative to create a national development bank has proved more difficult to pull off.
Russia’s sovereign debt agency Vnesheconombank (VEB) has been angling for the job of running the government’s development functions for several years. The 80-year-old agency was the frontrunner until the government decided to subsume the bank into the new merged entity at the end of May.
VEB started life as the Soviet debt management agency and central foreign economic transactions operator, functions it kept after 1991 – but it has been searching for a new identity ever since. Like KfW, VEB is not really a bank, as it has no bank licence, relying instead on a special presidential decree for its financial institution status.
Built up business
Under its previous chairman, Andrei Kostin, VEB leveraged its solid reputation as a state-owned bank to build up a huge portfolio of commercial business. However, most of this portfolio went with Mr Kostin when he moved over to run VEB’s sister bank Vneshtorgbank (VTB).
VEB CEO Vladimir Dmitriev has taken a different tack. VEB picked up the job of managing the so-called ‘undecided’ pension funds after the pension system was reformed a few years ago. Russians were given the opportunity to choose a private pension manager for part of their contribution to the state pension fund, but the vast majority of workers did nothing so their contributions default to VEB’s managers.
Over the past few years, Mr Dmitriev has been lobbying hard to turn VEB into a development bank, arguing that it is the obvious body to manage the new $2.6bn in the state investment fund, created earlier this year.
Regional agreements
VEB has been signing agreements with a string of regional governments across the country – backing their investments in infrastructure and development – as well as with strategic state-owned companies such as Atomstroyexport, which has a $1.5bn project to build two nuclear generators in China.
The decision to subsume VEB into the new national development bank must have come as a bitter disappointment for Mr Dmitriev. Only two weeks before the announcement, he was telling journalists that VEB would probably get a bank licence and lead the national development bank project.
VEB will be merged with Roseximbank, set up a few years ago as a credit export agency similar to US Eximbank and Germany’s Hermes, to boost Russian exports. A Russian Bank for Development, known by its Russian acronym RosBR, was also set up under the auspices of the state property fund to oversee the privatisation of state assets and bring investment into the ongoing transformation to private property.
Roseximbank went into operation last year after $600m of budget money was allotted to support non-raw material exports and another $100m to subsidise interest rates. One of its first deals was to guarantee a $90m sale of two Il-96 aircraft to Cuba, and more are in the pipeline.
The RosBR has also been active. In May, it organised a $100m syndicated loan to raise money to refinance its debut syndicated loan worth $50m and finance some of its projects. At the same time, the bank said it had plans to borrow $500m-$700m this year on both domestic and international markets. Some of these funds will be raised from a $300m Eurobond issue slated for September.
In its first big set-piece investment project, the bank announced in April that it would raise $2bn in investment capital for a digital broadcasting project run by the state-owned Russian Television and Radio Broadcasting Network over the next two years. Another Putin-inspired project, the plan includes the launch of two satellites worth $120m, jointly produced by Russia’s Reshetnev NPO company and France’s Alcatel.
To make the new national development bank effective, the Kremlin has turned to KfW, which signed a co-operation agreement with VEB at the start of June.
Regulatory base
“KfW plans to provide advice on issues such as the creation of a regulatory base for the institution, the determination of [the bank’s] priorities, the examination of large infrastructure projects, and the evaluation of political and commercial risks,” KfW said in a statement.
The two banks have been working closely together for two years. KfW opened a permanent office in Moscow at the end of last year and has been actively lending to the Russian government in the past year.
It was one of the banks to credit Gazprom with $7.2bn last year, backed by a state guarantee, and in the same month it was also part of a syndication that lent $600m to the Russian railway corporation for the development of a high-speed rail link between Moscow and St Petersburg.
