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Andrey Kostin: "I still don't feel that the situation is as bad as it was in 2008"



HOST 1: Russia’s VTB Bank has recently come under significant pressure. The lender, relying on the Russian Central Bank, in some fashion, for a great deal of its funding after it was cut off from global financial markets, VTB says it could see a loss in 2015 if interest rates aren’t lowered. Let’s go to Andrey Kostin. Delighted to welcome you back to this show, CEO of VTB Bank. Andrey, nice to see you, thank you very much indeed for joining us. Well, just give us an update, what is the funding for your bank, how tough are things?

ANDREY KOSTIN: Well, funding has become very expensive, of course, and that is the main reason why most banks expect losses this year. If the Central Bank manages to bring the interest rate down, I think it will improve the situation substantially, not only for the industry but for the banks as well. I think that the process will take some time, because the Central Bank will be cautious about bringing down the interest rate.

HOST 1: Yeah, it is a very interesting tension and it gives me parallels with what’s going on in Turkey as well, where the government has kind of drawn swords with the Central Bank in some ways. They say «Look, you need to get this right down, we need to improve economic activity», and at the same time the central bank is saying «We can’t do this, we’ve got inflationary concerns, we need to shore up the flow of capital out». So you understand where Ms. Nabiullina is going as well, but do you believe that she needs to cut rates more aggressively?

ANDREY KOSTIN: Well, I believe so, yes. I think that when the bank increased the interest rate at the end of last year it had a positive effect on the rouble exchange rate and calmed down the situation, and I think now is the time to gradually bring the interest rate down, which we expect later this year. I believe that it will be at least 100 bp less starting from Friday.

HOST 1: But I guess, Andrey, we still go back to the standoff with the West over Ukraine, and the funding issues will only alleviate themselves on a medium to longer term basis, if we see a resolution of the conflict. Is it how you see things?

ANDREY KOSTIN: Yes, I mean there are more reasons for the bad economic situation in Russia. I think that the sanctions are only one reason, the other of course is the oil price and the third is the weakness of the structure of the Russian economy, which we all have been talking a lot about over the last decade.

HOST 1: One more, you mentioned the oil price, Russia has not taken a barrel off the table. Russia does not look like it’s going to take a barrel of the table, neither are the Saudis, the Iranians or Iraqis want to put more on, etc. etc. I don’t see an end to the oil price problem.

ANDREY KOSTIN: Well, you see, the Russian economic scenario, as produced by the government, is based on an oil price of 50, and I think mentally we are ready to live in a situation where the oil price will probably be between 50 and 70. But I would agree with you, I personally, met with a number of Russian leading oil people and they were talking about a possible agreement with non-OPEC countries on actually reducing the production of Russian oil and other productions. So that’s what now is being announced, a little contradiction between the statement and intention.

HOST 2: Can I ask you, when you think of the current situation, if rates don’t go down and if the oil price stays where it is, and if you look at the next 12 months or a little bit longer, if you look at 2016, do you see the recession that is being engineered right now continuing into 2016?

ANDREY KOSTIN: No, our forecast, our bank’s forecast, says this year we might expect negative GDP growth of around 4.5% with possible positive growth of about 2.5% next year, and inflation this year may reach 15–16%, falling to one-digit figure next year. We think that the economy will cool this year, but with some prospects of economic growth next year, partly because of substantial government investment, which is now being planned in Russia.

HOST 2: And you think that the government investment, if the oil price is weakened further, could be delivered?

ANDREY KOSTIN: Well, our scenario does not envisage any further weakening of oil prices, we even think that this year the oil price could be as high as 60 rather than 50, but should probably stabilise at this level, that’s our opinion.

HOST 2: So then my next question is on default, when you think of the traumatic events that are going on and the lack of diversification of the Russian economy, do you have expectations of accelerating default over the next 12–18 months?

ANDREY KOSTIN: Well, are you talking about a sovereign a corporate default?

HOST 2: Corporate default.

ANDREY KOSTIN: If you are talking about, for example, borrowings, they stand at about $600bn, of which less than $100bn is sovereign debt, so for sure the sovereign debt is OK, it’s very low. As for corporate, I think the government will support Russian companies and the Central Bank from the point of view of hard currency repayment. No, I think there will be very selective defaults if they happen, mainly because of the wrong policies of this or that company, rather than any series of defaults. We do not see this situation, the Russian trade balance is positive, and I think the Russian government will provide, if necessary, assistance for those companies which are experiencing problems in getting refinancing in dollars or in euros on international markets.

