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Andrey Kostin: "We have to accept the situation we have for the time being and work in the new environment and the new conditions. It's difficult, but it's not impossible"



HOST: Shares are lower on the year for Russia’s second biggest lender VTB, that’s as the company deals with both Western sanctions and a high Central Bank lending rate, that was meant of course to stem the decline of the rouble. Joining us now to talk is VTB Chairman and President, that’s Andrey Kostin. Sir, thank you very much for joining us, great to have you in the studio this morning. Let’s talk about the interest rate environment then, because the interest rate in Russia is 15%, there’s a Central Bank meeting later this week to discuss those interest rates. They’ve been volatile of late, where would you like interest rates in Russia to be?

ANDREY KOSTIN: Well, definitely I would like to see the interest rate going down to at least 10% by the end of this year, but I think it will be a gradual process, and my expectation is that the Central Bank might take its next step of lowering the interest rate from 15% to 14% later this week. But of course, I would rather prefer to lower it at least to 12%. But I think the Central Bank will be quite cautious bringing it down.

HOST: How much of a negative impact is this high interest rate having on your business at this moment?

ANDREY KOSTIN: Very much so, because we are borrowing about 2 trillion roubles from the Central Bank, another 5% to pay means a 100 billion roubles a year, which is approximately $1.6bn more to pay the Central Bank than before. And if we compare it to the interest rate on 1 January 2014, it was only 5.5%, now it is 15%, so that is nearly 3 times higher, and it is very expensive. And of course, all our funding is becoming more expensive, so that’s the main reason for the big losses, which VTB, as well as many other Russian banks are expecting this year, not so much NPLs, but the cost of funding.

HOST: Did you see the logic for what the Central Bank was trying to do?

ANDREY KOSTIN: I do, but I think what was done had its own positive effect on the Russian exchange rate. I think it is time to think about economic growth and to bring the interest rate down.

HOST: You are going to get more state support from the Russian government, I understand, you are due to get some more in the 1st quarter of this year, or do you need more equity? Where are you going to get your funding from?

ANDREY KOSTIN: I think we will get the equity from the government through the Agency of Deposit Guarantees, and our expectation is it might get as much as $5bn in Tier 1 preferred stocks. This will cover our losses for this year.

HOST: Is that coming this quarter?

ANDREY KOSTIN: The legislation is currently passing through parliament, so it will take some time, but we expect that in the next couple of months we might get it, and we will cover our losses which we expect later this year.

HOST: One of the subjects that we must talk about is sanctions broadly, but also specifically and how they relate to your business. You’ve been caught up in the sanctions environment of course, because your listing of Global Depository Receipts in VTB on the London Stock Exchange.


HOST: Are you considering moving away from London? You were listed here at 2007.

ANDREY KOSTIN: Basically we are quite happy with the London Stock Exchange, and we have a very good relationship with the London Stock Exchange, but because of the policy we still don’t know, because everybody is pointing a finger at each other, I mean the UK Treasury and the European Commission, which is responsible for this decision that we can’t convert GDRs into stocks. And so we are looking at other stock exchanges like Hong Kong, for example, but I don’t think that’s an easy solution for the problem, so we’ll probably continue to work with authorities in Europe, and then the sanctions aren’t forever, we believe.

HOST: Yes. Has life become a whole lot more complicated for you doing business in Europe, for businesses like yours as well?

ANDREY KOSTIN: Well yes, we have experienced many difficulties over the last decade, you know, crises and other things. I think we just have to accept the situation we have for the time being and work in the new environment and the new conditions. It’s difficult, but it’s not impossible.

HOST: There are many Russians who have made London a second home, and I mean, we have the Foreign Secretary Philip Hammond yesterday talking about recruiting more Russian speakers. Did you ever think that things would come to this, did you ever think the environment would be so tense for Russian businessmen in London?

ANDREY KOSTIN: No, frankly speaking, we are a little surprised with the West’s position towards Russia, Russian business and we definitely would like the relationship to be improved. We just believe that the geopolitical situation will improve and that will create better conditions for business.

HOST: Let’s talk about what leads on from the sanctions conversation, about your access to SWIFT, the international messaging payments system. I know you said in the past that if Russian businesses and Russian banks were not able to use SWIFT, then that would be devastating to that effect to the relationships between the East and the West. How far along are the Russian plans to create an alternative to SWIFT?

ANDREY KOSTIN: We did create an alternative within Russia, so if for example tomorrow somebody’s switched off SWIFT from Russia, the Russian banking sector within Russia would continue to work easily, but of course, finding a replacement internationally would be much more difficult and there is no easy solution. But I agree, I mean, I would like just to reinstate, I think this kind of sanctions applied before only to such countries as Iran, with which the West effectively had no relationship at all, no diplomatic relationships, no political relationships etc. I don’t think it will be useful for anyone in Europe or even in America to have that kind of relationship with Russia, so I strongly believe that there’ll be no such decisions, because it really means a very unfriendly, even hostile, actions against Russia.

HOST: Would the Chinese system, the Chinese International Payments System, would that be an alternative for Russian banks if SWIFT were turned off?

ANDREY KOSTIN: Eventually yes, not at the moment. But I think the sanctions themselves make us think about an alternative, because the international financial infrastructure is becoming not very convenient for us, we can understand the threats to our security. So from this point of view we are definitely working more closely with the Chinese in order to develop an alternative system.

HOST: And just one example perhaps of the de-dollarisation of the Russian economy, do you think that path continues and how far that can really run?

ANDREY KOSTIN: Well, I think that’s the main task not only from the political point of view, but it would be useful for the economy. Really, the dollar played too big a role in our economy, and it’s no good for the national economy. So I think eventually it will happen, and for many years I proposed settlements in roubles and more payments in roubles, so unfortunately, of course, the devaluation of the rouble does not help this process, but I think using the Chinese currency, and maybe eventually the Russian one as well, may be a solution.

HOST: And what’s your prognosis for the Russian economy then, Andrey, as it stands here on the brink of another recession, oil prices and the path of the rouble, key to it, of course?

ANDREY KOSTIN: You know, our bank’s expectation or forecast is that we will have a substantial decrease in GDP this year of around 4.5%, but our forecast for 2016 is that we will return to growth of around 2.5%, partly because of the substantial government investment in the economy, and partly because of the stabilisation of the oil price and the positive effects of import substitution process. So we are not very pessimistic on this.

HOST: Andrey, thank you very much for joining us, good to see you. Andrey Kostin, the CEO of VTB, Chairman and President.


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