Anatoly Chubais: We Realized That We Can Work in the Bond Market, Not Just Waving Around State Guarantees
The head of RUSNANO spoke about the performance of his company and the industry as a whole, the prospects for privatization and partnering with foreign investors
For some, Anatoly Chubais still remains a major politician from the 1990s. Someone else remembers him as the long-time head of RAO UES of Russia in the era of the transformation of the Russian electric power industry. But in recent years, it’s nanotechnologies that hold the most rights to this “brand”. Chubais has headed RUSNANO for ten and a half years, a few months more than RAO UES. In 2018, the company earned record profits, and is preparing to work in the bond market without state guarantees. With RUSNANO’s participation, almost 100 factories have been built, but the young industry has enough problems, including attracting investment capital. In an interview with Interfax, Anatoly Chubais spoke about the performance of RUSNANO, the nanotechnology industry, partnering with foreign investors, the prospects for privatization, and many other things.
— RUSNANO has been in operation for over ten years. What are the main outcomes of this period, as a whole and specifically in 2018?
— The main outcome of 2018 is record profits and record dividends. The net profit as of year-end 2018 came to RUB 5.6 bln (under IFRS).
This is not the first year that we’ve earned a profit, but the first time for one of this size. The basis for our profit is the significant increase in the value of the managed investment portfolio. In 2018, the growth amounted to RUB 14.9 bln, in comparison with RUB 7.7 bln one year earlier.
And as a profitable company, we are able to pay dividends. We will recommend to the Board of Directors an allocation of RUB 550 mln for dividends.
Please note that income from the investment portfolio in 2018 increased by 17%, up to RUB 19 bln. These are mainly withdrawal proceeds from portfolio companies. Last year, the average internal rate of return (IRR) for 15 withdrawals from portfolio companies amounted to 18.6%.
If we speak about the outcomes of RUSNANO’s 10 years of existence, I would like to highlight two core ones. The first outcome is the nanoindustry’s formation. Toward this objective, RUSNANO was established. It was our mission. Now, there are 97 factories in Russia that were built with our participation. 39,000 people work in them. Last year, the sales of these businesses amounted to RUB 400 bln.
The second outcome is financial, but it is also of fundamental importance. Initially, the government invested RUB 130 bln in our company. And, according to our estimates, the total amount of payments to the budgets of all levels from our project companies has already reached RUB 132 bln. This is despite the fact that only 101 out of RUB 130 bln were allocated to the investment program of RUSNANO. Another RUB 29 bln were spent on the non-profit making Fund for Infrastructure and Educational Programs (part of the RUSNANO Group, IF).
— Dividends of RUSNANO for 2017 amounted to RUB 537.5 mln, or 50.8% of the company's net profit under RAS. At the end of 2018, the company will pay RUB 550 mln. Does this mean that net profit under RAS has remained almost unchanged?
— Profit under RAS for 2018 amounted to RUB 0.89 bln.
Where did the dividends of RUB 550 mln come from? This is due to the regulatory framework. The Russian government recommends allocating for dividends at least 50% of net profit, but it does specify which one—under RAS or IFRS. We understand that if we cling to profit based on RAS, rather than on IFRS, there will be controversy. As a result, weighing everything from a legal and financial point of view, we came to the conclusion that RUB 550 mln is, on the one hand, a figure we can support in terms of cash flow. On the other hand, it’s more than half of net profit under RAS.
— Do you work out the dividend policy for the medium term?
— Of course. We have no dividend policy yet. The point is that, even though we are proud to talk about our progress, the nature of RUSNANO’s business is such that significant deviations occur between actual financial results and planned ones. Moreover, results have been both “positive” and “negative”. Still, investments in venture and growing projects are not so stable so as to be able to pledge dividends for 5 years ahead. We have a financial model for RUSNANO, and we understand how to make ends meet by it. But at the level of dividend policy, we are not yet ready to work, all the more so because we are paying dividends only for the second time in our history. We have not yet grasped fully this new phenomenon.
At the same time, in accordance with the long-term development program of RUSNANO up to 2023 (approved in spring 2018, IF), the first dividend payments were planned only from 2021. Therefore, as for dividends, we are moving ahead of schedule.
— Is there any forecast for dividends for 2019?
— Actually, it is too early to speak about it.
— The development strategy of RUSNANO envisions the privatization of RUSNANO Management Company. Was this matter discussed at the meeting with President Vladimir Putin on Tuesday? What other questions were raised at this meeting?
— The strategy contains two development scenarios—one, with a private management company, the other, with a government-owned management company. If you look at reality, including the current investment climate, the privatization option is becoming less and less realistic. Our position on this issue is relaxed. We are not in the quandary, “either privatization, or all is lost”. And because of that, our position is relaxed. I did not raise this issue at the meeting with the president, and did not discuss it.
However, we are faced with the task of updating the MC strategy by September 2019. On that score, we will have to provide a definite answer to this question. We’ll see if both of these scenarios remain in place, or only one of them.
