Russia's Top Development Banker Talks Development with Putin

Chairman of the Executive Board of Sberbank Herman Gref.

Sber is Russia’s largest bank and also its largest public bank having roughly twice the assets as VTB, Russia’s #2 public bank. Aside from China, no other nation has publicly owned banks of similar size and importance. In his report to Putin, Mr Gref will mention paradoxes that relate to the norms of the Western banking system and its results, which differ primarily because those banks are not public banks and have a completely different set of priorities. This isn’t the first report about Sber, but there’re many more readers now than when those earlier reports were published. So, as new readers will discover, Sber does much more than just make loans as it’s one of the main outlets pumping investment capital into the economy, something most Western banks no longer do, which is why those nations are deindustrializing. As long as Russia continues to manage its public banks as it is now, Russia’s economy will continue to grow at the paradoxical rates now being seen. And for the ambitious development plans Putin has outlined to succeed, that practice must continue. Now we’ll see what’s paradoxical:

Vladimir Putin: Herman Oskarovich, the main topic is the results of work for the first half of the year, but we are in constant contact with you. I know that you have many investment and social projects.

Please, please.

H: Vladimir Vladimirovich, the economy is growing at a much higher rate than all analysts predicted: the forecasts were around one or two percent, and we see that our forecast today for the end of the year is 3.8 percent GDP growth. And wages are growing: in the first six months, wages are growing at a rate of more than eight percent, and about six percent – the growth of incomes of the population. Accordingly, we see an increased demand for our services, lending services. And, in general, this year we also significantly exceed our forecasts for loan portfolio growth.

Vladimir Putin: Despite the key rate?

H. Gref: Despite the high key rate, we can see that in six months we have already earned 769 billion rubles according to Russian accounting standards, and slightly more by international standards. This is six percent more than last year.

Overall, we have a return on equity of 22.9 percent, which is in line with our forecasts.

But we have a growing number of active clients among legal entities and individuals, and we see an increase in our loan portfolio. In the first half of the year, let's say our loan portfolio grew by about six percent and amounted to about 11 trillion rubles. We expected mortgage growth to be much slower this year, but the first half of the year was very successful.

We see that investments are growing. Paradoxically, you are absolutely right: with a high Central Bank rate, it would seem that the first type of lending that begins to decline is investment lending. But we can see that this year we have already issued about a trillion rubles of investment loans in the first half of the year, and the volume of investment transactions that are currently in operation is about a quarter higher than last year. In many ways, this is a paradox, in fact, it should not be so, but so far the company's investment activity is very high. Of course, public investment is also growing, but this is not the only reason, we see a big increase in private investment.

This year we will pay the total amount of taxes and dividends to the state in the amount of approximately 1.2 trillion rubles. This is an all-time record. We have already paid dividends in the amount of 750 billion rubles. And in principle, so far everything is developing quite positively.

Vladimir Putin: Apparently, the realization is coming – I mean private investment, the growth of private investment – that it is better to put everything in the house. The situation that has developed in recent years speaks to this.

Mr. Gref: Yes, you know, capital outflows are generally about two times lower than they were before, and this is also one of the sources of investment.

Dear Vladimir Vladimirovich, I was instructed by you to open School 21. We have opened a school in both Magadan and Anadyr [both in Russia’s Far East], and they have already started working.

"School 21" is the training of the best engineering personnel on the market. What's good about it? Free education, no age restrictions, no education restrictions. The most important thing is a high motivation to get a digital engineering degree.

Vladimir Putin: What year did you start this project?

G. Gref: We started in 2016 and invested a lot of money in creating the Shkoly 21 platform itself.

Well, the second project. We have opened two parks and two fountains in two Russian cities, and there are already 30 of them in total. Together with the fountain, we also give you all the equipment and videos that tell you about the musical culture. Together with the Bolshoi Theater and the Mariinsky Theater, the Glinka Park and Fountain in the birthplace of Mikhail Ivanovich Glinka in Smolensk were opened [in the year of] the 220th anniversary of the greatest Russian composer Glinka. Together with the governor, there were a huge number of people, and the Mariinsky Theatre and the Bolshoi Theatre gave a huge performance together. After the theater, we opened the park and fountain. It was a big holiday for the residents of the city. We received a very positive response from people.

Vladimir Putin: And what about Manzherok?

Mr Gref: Mr President, thank you for your support, particularly in creating all the necessary conditions, developing the airport and infrastructure in Gorny Altai.

