Putin’s Once-Mighty Bank for Pet Projects Now on Chopping Block

  • VEB selling off assets at fire-sale prices, cutting jobs
  • Kremlin mulls deeper cuts as quest for funding comes up short

The headquarters of Vnesheconombank in Moscow.

Photographer: Laski Diffusion - Wojtek Laski/Getty Images

The bank that financed Vladimir Putin’s grandest ambitions is running out of cash.

Vnesheconombank, which underwrote mega-projects like the Sochi Olympics and secret aid to allies in Ukraine, is dumping assets at fire-sale prices and relying on emergency government assistance to avoid default. It has virtually stopped new lending and cut off financing to most existing projects, according to two people close to the bank. 

VEB’s travails are the latest reversal for the Putin system, hit by the plunge in oil prices and U.S. and European Union sanctions. A hybrid of tight state control and reliance on cheap market funding, VEB was the hallmark of the boom years.

Now, with the price tag for its bailout rising above initial estimates of 1.3 trillion rubles ($20 billion), top officials are considering shrinking the bank to a shadow of its former self, according to four people involved in the discussions. The Russian president recognizes there’s no alternative to deep cuts, one of them said. Given the sensitivity of the issue, all spoke on condition they not be identified.

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“VEB faces a future over the medium term of dealing with the problems created in the past,” said Vladimir Tikhomirov, chief economist at BCS Financial Group, a Moscow brokerage. “That means only one thing, it will shrivel up.”

VEB’s problems mirror those of Russia’s economy as a whole. Short of cash and isolated internationally, the Kremlin must increasingly rely on its own limited resources to revive growth.

‘Quasi-Budget Fund’

“In its current form, VEB is a quasi-budget fund for financing priority projects,” said Karen Vartapetov, analyst at S&P. “This business model effectively requires constant support from the budget.”

A new management team is cutting about 20 percent of VEB’s staff and has given up its private jets and limousines. It is dropping a range of projects picked up during the fat years, including a sovereign-wealth fund and mandates to finance small business. A pair of failing commercial banks are also likely to be offloaded in the future.

The Kremlin didn’t respond to a request for comment for this article. VEB’s press service said the bank hasn’t frozen investment activity but declined to provide details on how much it’s financing at present.

To help raise cash, the bank is unloading whatever assets it can sell easily, even ones long considered strategic. First to go was a 3.6 percent stake in Gazprom, which VEB is selling back to the gas giant for 132 billion rubles, or just over half what VEB had paid for it years earlier. VEB is hoping to raise another 18 billion rubles by selling its 8.4 percent stake in the Moscow Stock Exchange.

Secret Deals

Bigger investments will be harder to liquidate. The $8 billion VEB put into long-secret deals for metals assets in Ukraine starting in 2009, for example, is still being traced by the new management. Some of the plants purchased were damaged in the war there. VEB hasn’t fully written off its likely losses on these, according to the people close to the bank, let alone found potential buyers.

Originally set up under Soviet founder Vladimir Lenin, Putin turned VEB into a pillar of his Kremlin-driven economy at the height of the oil boom starting in 2007. He pumped tens of billions of dollars into it and took personal control over key lending decisions. Fueled by government support and easy credit from U.S. and European markets, VEB’s assets grew more than seven-fold to more than 4 trillion rubles as Putin channeled the funds into high-profile projects and bailouts too risky for other banks.

That came to an abrupt halt when VEB was hit with international sanctions in 2014 over the Ukraine crisis, cutting off its access to western markets. Recession exposed many of its investments -- which included failing banks, construction projects, ski resorts and rail cars -- as money-losers. Putin put over $6 billion into VEB from one of the country’s sovereign-wealth funds, but that was just a stopgap.


In February, Putin installed the new management team. Chief Executive Officer Sergey Gorkov, a veteran of Sberbank, another big state bank, is crafting a strategy for what he’s calling “VEB 2.0” to be released at the end of this month.

“More alive than dead,” was how he characterized the bank’s state in April. He declined a request for an interview. He’s scheduled to speak at this week’s St. Petersburg International Economic Forum on a panel entitled, in part, “Realizing Ambitions.”

Internal estimates show about a third of VEB’s balance sheet -- as much as 1.5 trillion rubles -- are debts and losses that the bank will probably have to write off. Recent efforts to find alternative sources of money in Asia and the Middle East so far haven’t yielded much beyond pledges of possible future deals.

With the budget deficit growing, Putin limited help from the Finance Ministry to 150 billion rubles this year. VEB is expecting another 300 billion rubles in liquidity support from the sovereign-wealth fund.

Nabiullina’s Anger

Scrounging for cash, the bank’s new management team this spring proposed tapping the central bank for billions in financing. But when Elvira Nabiullina, the central bank chief, got word of the idea, she was livid at what would have amounted to printing money to cover the bank’s losses. She demanded the idea be eradicated from official presentations as dangerously inflationary, according to two people familiar with the events.

VEB backed down and the plan was dropped. The central bank’s press office declined to comment on the proposal.

VEB needs about 560 billion rubles this year to cover its foreign-debt payments, as well as other obligations. Missing those would risk default -- a potentially major blemish on Russia’s credit rating, since investors and rating agencies treat VEB as quasi-sovereign.

Payments on $18 billion in foreign-currency debt begin to rise next year, further pressuring cash flow.

Even for its newly narrowed mandate of backing high-tech manufacturing, infrastructure and non-commodity exports, VEB needs ongoing funding of about 500 billion rubles a year, officials said. With foreign markets closed for the foreseeable future and government funding strictly limited, there’s no obvious source.

Current subsidies are just enough “to keep our pants up,” said one senior official.

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