Head of the Far East Development Fund: Russian wood can become a global investment asset

The Far East Development Fund was established by Vnesheconombank (VEB.RF) in 2011 for the purpose of accelerating the development of the Far East and Baikal macroregions. Over the past eight years, the Fund managed to attract investments in major industrial and infrastructure projects in the Far East, to develop a service for the allocation of aquaculture zones intended for growing aquaculture, as well as to launch a program of supporting small and medium-sized businesses. One of the main objectives of the FEDF is to attract foreign partners in the Far East projects, primarily from China, Japan, South Korea and other APAC countries. At the same time, the range of challenges the Fund faces will become even wider this year, after the issue of the President’s instruction on expanding the FEDF scope to the Russian Arctic zone. The Head of the FEDF Aleksey Chekunkov in his interview with TASS told about the objectives they managed to achieve in the past few years, the projects that help to improve the life quality in the Far East as well as the challenges the Found faces when operating in the Arctic zone.

– Over the five years of your work as CEO, the Fund has invested more than 35 billion rubles in priority projects in the Far East, with more than half of the means being invested in new infrastructure. Currently, 14 projects are underway with a total investment amount of about 215 billion rubles. Which of the projects already implemented with the assistance of the Fund are the most important for the Far East? Did they help to solve the problems of any territories?

– It is inaccurate to say that one project is more important than others being implemented in the Far East – all projects supported by the Fund are priority and unique, because each of them is approved by the Government Subcommittee on the Development of the Far East. We have always striven to fill our investment portfolio with diversified projects, still they are united by one common thread – all of our projects are of "catalyst" type. Each of them resulted in launching a significantly bigger project or even transforming the whole economy sector. Thus, the launch of the Inaglinsky Mining and Processing Plant (MPP) in Yakutia allowed to develop such a competitive branch of the regional economy as the export of high-quality coal.
For me personally, the Khabarovsk Airport development project implemented in the city that has historically been the administrative capital of the Far East and remains its industrial capital, is very important. Unfortunately, the earlier and current condition of the airport does not correspond to modern standards and the status of the airport hub. For us, this project is also important because we are implementing it in partnership with our shareholder, and this is the first example of such a successful cooperation between the FEDF and VEB.RF. I hope this example will become a model, that is, other projects will be implemented in compliance with the same standards as VEB project.

– How much money can be allocated from the Fund for the implementation of this project?

– The total cost of reconstruction is 4 billion rubles: 2 billion rubles from the Fund and from VEB each. It may surprise you a little that we, despite being a subsidiary of Vnesheconombank, co-finance the project from our own funds. This is necessary because VEB.RF provides long-term loans at the market rate. On the contrary, the FEDF has the opportunity to allocate credit funds at a reduced rate thanks to a subsidy from the federal budget. When we, roughly speaking, “mix” this money, financing for the projects is getting both cheaper and longer. In addition, VEB attracts the Fund experts to work on projects, thereby reducing management costs.

– You mentioned that this project will become a model for the Fund – saying that, do you mean the algorithm of interaction with VEB.RF?

– Yes, this model assumes that the FEDF will become a single window for providing counterparties with financing both from its assets and assets of our parent structure. We ourselves already have a decent capital of almost 60 billion rubles, while VEB intends to invest at least 300 billion rubles in projects in the Far East over the next five years. Having these funds, we plan to attract 1 trillion rubles of investments in projects with our participation by 2024, since Vnesheconombank usually provides a third of project financing.

– Let us return to the question concerning the Khabarovsk airport; when it's construction is expected to be completed?

– The project is now being implemented at a faster pace; the contractor is building the domestic airlines airport, and by the end of the year this project is to be completed. The next stage will include the construction of the international terminal - it will take, I suppose, two years to build and launch it.

– Inaglinsky MPP and Airport are fairly large-scale projects; but what kind of support can the Fund offer to small and medium-sized businesses?

– Our support program for small and medium-sized enterprises is a piece of particular pride for us. We have issued more than 800 loans, and the total value of projects has already exceeded 18.5 billion rubles. Besides, take note of the fact that we were the first who started offering such preferential terms for small and medium businesses. When we initiated this program, the bars were too high for small businesses: there were restrictions set by the minimum loan volume, by industry – we started lending even to microenterprises, significantly increased the lending period for small and medium-sized businesses – up to ten years, and substantially reduced the rate by 4-6%, on average down to 10% per annum.
One can say, we are proud of this product, because it covered the widest group of customers, citizens, business, and brought not merely economic, but also social effect.

– As it was mentioned, currently there are 14 projects underway. Which of them are expected to be implemented before the end of this year?

