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Investment Catalyst

Alexei Chekunkov - on the projects of the Fund for the Development of the Far East and the Baikal Region

Alexey Chekunkov, General Director of the Far East and Baikal Region Development Fund (FRDV), talked about the principle by which the fund selects projects, what conditions it sets, what projects it directly participates in, and what it considers to be promising.

Investment Catalyst

- What principles and criteria does the Foundation follow when choosing potential projects? How many projects have been reviewed and selected?

- In total, such projects, which we previously considered together with experts, were considered promising, we had 2014 since December 64. Of these, about ten were the most efficient and then passed them through an important gateway - an investment committee of the Board of Directors of the FRDF, consisting of representatives of Vnesheconombank, Minvostokrazvitiya and independent directors.

Projects are submitted to the committee when we with the initiator reach a close understanding on the terms of the potential transaction. When they are ready to subscribe to our money, take them on the terms on which we are ready to give them. And these conditions are still quite tough - despite the fact that the money is paid, their price somewhere is 10,5% per annum in rubles. Still we demand rather rigid guarantees, sureties with the purpose of the maximum protection of the investments. We meet the projects satisfying these requirements on the investment committee. To date, the committee approved ten projects.

- In early August, the subcommittee of the Russian government approved the first three investment projects out of ten selected by the fund. When to wait for the rest? Which companies are involved, in which regions?

- I now did not want to name specific companies, but the branch cut is the transport, energy, industrial infrastructure. Projects in the territories of Primorsky Krai, Khabarovsk Territory, Sakhalin Region, Chukotka, Yakutia.

Projects in Kamchatka, the Jewish Autonomous Region and Sakhalin have already passed through a government commission. By the end of the year, of these ten projects, of which three have already been recognized as priority, we hope to hold at least three or four more projects. Honestly, there would be more money, we would move faster. In my opinion, all enterprises are in a very high stage of readiness to start working with this money.

In some projects we enter the design stage. For example, the project in Chukotka. This is a project for the development of the Baim deposit of copper and gold, which the Baim mining company is engaged in. This is a world class project. And one of the main issues of the project development is energy supply. There only the design will cost several hundred million rubles. We act as a catalyst for investment, we are actually entering the category of project participants de jure, and this is very important, especially for Asian co-investors. For them, the participation of the state fund in such a project is very important. Our participation is for the investor another weight of the proposal to enter the project.

- Have any foreign companies expressed interest in the project?

- I saw this project, while still working at RFPI. At that time there was interest from BHP Billiton. But then there was 2011 year, resource prices reached a peak, and the company had huge write-offs for the failed past years. She decided to focus only on a few existing businesses, did not go into the project. That is, it is an old well-known project. For him everything is decided by the energy sector. And there is an energy deficit in Chukotka. In addition, Bilibino NPP is being decommissioned in the region. To build there its own power is unprofitable and expensive, at the same time, in our Magadan region, the electricity surplus is almost 700 MW. Today, the RF Ministry of Energy, with the participation of the Deputy Prime Minister Yuri Trutnev, the government of Chukotka has developed a new approach to energy supply in Chukotka, and as one of the working scenarios, the connection of the power systems of Magadan and Chukotka is being considered.

Technologically, this is a complex scheme. Today, economically it can look expensive on the figures, but we understand that the region is thousands of kilometers of deposits, natural resources, which are never to be reached in this life without this energy road.

The project of electricity supply of the resource project can give impetus to the development of the whole region. One Baimka will change everything there - the structure of the economy, the size of the economy. And we, as a fund, would be interested in helping them to make this first step, understanding our role as a catalyst.

This is one of ten projects where we, with a relatively small investment, go in, and our money is firmly protected, there are strong shareholders. And we are moving on a safe for ourselves this big thing.

- So you are planning to invest only in the design of the Magadan-Chukotka energy bridge?

- Quite right. Today, the project to create an energy bridge from the Magadan Region to Chukotka is estimated at around 70 billion rubles, but this is an expert, pre-project assessment. I think that the amount of design costs will be about 700 million rubles, somewhere 1% of the total costs. Here we are ready to participate in this money together with the initiators of the project - the Baim mining company. While the design will be conducted, the main investments will already be attracted.

- Is the participation of the fund assumed directly in the project for the development of a deposit or the construction of a combine?

- The plans are very long-term. They just depend on the results of this design. And, of course, depend on where the conjuncture goes, as the prices for copper, aluminum and a number of other resources now reach five-six-year lows.
And if this situation stiffens, it will be necessary to look at such technologies and models of mining the field, when the richest areas are first worked out. It will be necessary to leave not on the shaft, but on a more point development.

