IFC in Russia: Strategy and Financing Instruments

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IFC in Russia Strategy and Financing
Instruments

• Association of European Banks
• Moscow
• May 25, 2005

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Outline

• Evolution of IFCs Strategy in Russia
• Financing Instruments
• Focus on Local Currency Finance
• Focus on Housing Finance

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IFC Investment Strategy in Russia
1990s Focus on TA - privatization and capital
markets - small amount of investment After 1998
Focus on foreign partners - DeltaCredit
Bank From 2001 Shift to local sponsors -
Russian Standard Bank - NBD Bank,
Centre-Invest, ICB St Pete Continued support
for foreign companies expanding into Russia -
Raiffeisen Bank - SocGen (BSGV) Mortgage TA
project Sustainable Energy Finance Project
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IFC Portfolio in Russia by Year
For IFC account
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Sectoral Focus

• Financial Markets
• - independent banks
• - new products (housing finance, leasing,
  consumer finance, microfinance)
• Real Sectors
• - retail, manufacturing, regional hotels
• - transport/logistics, agribusiness,mining

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IFC Portfolio in Russia by sector (as of June 30,
2004)
Total for IFC account US 1,123
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IFCs Largest Country Exposures(Portfolio for
IFCs account, as of May 2005)
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IFCs Products and Services

• Corporate loans
• Financial intermediaries
• Syndicated loans
• Project financing
• Equity and quasi-equity
• Guarantees
• Advisory services

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Key Investment Guidelines

• Private sector
• Financially, economically, environmentally, and
  socially sound
• 25 percent maximum IFC share of project cost
• Investment size
• 1 million to 100 million in standard projects
• An increasing focus on support for small and
  medium enterprises, mainly through lending to
  local financial institutions

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Loans and Intermediary Services

• Fixed or floating market-rate pricing
• Features
• Tailored to cash flow
• Loan maturities of 7 to 12 yeas
• Appropriate grace period
• Lending to projects through banks and leasing
  companies

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IFC Financial Products Equity and Quasi-Equity

• Equity investment based on anticipated
• return
• Never the largest shareholder
• Passive investor
• Often considered local shareholder
• Long-term investor
• Quasi-equity convertibles, warrants, preferred
  shares, subordinated loans

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Focus on Local Currency Financing

• Objectives
• Hedge exchange rate risks
• Help develop local capital markets
• Products
• Structured finance
• partial credit guarantees
• securitization
• Ruble-linked loans

Russian Standard Bank
Center-Invest Bank
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Russian Mortgage Market

• Mortgage market tiny
• Total outstanding mortgage debt less than 1
  billion 0.1 of GDP
• Demand for housing finance high
• Weaknesses in legal framework improving

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Mortgage Investments/GDP
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Russian Mortgage Market
US MN
600
500
400
300
200
100
0
2001
2002
2003
2004
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Russian Mortgage Market Structure

• Commercial
• US Moscow/St. Pete (400-600 mln)
• US 10-15, 5-15 years, true mortgage
• Quasi-Commercial
• Sberbank, Fed. Mortgage Agency
• RR, 13-15, 5-27 years

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Securitization the Great White Hope

• Legal problems
• No SPVs, no tax-neutrality
• Other aspects untested
• Market problems
• No data
• No market
• No long-term funding
• IFC focus
• Now Primary market
• Future Securitization structure

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Housing Finance Recent Investments

• Georgia
• Bank of Georgia
• Russia
• RZB Russia
• Delta Credit Bank (2)
• Societe Generale
• The Baltics
• BalAEF (2)

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Housing Finance Recent TA

• Russia
• Fannie Mae training
• MBS Law assistance
• Securitization working group
• Ukraine
• MBS Law assistance

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IFC Approach to Housing Finance

• FIRST PRIMARY, THEN SECONDARY
• Proven standards (from worldwide experience)
• Focus on mortgage origination
• Move to Ruble finance (as soon as possible)
• Long-term develop secondary market
• Eventually, securitization
• IFC has done first securitizations in several
  markets worldwide

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Housing Finance Next Steps

• Primary mortgage market development project
• Combining TA and funding
• Targeting domestic banks (regional)
• Launched in April 2005

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Focus on Energy Efficiency Finance

• Combining TA, GEF guarantee, and funding
• Energy intensity of the Russian economy
• End user inefficiency
• Rising energy tariffs
• Large EE potential in Russia
• Increasingly large potential for financial
  savings
• New business opportunities

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Program aims at stimulating private sector EE
investment in Russia through

• Overcome the liquidity barrier for EE projects in
  select financial institutions (FIs)
• Encourage funding of EE projects
• Improve expertise in EE project development at
  company level and processing by FIs
• Build relationships between FIs, energy service
  companies, vendors

CREDIT LINES
PORTFOLIO GUARANTEE
TECHNICAL ASSISTANCE
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Energy Efficiency Projects Examples

• Replacement of purchased heat by in-house
  generation (Metalworking)
• Decrease annual heating expenses by 82.
• Investment 546,000. Simple payback 4.4 yrs.
• Installation of a steam boiler and steam turbine
  for electricity generation (Food processing)
• Generate in-house cheap electricity
• Investment 1,250,000. Simple payback 1.6 yrs.
• Installation of co-generation steam turbines
  (Pulp and paper industry)
• Decrease expenses for heat and electricity
  consumption
• Investment 2,860,000. Simple payback 1.6 yrs.
• Installation of co-generating module for in-house
  electricity and heat production (Wood working
  industry)
• Decrease of expenses for electricity consumption
• Investment 2,700,000. Simple payback 2.7 yrs.

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Program Focus Project Criteria

• Ownership private sector projects
• Size gt 50,000, lt 1 million
• Payback period lt five years
• Technical investment must be in a proven
  technology

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