by Simon Pirani
Vneshtorgbank is coming into its own. In Russia, it is channelling a rich stream of ECA deals to importers. Internationally, it is turning its assortment of subsidiaries into a focussed chain.
The impetus for development is two-fold. Firstly, the state-owned bank, with whom the EBRD is currently discussing the cost of a 10% stake, is going universal and preparing for part privatisation. Secondly, the industrial recovery – on which president Putin’s second term, expected to start this month, will focus – is raising demands for types of credit it is uniquely well-placed to arrange.
Denis Ursulyak, Vneshtorgbank’s head of financial institutions and trade finance, says that the loan book’s rapid growth is good both for current and future shareholders and for corporate clients.
“Our BIS capital ratio stood at 26% in mid-2003, which is too high. It may look good to credit analysts, but not to shareholders. The bank has to do something with its money, and the main way to increase the asset side has been through building the loan book. [Chairman] Andrei Kostin and his team have concentrated on that.”
The loan book, almost entirely to corporates, grew from $2.59 billion in 2001 and $3.37 billion in 2002 to $5.4 billion (unaudited figure) for 2003. And the front-line product is a series of ECA-backed deals with increasingly long tenors, under which loans from foreign banks to Vneshtorgbank are on-lent or otherwise structured to finance the import of equipment by Russian companies (see Trade Finance December 2003/January 2004, for a general report on this market).
An important $7.4 million deal was signed in December with the Industrial and Commercial Bank of China (ICBC), China’s largest commercial bank. A six-year loan was made to Vneshtorgbank with insurance cover by Sinosure, the Chinese ECA, to finance the import of Chinese telecoms equipment for the Khabarovsk and Novosibirsk subsidiaries of Megafon, Russia’s third-largest mobile operator. The deal built on a similarly-structured $5.4 million, four-year credit, signed in August 2003 to finance import contracts for Uralsviazinform, a local telecoms company.
The Megafon deal is the first under an agreement signed with Sinosure in August 2002 to insure $200 million worth of imports for up to ten years. And framework agreements with four Chinese lenders – ICBC, Bank of China, Exim Bank of China and Construction Bank of China – amount to $700 million.
“We are geared to borrow with ECA support and without a Russian state guarantee. No other Russian bank is able to do these deals on the same scale,” Ursulyak explained. “We have closed three deals covered by Sinosure this year, and have also done three ECA-backed deals with Japan this year, in which the lender was JBIC. In one case the importer was [the telecoms company] Rostelekom; there were two deals for smaller clients of one of our regional branches.
“Our strategy is to build relationships with banks across Asia and the Middle East. We have also done non-ECA-covered deals to finance Korean and Malaysian imports this year, and we plan to strengthen our ties with Asian banks by raising a loan from a syndicate based in Asia.”
The same pattern is followed with European ECAs. Last year there were six deals underwritten by SACE of Italy, the largest of which was a euro10 million deal from Gazkom from Mediobanco; four deals guaranteed by Hermes of Germany; and deals with the Spanish, Swiss and Austrian ECAs, including substantial on-lending structures for the car-maker Avtovaz.
Vneshtorgbank is systematically sewing up framework agreements for this type of business all over the world (see box). The latest one, signed on 27 February, provides for Nordea Bank group members in Denmark, Finland, Norway and Sweden to finance from Scandinavia with 85% cover from the relevant ECAs.
Vneshtorgbank is also keen to develop financing of Russian industrial exports, and last year did short-term deals of $13 million for Energomasheksport and $20 million for Power Machines, the machine-builder controlled by the Interros group that in December announced plans to merge with United Heavy Machinery. Vneshtorgbank’s understanding with Indian banks for a project financing for Power Machines and Tekhnopromeksport (see box) points the way forward.
Power Machines is the type of target international banks will be anxious to work with too, and in December, after the merger announcement, it signed an agreement with the EBRD for a seven-year $81.5 million corporate loan, the first tranche of which was drawn down in January.
Nikolai Kuznetsov, cfo of Power Machines, tells Trade Finance: “Western banks are of course more competitive on interest rates. But in terms of LCs and guarantees to counterparties, Vneshtorgbank is able to cover our credit risk for longer periods of time. We will continue to work with both sets of bankers, and hope in the future to develop combined structures that will give us the best of both worlds.”
Vneshtorgbank also remains the most active Russian participant in the EBRD’s trade facilitation programme, and handled roughly $200 million worth of business under the scheme last year, including a $70 million deal for Rosneft oil company.
Vneshtorgbank’s international network will this year “become more sharply focused on corporate banking and trade finance”, Ursulyak says. Subsidiaries in Austria (Donau Bank), Luxemburg (East-West United Bank), Switzerland (Russian Commercial Bank, Zurich), and Cyprus (Russian Commercial Bank (Cyprus), Limassol) and an associated bank in Germany (Ost-West Handelsbank) will become the basis for an international division headquartered in Vienna.
Vneshtorgbank is also set to open a subsidiary in Ukraine this year, and was last month in the process of completing a deal to take control of Sberbank of Armenia.
The context for Vneshtorgbank’s aggressive expansion is its preparation for part-privatisation. The first step on that road is likely to be the sale of a 10-20% stake to the EBRD, and chairman Kostin was reported in the Russian press as expressing disappointment that, at the presentation of the bank’s 2003 results on 25 February, the EBRD had not yet submitted a formal offer.
