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!