Problem $ 20 billion: how “the Bank for development” has turned into a black hole

Why was the web created?

The Vnesheconombank counts its history from 1922, but in its current form, the web has emerged pre-crisis in 2007, when President Vladimir Putin signed the law “On Bank for development”. VEB has received the status of the Corporation’s banking license. Home “development Bank” focused on the model of the German KfW — state Agency, operating under a separate law. KfW actively supports German exports, and all its obligations are guaranteed by the government of Germany. The state Corporation was supposed to develop infrastructure, innovations, special economic zones, support of export of Russian goods, support small and medium enterprises.

As VEB is engaged in the development of crisis management assignments?

In the 2008-2009 financial crisis, the VEB began to perform functions that were not initially spelled out in his concept, he took on the rescue of commercial banks, GLOBEXBANK and Sviaz-Bank, and intervened in the stock market.

In September 2008, Globex faced mass outflow of funds of individuals and legal entities, which resulted in the acquisition by VEB of 98.94% of shares of “GLOBEKS” for symbolical 5 thousand rbl. at the same time, Sviaz-Bank, anchor Bank of the telecommunications industry, “overworked” on repos with securities, and also issued a large number of loans of dubious quality. In the end, the Central Bank provided VEB for the reorganization of these banks 212,6 billion rubles in 2008.

During the crisis of 2008-2009 VEB was also buying up “sagging” of the shares for the account of the Ministry of Finance 175 billion rubles from the funds of the national welfare Fund (NWF) and then sold these securities at a profit of about 100 billion rubles.

Why the VEB has invested in unprofitable projects?

The Memorandum on financial policies of Vnesheconombank stipulates that the Corporation must invest in profitable projects, but in fact Vnesheconombank in 2009-2010 gave billions of dollars in loans for projects that had little chance to pay off. At a time when Vladimir Putin was Prime Minister and head of the Supervisory Board of VEB, the Bank has issued more than $8 billion in loans to an unnamed Russian and Ukrainian investors for the purchase of industrial assets in Ukraine, principally in the Donbas. These investors never called, and in reporting VEB they are just as “third parties” received from VEB’s loans for the purchase of shares and financing of Ukrainian metallurgical enterprises. It is known that the money of Vnesheconombank purchased shares of companies “Industrial Union of Donbass” and “Zaporizhstal”. As argued by Forbes magazine, these investments were made for political purposes, and the actual owner of these enterprises became the web.

Now Ukrainian investment VEB practically do not work, these loans are not serviced enterprises in the Donbass destroyed. At the end of September 2015 VEB has been evaluated by the volume of loans anonymous investors for the purchase of securities and financing of the metallurgical industry of Ukraine in 561 billion rubles ($7.2 billion at current exchange rates), relating them to the category of risk. The impairment of these loans amounted to almost 170 billion rubles.

“Olympic” loans to VEB for a total amount of 240 billion rubles in advance is also not looked breakeven/ Already at the end of the 2014 Olympic credits to 183 billion rubles VEB were classified as problematic. Formally they are not expired, but only thanks to a moratorium on the servicing and repayment of these loans, as extended recently till mid-2017. Without this extension, these credits were officially unemployed, and in fact we are talking about deferred losses, says Fitch.

Where the web took money?

VEB prior to the introduction of sanctions of EU and USA in 2014 borrowed money largely from foreign investors and banks and had by the middle of 2015 about $20 billion external debt. Now, because of sanctions, VEB does not have access to Western markets. However, only in 2016 VEB must repay about $3 billion Of them, as recalled by S&P analyst Victor Nikolskiy, Eurobonds worth $516 million and Russian bonds by $302 million.

“The main problem of EBV — significant non-performing assets. The second — problems with funding and liquidity due to the fact that the Corporation is under sanctions. The third is the complex organizational structure”, — considers Vice-President, senior analyst Moody’s Alexander Proklov.

The structure of attracted funds of VEB group (core).

From 3,987 trillion rubles commitments of VEB’s:

28% — issued securities, including Eurobonds
25% — attracted funds from banks, mainly from foreign
15% — deposits and current accounts of individuals and legal entities (mainly the liabilities of the banking subsidiaries of VEB)
17% is borrowed funds from the government and the Central Bank
9% subordinated deposits, including from the national welfare Fund (NWF)

Source: annual reports of VEB under IFRS for the third quarter of 2015, S&P

The Moody’s rating, the aggregate capital infusion into the web by the government from 2007 was $ 559 billion rubles (tier I capital) and additional $6 billion in tier II capital. The assets of Vnesheconombank (RUR 4.3 trn as of 30 September 2015) is about 8% of Russia’s GDP (in the first nine months of last year).

Blame for the problems Dmitriev VEB?

Change in VEB is long overdue, and decided to start with the change of the head of the Corporation. Thursday, February 18, Vladimir Dmitriev announced at the meeting in the staff about his upcoming departure from the post of Chairman of the state Corporation, said knowledgeable sources. As his likely successor called Deputy Chairman of the Board of Sberbank Sergey Gorkov — man team of German Gref. Earlier, a source close to VEB said that the country’s leadership intends to put at the head of the state Corporation experienced Manager, ideally the Gref: “If it were possible, Gref. Because this is unrealistic — that one of his deputies, which Gref word”.

Vladimir Dmitriev came in the Vnesheconombank of the USSR (since 2007 — state Corporation “Vnesheconombank”) in 1997 to the post of first Deputy Chairman and in 2004 led the organization. As explained a source close to VEB’s Supervisory Board, the resignation Dmitrieva is that he “was just doing what he is told, and thus not informed about the risks”, which may be associated certain decisions of the government, certain financial operations carried out through the web.

Why the web can’t simply close down?

One of the possible reforms, the government discussed the gradual “closing” of the Bank. Meaning — “to leave from the Corporation, the legal entity” by passing his projects and government debts, and create a new development institution. “Close WEB one of the options. But we do know that the Institute of development we need — we cannot do without it: it is possible that you will create a new”, — said before a government official. However, this option is unrealistic due to the $20 billion external debt of VEB, as well as the highly complicated structure of the Corporation.