Therefore, it is necessary to attract a large foreign strategic investor for a field development project, realizing that this is a world-class project, where you can go blindly and take opportunistic risk, you cannot. There you need to go, understanding the markets for finished products.

- Concerning the issue of marketing products, including transport logistics, the Sevmorputi project is recalled. Would this project be of interest to you?

- We participate in a working group with the Ministry of the Interior, which is engaged in expert and analytical work on this project. Based on the results of this expert work, preliminary conclusions are a mega-interesting project. I would compare it with the exploration of outer space. When space exploration began, no one calculated its commercial appeal, as a result, we received technologies such as GPS and navigation, thanks to which the transport logistics for the whole world, agriculture, have changed radically. To some extent, the Internet can be considered one of the results of such a fundamental state project.

Now the creation of a new nuclear icebreaker is being discussed on the basis of the concept project "Leader" - a new-sized ship with a new engine. Such an icebreaker will be able to lead vessels that are much larger than before. The consolidation of ships is a trend in the world's sea freight traffic. It started once with liquid tankers, now huge container vessels are already being built for 18 thousand TEUs (unit of capacity of freight vehicles - Ed.). And through the Sevmorput now only four thousand people go. So, if at least eight thousanders go, it's how much the cost per TEUs will decrease! Therefore, three quarters of the development of the Northern Sea Route from the point of view of the resources necessary for its implementation is shipbuilding. This is the creation of ice-class vessels and icebreakers. And one quarter - investment in the port and navigation infrastructure. All as a whole can significantly change the balance in the world transport market.

- Previously, the rules allowed the fund to invest money only in projects of a very high degree of readiness with minimal risks. Thus, the foundation’s activity as an institution of development was actually blocked. Did you manage to remove these restrictions together with the Ministry of Finance?

- In July, the government changed the rules for investing the fund's assets. It's actually been a month since we can breathe. Prior to that, they lived on the artificial respiration apparatus, because it was clear that money can not be touched. Of those 60 projects, maybe only five corresponded to the rules of subsidies that existed initially when the foundation was created, unfortunately.

Now the criteria have changed significantly due to the fact that the projects of the fund are considered both by the government and the Ministry of Finance. Now, thank God, the rules are reasonable, although they still leave a lot of responsibility for us to protect investments, and we are actually working as a financial institution. But now, at least we can invest in the same design, now we can co-invest with state-owned companies, before such could not be done. There were criteria that described the projects in such a way that they should have been the best of market commercial projects, but for some reason not necessary for commercial investors. But this does not happen. Honestly speaking, the projects that are the best from the point of view of investment profitability do not fall into our table. Those projects, where there is a profitability in 25-30% per annum, are already in demand by Russian investors.

- In process of investing in projects, the fund's resources will be reduced. How will the capitalization take place?

- It was commissioned by Yuri Petrovich (Trutnev - ed.) To invest at least half of the fund until the end of 2015. We will fulfill this task. According to our current portfolio of projects, we see that we will invest at least half of the existing capital in 15,5 billion rubles. That is, before the end of the year this amount will be 7-8 billion rubles. We are able to invest the entire fund within the next 12 months.

As for capitalization, it was the instruction of the Russian president and the prime minister to agree on a mechanism for the capitalization of the fund, based on reinvesting some of the federal taxes to the fund from new projects in the Far East and the Baikal region, without regard to VAT. We have worked it out, prepared a draft federal law on changes to the budget code from Minvostokrazvitiya. Received a reaction between the Ministry of Economic Development and the Ministry of Finance. This work is not finished yet. Its intensity rises as we invest our existing money.

We have a number of projects that we are now discussing with the regions, with the authorities on the concession model, when we create the infrastructure, the region acts as a concessor, we are a concessionaire. For example, you need a road to the deposit, which the investor is able to develop, but to take on more and it is not ready. So, of course, we would like to see the taxes coming from this field, the federal part of the same MET, the same profit tax come to the fund. And the Finance Ministry, I hope, will agree with this. We will complete the details by the end of this year.

We hope from the year 2016 to apply this mechanism. Legally, the infrastructure for this is created. That is, we are ready to receive these funds in the framework of reinvestment of taxes. The main thing is that the mechanism has been agreed by the government, there have been changes in the legislation.

- The Industrial Bank of Korea proposed to create a joint fund for the development of infrastructure projects in the Far East, primarily related to shipbuilding, construction of shipyards. Does your fund somehow participate in this project?