HOST 3: But the expectation is that this will increase pressure on you, as you have to obviously deal with provisioning for exposure that you have into the corporates. So even if there’s not a default per se, the pressure will be felt within your own results?

ANDREY KOSTIN: You see, I still don’t feel that the situation is as bad as it was in 2008, for example, for the Russian industry, particularly for large Russian exporters who feel much better because of devaluation. So my major problem as a bank today is the high interest rate, but defaults might reach crisis level, I mean 10% of NPL, but at the moment we feel that the economy, that companies are coping better than 6 years ago.

HOST 3: I sounds to me, I mean when I was in Russia just before the last interest rate move from the Central Bank, when the Finance Minister was saying «interest rates need to come down», I interviewed you, you said «interest rates need to come down». It wasn’t in the market at all, nobody had the expectation, but they cut rates. And I am listening to you again here, Andrey, and I am thinking «OK, so we are now scheduled for another cut in interest rates from the Central Bank».

ANDREY KOSTIN: A small one, I think a small one. I would prefer a more drastic one.

HOST 3: A small one? We won’t get anything more aggressive from the Central Bank?

ANDREY KOSTIN: No, I think they are still very concerned about inflation, they are still very cautious about the fragility of the exchange rate. So I think they will be cautious, but I expect maybe something around from 15% to 14%, bringing down the interest rate, it’s quite possible.

HOST 3: 'Cause HSBC has got an expectation out there for 100 basis points, which looks very aggressive at this point. And why not? Given the pressure that everybody is feeling from the stronger dollar.

ANDREY KOSTIN: Yes. I think that everyone in industry is expecting this, because the interest is very high for industry, so that’ll definitely bite.

HOST 3: For many companies at the moment, I think, VTB is seen as the lifeboat, and they are swimming towards you, because you are the channel through which to access government support. You’ve taken a stake in Otkritiye, do you expect that you’ll increase your stake in that firm?

ANDREY KOSTIN: No, we took it as collateral, it used to be collateral, so it’s not our acquisition, you know.

HOST 3: But effectively they are returning their debt to you?

ANDREY KOSTIN: But it is a good company actually, we know them, it’s one of the fastest growing financial institutions in Russia. We are only taking it for a short period of time, we’ll sell it when the time comes.

HOST 3: But do you expect these debt-to-equity deals to start happening as people are finding it difficult to finance themselves?

ANDREY KOSTIN: Well, you know, in Russia, unlike maybe in the West, when it is sometimes difficult to sell assets we just got, it’s not investment we’d like to see, but we’d have to deal with the bad loan somehow.

HOST 3: And just one last one from me. The last bit of ratings news I saw was a Moody’s downgrade around the financials, and you were included on that long-term deposit rating, and so on and so forth. Are you frustrated with the actions of the ratings agencies, are they conspiring with the Western governments here to increase pressure on strong economic principles in the Russian economy?

ANDREY KOSTIN: I don’t know, I mean the ratings agencies were so heavily criticised during the crises for missing crises, so it might be their fear of that, we don’t know. For us today it does not matter very much, because we are not borrowing in the West, for example, but we know that the road to a higher rating takes a long time, so from this point of view yes, it’s frustrating. We all think that the time will come when we will return to the market and we have to pass all these stages again with all the rating agencies. It will take some time for us, but that’s life, you know, there’s nothing to be done about this, we just have to accept it for now and to continue to work.

HOST 1: Andrey, we have got about a minute left. Just one last one from me, we both spoke to Mr. Siluanov recently as well, while I was in Turkey at the G-20, and I got the impression he wanted to use the current crisis with the oil and sanctions as a springboard for reforming, for restructuring the Russian economy as well, that’s the up time for Mr. Siluanov. Do you get the impression in your talks with the Kremlin that there’s an appetite to really restructure and reform and re-galvanise the Russian economy not on hydrocarbon lines at the moment?

ANDREY KOSTIN: There has been an appetite for restructuring in Russia for a very long time, but somehow it was not fully satisfied, so I believe that this time there might be more reforms, but to what extent it is difficult to say. You know, I personally believe that it’s easy to conduct reforms when a situation is better, than when it is worse. And there’s quite an unfriendly environment, it is also not easy, so we shall see. I may be a little bit more sceptical on this than Mr. Siluanov.

HOST 3: Very good to see you as ever. Thank you very much indeed for finding the time to see us. It is always good, Andrey. Andrey Kostin, the CEO of VTB Bank.


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