We are now developing potentially the largest resort and want to make it the best ski resort in the world. We took all the parameters that are currently available in the best ski regions in Europe, in the United States of America, and in Latin America. We try to maintain all the parameters so that this resort is the best.

To date, 40 kilometers of trails have already been opened. We have 400 hotel rooms. We are currently designing and will start construction of the airport this year. Thanks to the Government, they are expanding the runway and the road straight.

Vladimir Putin: In Gorno-Altaisk, right?

H. Gref: In Gorno-Altaisk.

Vladimir Putin: It's a mountainous area. Can the strip be enlarged?

H. Gref: Yes, it is possible to increase the runway by 500 meters and thus ensure the landing of all types of aircraft, even the IL-96. But there are some restrictions on cargo, on cargo capacity, it should not be 100 percent full, but in principle landing of all types of vessels will be possible.

500 meters of runway: under a concession agreement with the Government, we are building and extending the runway, making new aprons and building a super-modern airport. The project has already been approved, and it has been coordinated with local authorities, the acting governor, and the Government. Therefore, we are working very amicably.

Thank you for your support and momentum in this work. I think that in a few years this region and Gorny Altai will be unrecognizable from what it is now. We plan to eventually create about 200 kilometers of ski slopes there and create about 15 thousand new jobs.

Vladimir Putin: Did you want to show something?

H. Gref: I'll show you the video now, if I may.

(Video demonstration.)

This is an existing hotel, this is a projected hotel. I think the villas will be completed by the end of the year. This is all in the existing hotel too, a children's center, five thousand meters we have a spa inside the hotel.

Vladimir Putin: Is it already there?

Gref: It's all built up already. The airport is a project that we will start building at the end of this year. This is a hotel where you can go skiing on the roof. This is a museum and art gallery, there will be a four-kilometer embankment around the lake, and we will launch it by the end of this year. 26 hectares – a family adventure park and a children's park, it will be all-season: both summer and winter. This year, we will already hand over the first part of the park.

All this already exists today. We have already made more than 40 kilometers of ski slopes, for bicycles, for walking. And we do all this as environmentally friendly as possible. We will try to fully emphasize the features of Altai everywhere.

Vladimir Putin: Good. Thank you. [My Emphasis]

And it’s likely Gref’s report didn’t end there. As you read, Sber isn’t just a bank. The School 21 platform I linked to is an educational institution with branches that will eventually be in all 89 Russian regions. The resort complex and theatres and civic improvement programs are all part of Sber’s social programs that are one facet of its public investment. The reason why the main bank rate is so high is to control inflation by keeping Russia’s growth rate at a manageable level. The year started out fast with growth over 5%. That has now slowed to 4%, and the end of year drop-off will give an overall yearly rate of somewhere between 3.5-4%, which as Gref said is a paradox given all the external factors aimed at slowing Russian growth, meaning sanctions and the high rate. But as Gym followers know, there are many special investment tools available that are well below the prime rate as well as mortgage programs that are as low as 2% in some cases. On several occasions over the past 18 months or so, Putin has spoken publicly to Russia’s wealthy that it’s better for them to invest at home instead of risking their money elsewhere because of the unpredictable illegal sanctions that have stolen many people’s monies and investments outside of Russia. So, “it is better to put everything in the house.” And it appears that message was heard and is being acted upon. IMO, rates of return on investment in Russia’s development is higher than most anywhere else for both the short and long term.

The international financial scene awaits the BRICS Summit at Kazan next month causing Pepe Escobar to ask the begged question: Will a BRICS Bretton Woods Take Place in Kazan? Now the original Bretton Woods Conference in 1944 met over 21 days until it was finally coerced to adopt Dexter White’s plan for US financial hegemony that displaced Keynes much fairer and democratic alternative. It’s been 80 years since that unstable system was born and was then reborn again in 1971 when the Outlaw US Empire ended convertibility of the dollar into gold, making it a 100% fiat debt-based currency that reinforced dollar hegemony that was on the verge of ending because the Empire lacked the gold needed to back its currency. The main lesson of that experience is that no national currency should ever become the main commercial currency for conducting international trade and for making needed development loans to the nations needing them. Pepe’s article reviews the possibilities, but the answer still remains elusive, and we’ll need to wait for the Kazan Summit to provide BRICS answer—but don’t let that dissuade you from reading Pepe’s article.

Russian development will continue at its current pace given the goals it’s set for itself and because the public banks are outgrowing the private banks since they’re the preferred vehicles of pumping investment monies into the economy. And the West has no tools to stop Russian growth and is rudderless to stem its own decline whose rate is steepening despite the jiggering of economic stats.

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