– This year, we are renting housing for employees of Zvezda Shipyard, and the already mentioned Inaglinsky MPP approximates its design capacity of 4 million tons. There is a plan to complete the construction of the Russia-China bridge in the area of Nizhneleninsky village, the Jewish Autonomous Region. This is an important project; we want to make it as modern as possible and, most importantly, designed for the transportation of mixed cargo (wide range of goods), not just bulk cargo, as the currently approved project offers. Therefore, we will think over and consult with the government, whether it is feasible to hurry with the project handover in a limited form, or perhaps it makes sense to carry out additional design work and hand over the universal project, which will be implemented using the cutting-edge technologies.

– Does the Fund intend to participate in the next stages of housing construction for Zvezda employees after the completion of the first stage?

– So far, we haven’t received any such requests from Zvezda. However, we already took the first (the most difficult) step, and strategically, if such a need arises, we will be very attentive to any requests in this respect.

– By analogy with this project, the FEDF planned to take part in the construction of housing for workers of the Inaglinskoye field.
Have you already reached an agreement?

– I would not single out this task as an individual project. Today, we are looking more broadly at the Fund’s participation in mortgage programs: the development of the urban environment is a priority for VEB.RF, our shareholder, and the reduction in the cost of mortgages is one of the goals of the Housing and Urban Environment national project. Therefore, in cooperation with the Ministry for Development of the Russian Far East and Arctic, we are developing a preferential program, which would allow the Fund to reduce the mortgage rate for the Far East in cooperation with regional agencies. We will strive to offer such product at a minimum interest rate for end borrowers. We'll see what we will be able to do in this field, but I think that later this year we will offer something interesting to the market.

– Some time ago, the FEDF announced plans to work on a new project, a mechanism for the allocation of forest plots through tendering, similar to the electronic service for allocating offshore zones for aquaculture. Has the development of this service already started?

– Indeed, a year ago we opened an electronic service that allows investors to choose zones for growing aquaculture – such valuable and tasty products as sea cucumber, scallop, sea urchin, oysters and seaweed. This project has amazing results: during the year and a half after receiving the instruction from the President of the Russian Federation Vladimir Putin to develop such mechanism, business representatives could obtain twice as many offshore zones as in the previous 20 years and, consequently, a significant part of entrepreneurs were brought out of the shadows. But the most important result was obtained thanks to electronic tendering. Since last year, 64 zones with an area of more than 13 thousand hectares were sold at electronic auctions. Some offshore zones during the auction went up in price 24 times. Accordingly, revenues from one hectare of water increased significantly. The federal budget will receive more than 270 million rubles, which is significantly higher than the starting price of the zones – 126 million rubles. Investors can't complain, because they spare no expense for what is transparent, clear and fair.

– What components of the mechanism for allocation of plots made it possible?

– Formerly, the investor did not know, which plot he could receive. We formed a single list of available plots, developed online map, and transferred all tenders to online auctions. We will use these decisions to fulfil the new instruction. Unfortunately, the forest industry still uses outdated technologies: database is collected and stored on paper, while the age of information exceeds 20 years in over 70% of cases. When an investor wants to get some forest plot, he usually deals with a forester armed with a mapboard, where all maps are drawn by hand and based on information obtained 20-30 years ago. Obviously, it can be done much better. 
Different organizations – Roskosmos, Ministry of Defence, Rosleskhoz, Rosreestr – already have segmentary tools that allow to see this sector in a digital context. The objective of our system is to use modern technology, replacing the subjective human factor with an objective technological one. We will observe forests from space and analyse data using software so that investors, market participants, and authorities could receive up-to-date information.
Currently we are dealing with the integration of tools into a unified system, which will consist of several main units. The main unit is an interactive map, which allows anyone to see what happens with the forest. The second is the auction system, which will allow holding open online auctions for forest plots. The application of this system is expected to increase revenues to the federal budget and boost the transparency of the process. The third is an electronic market place for products, so that from the moment of granting forest plot to the disposal of wood processing waste, its sale within the country or export sale, the state could control its flow. Such control is planned to be made feasible using chipping, i.e. assigning an electronic digital passport to each tree. The system is currently at the stage of prototyping. We will provide a prototype for the Eastern Economic Forum (EEF), and the full-scale application will start in 2020.

– How often will the interactive map of forest plots be updated?

