Russia's sinking Vnesheconombank gets $2.2bn lifeline

Russia's sinking Vnesheconombank gets $2.2bn lifeline
VEB: Too big to default, too indebted to function.
By bne IntelliNews March 30, 2016

Burdened by toxic assets from giant infrastructure projects in Russia and exposure in   Ukraine, Russia's state development bank Vnesheconombank (VEB) will get a RUB150bn ($2.2bn) injection from the government, Prime Minister Dmitry Medvedev said.

But with the state-controlled lender mired in up to RUB1.2 trillion ($17.8bn) in debt, Medvedev urged its new management installed in February to "secure control over project realisation, carry out a thorough audit, sort out and restructure bad debt, and get rid of the burden of non-core assets", Interfax news agency reported on March 29.

The sanctioned VEB remains shut off from international capital markets and has been branded a major fiscal risk as Russia fights to balance its budget and keep the deficit in hand. Standard & Poor's forecasts the government will spend up to 0.3% of GDP on recapitalising the bank, assets of which reportedly equal around 9% of GDP.

The authorities are reluctant to overspend on VEB in the short-term, with former head of the bank Vladimir Dmitriev dismissed last month and Medvedev calling for "unorthodox measures" to keep the bank afloat.

Vedomosti daily on March 30 cited the unpublished plan of facilitating financial stability of VEB, prepared by the team of its newly-appointed head Sergei Gorkov to ultimately salvage the bank-that-isn't-a-bank: Vnesheconombank is in fact a Russian state corporation created from a former Soviet bank, has no Russian banking license and is not under the supervision of the Central Bank of Russia (CBR). Rather it functions as a bank on the basis of a presidential decree, and is tasked among other things with managing Russia's external debt as well as investments by the state pension fund.

Team bail-out

Apart from a direct injection of RUB150bn as a subordinated loan to be included in second-tier capital, the plan proposes to spread the bail-out of VEB across various state institutions. These include various indirect liquidity provision, guarantees, and loanouts from the central bank, treasury, the sovereign National Welfare Fund, pension fund, and state corporations.

VEB is also planning to sell its stake in state gas major Gazprom in which the bank holds 2.7% or $1.3bn worth of GDRs at current prices, Vedomosti reports.

Other non-core assets planned to be cleared off VEB's balance include Ukrainian Prominvestbank, Svyaz-Bank and Globex, railroad and airline assets, as well as assets accumulated on special state projects that will be transferred to the state property agency Rosimushchestvo.

According to recent reports, the Russian Direct Investment Fund (RDIF) - the state sovereign fund and de facto investment promotion agency - will also be split off from its parent VEB and be made an independent entity.

Secure millstone

VEB is seen as being in Russian sovereign risk category, with a risk of default being low, S&P analyst Karen Vartapetov told Vedomosti, adding that "it's hard to imagine the consequences of country's second largest financial institution defaulting".

Alfa Bank commented on March 30 that the news of RUB150bn recapitalisation are seen as negative. The initial refinancing needs of VEB "suggest that the cabinet has decided to follow a smooth scenario to help the bank survive instead of a scenario that would dramatically squeeze VEB's business", the bank's analysts wrote.

The problem of VEB is seen by the government as a managerial one, rather than one of systemic efficiency of state institutions.

Gradual support of VEB is seen by Alfa as a bullish scenario, building on recovery of global markets and Russian economy, which will keep covert fiscal risks to the budget. The analysts also do not support swapping VEB's short-term debt with central bank's long-term subordinated debt, while the government would help to support VEB liquidity via deposits.

"We believe that this is inappropriate: recapitalization would be best funded with government monies, while the CBR concentrates on liquidity support," Alfa warns, adding that the decision in its current form presents risks to the CBR and thus for the stability of monetary policy.

Due to the high cost of allowances for loan losses, VEB posted a net loss of RUB73.5bn under IFRS in January-June 2015. The bank's main source of problems were loans for so-called special projects that turned out to be unprofitable. In particular, VEB co-financed the construction of Sochi infrastructure and facilities for the 2014 Winter Olympics.