* Kremlin mulls $20 bln rescue package for VEB bank
* Bank reported $4.5 bln loss in 2014
* VEB loans helped fund 2014 Sochi Olympics
* Also faces heavy losses from Ukraine investments
By Jason Bush
MOSCOW, Nov 27 A $20 billion bailout request
from Russia's state development bank is raising questions about
the running of a lender which helped fund the Sochi Olympics in
The descendent of a Soviet foreign trade bank,
Vnesheconombank or VEB assumed a bigger role in 2007 when Russia
designated it as the country's development bank, since when its
loan portfolio has expanded more than tenfold to reach 2.8
trillion roubles ($50 billion).
VEB, which also has around 1 trillion roubles in other
assets, says it is modelled on state banks in other countries
and serves important functions such as investing in
infrastructure and promoting high-tech industries.
But last year it reported a loss of 250 billion roubles
($4.5 billion) and critics ask why taxpayers should fund
loss-making projects whose economic benefits are often
"The main problem is that the bank is not governed as an
independent agency or a business entity," said Sergey
Aleksashenko, a former Russian central banker. "It is governed
like a second budget ... (ignoring) economic efficiency or
VEB declined to comment.
Even some senior ministers are unhappy with how VEB
operates. Finance Minister Anton Siluanov told Reuters the
bank's activities "should be based on break-even principles".
Analysts say VEB's losses are unsurprising given how the
government uses it to finance spending outside the budget,
making government finances look stronger than they really are.
The 2014 Sochi Olympics are a case in point.
With an official cost of some $50 billion, they were by far
the most expensive Games in history. Many projects linked to the
Olympics were financed by VEB, which made loans to private
companies to build facilities but which have since been unable
to repay the loans.
"Basically what VEB did in terms of the Olympics was de
facto government expenditure postponed until the future," said
Karen Vartapetov, associate director at rating agency Standard
and Poor's. "The government didn't want to fund it from the
budget directly, so asked VEB to step in."
Andrei Elinson, deputy CEO of Basic Element, a conglomerate
owned by prominent businessman Oleg Deripaska which was among
the companies involved in Olympic projects, said it wasn't
possible to repay the loans on schedule because forecasts
provided by the government proved to be wrong.
A port built by Basic Element, for example, with a loan from
VEB, was forecast to have annual cargo volumes of 10 to 15
million tonnes. In the event volume was only 4 million, not
least because the government chose to build a railway as well.
"Some of the projects didn't go as planned from the very
beginning," said Elinson, adding Basic Element planned to repay
The hole blown in VEB's books by the Olympics underscores
how its difficulties predate Russia's falling-out with the West
over Ukraine and the subsequent economic crisis, though those
developments have exacerbated its problems.
VEB is among several state banks subject to Western
sanctions, effectively meaning it cannot sell bonds to Western
investors. That poses a bigger problem for VEB than for other
banks because it does not raise money from private depositors.
Finance Minister Siluanov said financial support for VEB
under discussion would enable it to meet its liabilities over
several years and shouldn't be seen as an immediate injection.
But though only part of the financing is needed to repair
capital destroyed by bad loans, these losses are huge. S&P
estimates some 500 billion roubles of VEB's loans were directed
by the government and are therefore regarded as relatively
While the huge investments made in Sochi have generated
public discussion in Russia, far less attention has been given
to no less massive investments VEB made in Ukraine.
"That's still on their books and they keep rolling those
loans over. Of course it's only a question of time before they
accept losses on those assets," said S&P's Vartapetov.
In an interview in December 2013, VEB Chairman Vladimir
Dmitriev said the bank had via Russian investors ploughed $8
billion into Ukrainian steel plants, mainly in the Donbass
region, since ravaged in a separatist conflict. He said the
investment had supported 40,000 Ukrainian workers, but did not
say how the Russian economy had benefited.
Production at several plants was halted for months because
of the war. But their financial condition was worsening years
beforehand because of low global steel prices and rising
material costs, said Ivan Dzvinka, an analyst at Eavex Capital,
a Kiev brokerage.
The main company involved, Industrial Union of Donbass, said
six months after the first VEB-backed investment in 2010 that it
had restructured its debts because of "hard times".
The Russian investors who received money from VEB were never
disclosed. The only one identified by Industrial Union of
Donbass, Alexander Katunin, said at the time he was acting for
others whom he declined to name. Katunin's own company, a Swiss
trader called Carbofer, went bankrupt in 2012.
The lack of transparency and puzzling commercial logic has
fuelled speculation that VEB's loans had a hidden political
purpose. "The deal was interpreted as a way for Russia to
strengthen its economic as well as political leverage on
Ukraine," said Dzvinka.
($1 = 56 roubles, the exchange rate on 31 Dec. 2014)
(Editing by Andrew Osborn and David Holmes)