Talks between the two institutions have been in progress for two years, encouraged by former prime minister Mikhail Kasyanov, and it is hoped that when the second-term Putin administration settles in after the presidential election on 14 March that the process will get a new lease of life. The IFC has also expressed interest in buying into Vneshtorgbank.
In any case, Vneshtorgbank is working overtime to turn itself into a universal bank. It succesfully launched a five-year $300m investment-grade-rated eurobond in October, the first tranche of a $2 billion EMTN programme. It has also steadily increased its deposit base: customer accounts passed the $3 billion mark in the first half of 2003 and mid-year represented 46% of total liabilities. Term deposits are 59% of the whole.
If you are looking for the centre of gravity of Russian trade finance banking, look no further.
Natalia Loginova, head of financial institutions and short-term finance, who joined Vneshtorgbank last year from Norilsk Nickel, heads a team of about 40 people that raises pre-export finance loans, arranges deferred-payment LCs and post-financing of LCs and works on other trade finance deals. A separate 10-strong department headed by Anatoly Ballo works on structured project finance and medium-term finance. Loginova and Ballo reported to Denis Ursulyak.
Financing Russia’s trade with India
Russian and Indian banks are developing dollar-based trade finance arrangements to replace the ruble-rupee bilateral facility, which expires at the end of this year.
Prabhakar Dalal, general manager of Exim Bank of India, told Trade Finance that a $25 million credit line, opened for Vneshtorgbank in July 2002 to finance Russian imports from India, would be supplemented by another similar deal this year.
“We want to ensure that Indian companies do not lose out after the ruble-rupee arrangement ends,” he said. “Pharmaceuticals are doing very well, but other traditional exports such as tea and tobacco face stiff competition.”
Exim Bank of India’s relationship with Vneshtorgbank is key. Dalal hopes that the partnership will this year roll out its first project finance structure – for the Sipat power station project, for which the Russian construction and engineering companies Tekhnopromeksport and Power Machines are bidding against western European competitors.
Vneshtorgbank has already initialled an agreement with Exim Bank of India and Canara Bank, for a five-years-plus financing for the import of project services, under which Exim will issue a guarantee against Vneshtorg’s counter-guarantee.
Denis Ursulyak at Vneshtorgbank says: “We have often faced the problem in India, and other Asian markets, that our companies can offer a technically first-class package, but that the Germans or Americans have better financing arrangements. In this case we have agreed that, if our companies win the tender, we will finance the project for up to $180 million.”
On the vanilla trade finance front, bankers on both sides face the challenge of making the transition to dollars without Indian companies losing out.
Under the ruble-rupee facility, established in 1956, Soviet importers were allotted amounts of Indian rupees, received in payment of Indian state debt, to finance exports. In the last two years, the rupees have been auctioned to prepare for transition away from the agreement.
But Sanjiv Kohli, counsellor at the Indian embassy in Moscow, tells Trade Finance that in 2003, about two-thirds of Indian imports to Russia were still financed by the scheme, and warns: “The danger is that our trade balance with Russia will become lopsided in favour of Russian exports.”
Or as Russia’s ambassador to India, Aleksandr Kadakin, put it in a newspaper interview last year: “The days when the Soviet politburo decided to purchase one million sweaters from Ludhiana are gone. Indian business needs to get out of this mindset.”
One means of support for Indian importers is the inauguration, expected this month in Moscow, of a state-controlled Indian joint venture bank, Commercial Bank of India. It has been licenced by the Russian central bank and is owned 60% by the State Bank of India and 40% by Canara Bank.
A survey of exporters conducted last year by the Federation of Indian Chambers of Commerce and Industry reflected fears that exports to Russia would fall after the ruble-rupee agreement ended, primarily due to “greater competition” and “greater credit and forex risks”. The federation’s general secretary, Amit Mitra, believes the total Russo-Indian trade turnover can rise from the current $1.2 billion per year to $5 billion by 2005.
The credit lines
On 1 January 2004 Vneshtorgbank had framework agreements in place for up to $3 billion (or, taking into account country limits, slightly less than that at any one point in time) with foreign banks and ECAs, including:
|$25m||EximBank of India||Jul 2002, renewed Jul 2003||India|
|EUR300m||Natexis||November 2002||EU, USA, Canada|
|250m Swiss fr.||UBS (Switzerland)||March 2003||European countries|
|$100m||BBVA (Spain)||Aug 1998, renewed Apr 2003||Spain|
|$200m||Construction Bank of China||May 2003||China|
|EUR200m||HSBC (UK)||June 2003||European countries|
|EUR20m||Nordic Investmentt Bank||June 2003||Scandinavian countries|
|EUR70m||RZB Austria||August 2003||Austria|
|EUR300m||BNP Paribas (France)||October 2003||European countries|
|EUR50m||Exportfinance (Norway)||October 2003||Scandinavian countries|
|$30m (revlv’g)||Korea Eximbank||November 2003||Korea|
|$50m||HSBC (with US Exim guarantee)||November 2003||USA|
|EUR250m||Fortis Bank||November 2003||European countries|
|$250m||AKA Bank (Germany)||Nov 2002, renewed Dec 2003||European countries, USA|
|EUR100m||ABN Amro||December 2003||European countries|
|A version of this article appeared in Trade Finance magazine, February 2004.
Posted April 2004; © 2004 Simon Pirani