— Last year, RUSNANO engaged PwC to evaluate the attractiveness of the management company as the management organization for direct and venture investment funds with international investments. The technical assignment states that the company aims to expand its activities as a managing partner of funds, and plans to engage new international investors for cooperation. Does it mean that RUSNANO is considering the possibility of expanding the scope of investments and becoming a universal management company, rather than just for the nanoindustry?
— This is quite important for us and has a great strategic meaning. What is the essence of the matter?
We have JSC RUSNANO and RUSNANO MC. MC is the sole executive body of JSC. On the other hand, we operate in a private equity and venture business, where the general partner (GP) and the limited partner (LP)—the manager and the investor—are a fundamental part of the architecture. In this sense, RUSNANO MC is a GP and managing partner (this is inherent in our strategy). The key quality of the managing partner is the ability to attract investments. As of today, we have learned, using JSC RUSNANO as an anchor investor, to attract outside investments to new funds in the ratio of 1:3. Then, we set the task to bring the ratio of our equity and private assets in the funds up to 1:5, and ideally, up to 1:10.
Such ratios mean the ability of MCs to be competitive with other GPs in the market for attracting investments. That is exactly what we want to achieve via this assessment. As a result of the assessment, PwC should tell us how we look, in terms of international requirements for a classic GP, and tell us what is missing. We want to raise our GP competencies from the Russian to the international level. This work is in the final stage. Approximately two weeks remain.
We, in turn, given the results of the assessment, will perform an upgrade of RUSNANO MC’s strategy, and in the end we will be able to attract foreign investors more actively. Of course, it is quite difficult in the current environment. But we, however, created a Wind Development Investment Fund with Fortum, and we will continue to work with them.
— By the way, speaking about Fortum, in May the next tender for projects in the field of renewable energy will be conducted. Last year, RUSNANO, together with Fortum, won projects for almost 1 gigawatt. Do you plan with Fortum or with someone else to participate in tenders this year?
— Last year, we became the leader in terms of competitive selection. As for this year, the answer is “yes”. But it’s true that very small volumes remain at stake up to 2024, about 70 MW. We have a sustainable partnership, and we want to obtain something else as part of the competition.
— Will RUSNANO continue to attract loans in the market without state guarantees? And wouldn’t it be more logical to borrow under guarantees, in order to among other things, reduce the cost of debt service?
— The current amount of debt secured by state guarantees is RUB 130.6 bln. Now we are planning to attract the last bond issue secured by state guarantees. We have no intentions to receive new state guarantees from the government. But we ourselves have posed the question like this, since we have learned how to attract loans with good conditions, secured by state guarantees, given sustainable financial performance, we can try to obtain loans without guarantees, as well. We made the attempt. The first such bond issue amounted to RUB 10 bln and, at the end of December 2018, our financial managers received it.
We realized that we can work in the bond market not only waving around guarantees, but also without them, due to our financial performance. We liked this experience, and we think that we’ll continue to move in this direction. At the same time, we have no such goal, of course, simply to increase our loan portfolio.
First of all, we want to continue to use all the funds that are due to us under state guarantees. At the end of March, early April, we will hold the last issue of bonds secured by the state guarantee in the amount of RUB 13.4 bln with a maturity period of 9 years. We expect high demand for these securities, given the results achieved by us and the overall “appetite” of the financial market.
Therefore, by the end of March 2019, we will be ready to offer an additional issuance to our potential lenders for up to RUB 20 bln, for a term up to 10 years. But first of all, we will use it carefully, and only in accordance with our investment needs. If we foresee our participation in an interesting new fund or investment project, and for this aim we’ll need additional resources, we, of course, will use the instrument of bonds without state guarantees. But there will be no large-scale attraction. They will have a targeted and goal oriented character.
— Do you have any progress in attracting pension funds to the venture capital industry, and in particular, to the funds of RUSNANO?
— We said and we will repeat that this direction is extremely important for us. We believe that one of the main shortcomings in the Russian venture capital industry is that NPFs do not work in our market, although the situation all over the world is just the opposite. And we will continue to prove our point of view to the regulators along with other funds.
From a broader perspective, it’s an issue for the Central Bank. The regulator has already submitted a draft directive, which, although in a very limited scale, allows non-state pension funds (NPF) to place part of their assets in investment partnerships (the draft directive of the Bank of Russia “On the requirements for forming the composition and structure of pension reserves, investment objects in which non-state pension funds are entitled to independently allocate funds of pension reserves, and in cases of concluding repurchase agreements – for the account of pension reserves ”, IF).
This year we expect to have a meaningful discussion with the regulator, and also to offer it possible requirements for funds that could invest in the nanoindustry. We understand that the activity of NPFs is a socially sensitive area, and requires a clear understanding of the risks related to the investment object. We have ideas on how to describe these risks and separate those types of activities in which NPFs can invest from those ones that cannot be used for investing. We are preparing such proposals and will definitely discuss them with the regulator.
— What is the fundamental difference between these directions for NPF?
