VEB

RBC had an update a few days ago about the situation at the state-run bank VneshEconomBank.

VEB has lowered the rate on loans to major borrowers, who built the Olympic facilities in Sochi, nearly four times, to 2.5% per annum, RBC found. This is a necessary measure in order to avoid defaulting on these loans, a source at the bank said.

Reuters had previously reported that this restructuring plan would be implemented back in late June, but had few details to offer. Now RBC gives more details:

The Supervisory Board of VEB approved the restructuring of loans that were opened for the construction of the Olympic facilities in Sochi. The Bank extended the term of floating credit from 5 to 25 years (until 2037). The interest rate on these loans amounted to 9% per annum, and the new rate will be lowered after restructuring by the “Market”, says VEB’s chairman Sergei Gorkov, but its size has not been stated.

A 5-year grace period on interest payments will also be granted, the article states.

The terms of restructuring will make the Olympic assets more “attractive” for investors, the bank’s deputy, Mikhail Poluboyarinov told RBC.

According to the paper’s source at the bank, “Only at this rate were investors willing to service the loans.”

The source continued:

…all the “Olympic” loans were issued in rubles. To finance the construction of the Sochi facilities VEB provided investors with 248.6 billion rubles, and in late 2014 the bank was faced with non-payment for the majority of the loans: 183 billion rubles were classified by VEB as problematic. Formally they were not overdue, but only because of the moratorium on repayment (that was introduced in 2014). In fact, it is a deferred loss, according to the rating agency Fitch.

The biggest investors in the Olympic construction who took loans from VEB were:

  • Vladimir Potanin’s “Interros” – approximately 70 billion rubles;
  • Oleg Deripaska’s “Basic Element” – more than 30 billion rubles;
  • Viktor Vekselberg’s “Renova” – about 15 billion rubles.

The 2.5% per annum is in fact “subsidized”. Now the Central Bank’s refinancing rate starts at 10.5%, while the rate in rubles for the best borrowers is between 10-10.5%, given that the market expects a rate cut…. In similar conditions [as VEB is currently in], the State allocates money from the National Welfare Fund: the minimum rate on loans from the NWF is “US inflation plus 1 percentage point, but not less than 2% per annum.” For example, in 2015 “Sibur” got $1.75B at this rate from the NWF for their project “Zapsibneftehim”.

For the bank such loan terms are “a loss in international accounting”, says [Rosbank’s] Olyunin, “the prolonging of a virtually interest free loan is de facto cancellation of the debt.”

However, VEB is not a bank in the classical sense [but rather a “State Corporation”], so it has no problems with the banking license due to the redundancy of these funds, adds Nordea Bank’s Mikhail Polyakov. He believes that the main reason for providing such favorable conditions is to prevent a default on these loans.

RBC continues:

On the need to make additional provisions for the “Olympic” loans in late June, Gorkov himself stated, “We do not see this as a big problem.” According to him, these loans were originally reserved by nearly 100%.

The bank ended 2014 with a loss of 249.7 billion rubles, due to the cost of the reserves in the amount of 326.1 billion rubles, the bulk of which came in loans for the construction of the Olympic facilities in Sochi. And by the end of 2015, VEB received 14.9 billion rubles in profit, but this happened with the help of the State – the bank “earned” on the deposit from the National Welfare Fund (the Fund placed on deposit with VEB more than $6 billion at a 0.25% rate), which was categorized in the report as “instant profit”.

What this means is that money from the NWF is being counted three times. The Ministry of Finance counts it as their own, the Russian Central Bank is including it in their “International Reserves”, and VEB includes it, and is making a profit off of it.

The Reuters piece from last month also noted that VEB is preparing to sell off its shares in state-owned enterprises: including Gazprom, and MICEX (Moscow’s stock exchange).

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