– We are still looking for a reasonable balance. The map will be definitely updated much more often than now, but whether it will be once a day, once a week or once a month - I can't tell now, because it requires markedly different expenses. Still, this is not an operational response system, that is why we want to configure it so that the development and maintenance costs would be economically feasible and allow to increase in the state revenues from timber exploitation, sale of plots, export duties, and taxes. We believe that these effects will be perceptible, and in the first year of operation, the system will allow saving tens of billions of rubles. The ultimate goal of this project is to increase the capitalization of the Russian forest. It is known that the forest in Russia cannot be privately owned, only leased for 49 years. This period is sometimes insufficient for investors, as some tree species grow longer. However there are interesting examples from the world's practice, for example, in Finland, where the forest is privately owned. We think that we can allocate specialized plots and make "investment forests", which can be invested in by both Russian citizens and foreigners.
Forest is an investment that is physically growing, so why not make Russian forest a global investment asset? It can cost tens, or even hundreds of billions of dollars in terms of capitalization, become the property of mankind and significantly increase the welfare of the people living in the Far East.

– How did the Ministry for Development of Russian Far East and other federal authorities react to the idea of turning the forest into a global investment asset?

– Before the completion of prototyping, it’s too early to talk about any specific reaction. After the prototype is available, it will define the field of work, and further details will be worked out, including changes to regulatory acts, federal laws and the Forest Code. In this work, we rely on the opinion of the Government, we coordinate our efforts with Yury Petrovich Trutnev (Deputy Prime Minister of the Russian Federation and Plenipotentiary Envoy of the President of the Russian Federation in the Far Eastern Federal District TASS).

– The Arctic has become another new “work front” for the Fund – the FEDF will act as an investor and organizer of financing projects in the Arctic zone. Earlier in your interview with TASS at the 5th International Arctic Forum, you said that a list of 119 projects has been created that are ready for implementation in the Arctic. Which of them are planned to be implemented first of all?

– A lot of work on the selection of investment projects in the Arctic is yet to be done. In the Arctic zone, investment needs are even larger than in the Far East. The portfolio of projects that can be implemented in the Arctic already exceeds 9 trillion rubles, and our task is to thoughtfully select the most cost-effective and efficient ones. I think it is most advisable to start with projects related to the development of transport hubs. The first of these may be logistics projects in the Arctic zone connected with the development of the Northern Sea Route (NSR).
The main thing we should focus on is the improvement of the quality of people's lives. That is why, for example, we pay special attention to airport construction projects and are actively engaged in them. Therefore, such a strong emphasis is laid on improving the quality of the urban environment. Under no circumstances we are trying to substitute municipal administrations and we cannot invest in the creation of public zones, still in cooperation with local authorities, as part of concession agreements, we finance healthcare facilities, for example, the Kamchatka Krai Hospital.
We hope that we will succeed to launch a program for small and medium-sized businesses in the Arctic; it is very important to support SMEs considering a high value of credit resources and high cost of living. Among all else, the work of small and medium-sized entrepreneurs in the Far North is essential, since there is a demand on the part of rotational workers, employees of resource, oil and gas companies.
Support of tourism can be another area of activity. I think there are vast opportunities for the development of tourism business in the Arctic, and they are not fully exploited. At the same time, the development of tourism will definitely affect the economy growth as a whole and will result in an increase in the number of SMEs.

– At a plenary session of the Arctic: Territory of Dialogue Forum, Russian President Vladimir Putin said that the FEDF capital can be capitalized to finance Arctic projects. Is the final decision taken?

– In the near future, I expect that, in fulfilment of the President's instructions and following our ministry in charge, we will become the Far East and Arctic Development Fund. In this new chapter of our life, we will face major tasks requiring additional capitalization, which the president spoke about. And, certainly, since we plan to invest 300 billion rubles in the Far East within the next five years, then we will need similar amount for the Arctic in order to have a comparably sized economic effect.
I think that we will have more recapitalization rounds this year, associated exactly with the expansion to the Arctic. Arctic projects will receive money from the new subsidy, because the current subsidy is for the Far East, it is targeted.

– Did the fund receive this targeted subsidy?

– Yes, 9.7 billion rubles were received. Today, the Fund's capital is 59.4 billion rubles, but since we receive interest on projects, consider that we already have 60 billion. When we started working with this team in 2014, we had 15 billion rubles. We have quadrupled during four years, and now our goal is – I’m speaking seriously – to maintain this asset growth rate. We can invest this money for the benefit of the economy, so I guess that we will take the bar of 200 billion over the next four years.

– Which projects the last subsidy will be allocated for?

–Two major projects are almost ready to be launched.” The first one is the Nakhodka Fertilizer Plant, whose active construction will commence this year. The second one is the development of the Malmyzh deposit. Besides, the work on development of infrastructure within a number of projects is underway, including major federal projects, which are primarily aimed at deep processing of natural resources and export development.