- I have some experience in creating funds. This is a very long and very difficult history. When you are a project management organization, paying for fund management is not always a winning strategy. Because, by releasing money to the fund, you are already losing control to some extent. In general, I consider the idea of ​​creating such funds premature. Our strategy so far is to build on projects.

- Recently, it was announced plans to create a company "International Airport Khabarovsk", which will deal with the reconstruction of the air port. With whom of foreign investors are negotiations about participation in the project?

- This is a project that we have been working on for a long time. He has not yet left for the commission, because we need to finalize the structure of investors and creditors. Initially, Japanese structures showed great interest, and they were ready and continue to be ready to invest in the form of equity and loans. But this money, even if they cost 2% per annum, is money in yen. This money is long, for seven years. But taking money for seven years in a currency is risky, given that the object is purely ruble, all fees are ruble, and some of them are regulated by our tariff service. At the same time, if credited in rubles, even if the rate is significantly higher, then in this case we have at least some binding to our inflation, to our purchasing power.

Until the end of the year, we hope to complete the deal on the construction of a new terminal at the Khabarovsk airport. Now we are working with Russian banks and in parallel we continue to work with Japanese and even with Chinese partners to reach some final investment decisions in the next two months - let's say, until the end of October. As soon as the investment pool is closed, one hundred percent of the capital will be understood, we will submit this project to the government. The whole project is estimated in the order of 6-7 billion rubles.

- Does the FRGF come into the charter capital?

- In the authorized capital, our share will be somewhere between 20 and 30%. It is about entering into the authorized capital, but with a certain coupon, discussing preferred shares. I think this is one of the key projects related to the development of the Far Eastern region, because it is the gateway to the administrative center and historical transport hub of our entire Far East.

- Since you have a fund for the development of the Far East and the Baikal region, are there any specific projects in which the fund could have taken part in the Baikal region?

- Indeed, the foundation's mandate includes the Baikal region. The very system of consideration of projects for implementation in the Baikal region was formed only in July this year, when it was determined that projects in the Far East pass through itself Minvostokrazvitiya, and in the part of the Baikal region - the Ministry of Economic Development. We started work, sent out all our governors to our investment criteria and methodology. They met already with the head of Transbaikalia. Discussed projects in agriculture and projects for deeper processing in Krasnokamensk copper ore Bystrinsky GOK (development of the field is engaged in "Norilsk Nickel" - Ed.). There are now plans to make the territory of advanced development - TOP.

Bystrinsky GOK is developed by Norilsk Nickel, but in Krasnokamensk it is necessary to build a metallurgical processing plant. Let's look for an investor together. This will be a major project, so as not to concentrate lead by rail to China, but already a product of high redistribution.

- The project "Vladivostok Free Port" was completely new for Russia. To your foundation, how interesting is it?

- The most active way we look. In our list there is a project related to the modernization of port facilities in the port of Vladivostok. With one of the operators, we are now in fairly advanced negotiations on the modernization of a part of the port infrastructure, we are talking about the construction of a new refrigerator. We are involved in the project of a wide international transport corridor - Primorye-1 and Primorye-2. On the first - more on the construction of roads, on the second - in the development of the port of Zarubino, the expansion of roads, railroad crossings, energy capacity.

- Canadian-American JV Amur Minerals LLC announced its intention to attract Russian companies to the Far Eastern mining project - Malmyzhskoye gold deposit in the Khabarovsk Territory. The agreement on entering the project of Russian investors can be signed within the framework of the Eastern Economic Forum. Does the foundation plan to participate in this project?

- We have contacts of quite an early character here. The project we know. One of its participants is the American company Freeport McMoRan - one of the leaders of the copper-gold projects. The development of the Malmyisk gold deposit is a world-class project. The field requires very large investments. The company "Amur Minerals" really appealed to us. We are open for cooperation, but there is no ready deal with them yet. We do not have this project on our short list, but we continue our work.

"What did they offer you?" What kind of participation?

- Any resource project is interested in getting us in a certain sense as a flag. We take part in various projects with small money, we are investors, shareholders. For us, this mechanism is a working one, provided that if we understand how our money comes back, there is a guarantee.

In the case of the Malmyzhskoye field, there is no such guarantee. The initiator is a private company, not a public one, so we, let's say, are exploring this possibility, but we still do not consider Malmyzh as a finished project. The region supports them, knows it very well, considers the project promising. Both project organizers and local authorities believe that the project is technologically implementable. Despite the low content of metal, the technology of mining is, it is not as complicated as, for example, Udokan (Udokan deposit - ed.).

I think if the company is now becoming active, we are ready to pick them up and work together in a road show mode, in the mode of attracting investments from our partners.

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