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IFC in Russia: Strategy and Financing
Instruments
Association of European BanksMoscow
May 25, 2005
2
Outline
• Evolution of IFC’s Strategy in Russia
• Financing Instruments
• Focus on Local Currency Finance
• Focus on Housing Finance
IFC Investment Strategy in Russia1990s: 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
4
IFC Portfolio in Russia by Year
0
200
400
600
800
1,000
1,200
1999 2000 2001 2002 2003 2004
US
$ m
illi
on
s
Other sectors
FM
For IFC account
5
Sectoral Focus
• Financial Markets
- independent banks
- new products (housing finance, leasing, consumer finance, microfinance)
• “Real Sectors”
- retail, manufacturing, regional hotels
- transport/logistics, agribusiness,mining
6
IFC Portfolio in Russia by sector (as of June 30, 2004)
General Manufacturing
22%
Utilities1%
Health Care0%
Infrastructure9%
Food & Beverages4%
Wholesale and Retail Trade
8%
Information Technologies &
Telecom5%
Oil, Gas and Mining1%
Collective Investment Vehicles
2%
Finance and Insurance
48%
Total for IFC account US$ 1,123
7
IFC’s Largest Country Exposures(Portfolio for IFC’s account, as of May 2005)
0
200
400
600
800
1,000
1,200
1,400
1,600
US
$ m
illi
on
s
8
IFC’s Products and Services
• Corporate loans• Financial intermediaries• Syndicated loans • Project financing• Equity and quasi-equity• Guarantees• Advisory services
9
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
10
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
11
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
12
Focus on Local Currency FinancingObjectives: • Hedge exchange rate risks• Help develop local capital marketsProducts• Structured finance:
– partial credit guarantees– securitization
• Ruble-linked loans
Russian Standard Bank
Center-Invest Bank
13
Russian Mortgage Market
• Mortgage market tiny– Total outstanding mortgage debt: less
than $1 billion – 0.1% of GDP
• Demand for housing finance high• Weaknesses in legal framework
improving
14
Mortgage Investments/GDP
0%
10%
20%
30%
40%
50%
60%
Russia EU-15 US
15
Russian Mortgage Market
US$ MN
Sberbank DeltaCredit AИЖКRaiffeisenbank MIA Others
0
100
200
300
400
500
600
2001 2002 2003 2004
16
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
17
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
18
Housing Finance: Recent Investments
• Georgia:– Bank of Georgia
• Russia:– RZB Russia– Delta Credit Bank (2)– Societe Generale
• The Baltics– BalAEF (2)
19
• Russia:– Fannie Mae training– MBS Law assistance– Securitization working group
• Ukraine:– MBS Law assistance
Housing Finance: Recent TA
20
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
21
• Primary mortgage market development project:– Combining TA and funding– Targeting domestic banks
(regional)– Launched in April 2005
Housing Finance: Next Steps
22
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
Focus on Energy Efficiency Finance
23
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 FIsBuild relationships between FIs, energy service companies, vendors
CREDIT LINES
PORTFOLIOGUARANTEE
TECHNICAL ASSISTANCE
Program aims at stimulating private sector EE investment in Russia through:
24
• 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.
Energy Efficiency Projects: Examples
25
Program Focus: Project Criteria
• Ownership: private sector
projects
• Size: > $50,000, < $1 million
• Payback period: < five years
• Technical: investment must be in
a proven technology
26
THANK YOU!