— There are many details in our proposals, but I will reveal one of the directions. You know that we work a lot in the renewable energy sector, for example, in wind energy. Everything that happens in this area is based on the concept of Capacity Supply Agreement (CSA). CSA on the wholesale market have proven to be an absolutely reliable tool, in fact, similar to bonds, government bonds, with low risk and high guaranteed return. It seems to us that this kind of asset could be potentially attractive and safe for NPFs.
— Currently, RUSNANO has a financial surplus with regard to withdrawals from projects. But one of the company's objectives is to provide technology transfer in the Russian Federation. Is there an assessment of the effectiveness of such a transfer, both in general and for the projects from which RUSNANO has withdrawn?
— This is a large area in which there are dozens of examples. For example, solar energy originated from the Swiss company Oerlikon, from which we, together with Renova, made a technology transfer to Russia, purchasing equipment and building a plant for the production of thin-film solar panels in Chuvashia with an efficiency factor of 9%.
At the same time, in St. Petersburg, RUSNANO established a scientific and technical centre for thin-film technologies at the Ioffe Institute, whose task was to update the technological process to the maximum extent, using existing equipment so as to obtain a new product. The centre coped with the task, by inventing another design, a hetero-structural panel, the mass production of which is done at the Hevel plant. And this is already a Russian panel with an efficiency factor of about 23%.
Thus, step 1 is a 100% technology transfer. Step 2 is a technological upgrade. And there is step 3—export, which has already been achieved. Hevel won a tender for the supply of solar panels to a power plant in Kazakhstan.
This is the basic logic for us: transfer-upgrade-export.
For wind energy, we are still only in the early stage. Vestas, the global leader in wind energy, together with RUSNANO, secured a technology transfer for the production of towers, blades and wind turbine nacelles. All the necessary facilities were built in Russia, and the first wind power plant with Russian equipment in Ulyanovsk began its supplies of power to the wholesale market as of January 2019. But, so far, this is only a transfer. Of course, we’re contemplating future upgrades of wind power plants.
If we look at the effect of RUSNANO’s foreign investments, then at the end of 2018, in the context of transfer they generated in favour of RUSNANO, 9 new production facilities and research centres were launched in Russia, and also 390 objects of intellectual property rights were transferred. As part of the transfer from foreign projects by RUSNANO, at the end of 2018, investments in the Russian Federation will amount to RUB 23 bln.
— According to RUSNANO, is there a shortage or excess of nanoprojects on the market now? What is the quality level of these projects?
— In the early stages of RUSNANO’s work, we made an item-by-item selection of projects. Now we are already dealing with funds, many of which are aimed not just at the selection of projects, but at comprehensive technological clusters. And we see, for example, that by 2024 there will be an integrated, workable technological cluster in the field of wind energy in Russia, although so far there are only two wind power plants in our country. But we clearly understand that they will be built further, as well, because a cluster is formed from one power plant to industry. Then science and education will join.
In total, we see five new clusters of nanoindustry that will appear in Russia in the next 10 years (wind power, recycling of solid household waste, flexible electronics, industrial energy storage, nanoaugmented materials).
— What was the volume of the Russian nanoindustry in 2018, and the share of RUSNANO project companies in it? What portion of the revenue of businesses engaged in nanoindustry comes from export transactions?
— In 2018, nanoindustry businesses supplied consumers with goods for RUB 1.96 trln, of which RUSNANO portfolio companies accounted for about 20% or RUB 400 bln.
Last year, export transactions of nanoindustry products amounted to RUB 526 bln. RUB 68 bln of these exports came from RUSNANO portfolio companies. On the average, exports account for 33% of the total volume of nanoproducts delivered to consumers, and it is a very worthy indicator.
— What are the main constraints now for the development of the Russian nanoindustry?
— Nanoindustry is subject to all general economic trends in the country. As we know, the investment climate and economic growth are not very impressive. Naturally, this all reflects back on us. We do not live in a vacuum. One of the most difficult problems is still attracting investors. The investment climate is difficult, in the high-tech area, and especially in the material based, even more so than in traditional industries. And this is one of the main challenges for us. In addition, there are specific, internal technological problems in the nanoindustry.
But some benefits are available as well. For example, if the growth rate of the Russian economy is 1–1.5%, then our portfolio companies have a growth rate of 15–20%, and in some sectors even more.
— What are the regions RUSNANO is focused on now to attract funds from foreign investors? After the beginning of the confrontation with Europe and the United States, the emphasis was placed on investors from Southeast Asia. To what extent did these plans materialize?
— RUSNANO is also considering investors from the Middle East. Basically, this money is from the sovereign funds of the UAE and other Persian Gulf countries. Investors in this region are interested in attractive projects, with respect to risk and yield, in the field of alternative energy and wind power industry, in particular, the Wind Development Investment Fund.
Investors from Asia and Southeast Asia are quite difficult to deal with. For example, in Japan, a system of corporate finance and a public market is highly developed. Direct and venture capital investments have not received wide acceptance, so it is difficult to find a suitable partner. We are making arrangements for organizing a meeting with them, for presenting the Far East Development Fund, and for the introduction of high technologies.
The situation is approximately the same with our Chinese partners. Due to restrictions on the capital conversion for foreign investments, China is becoming a difficult investment partner, although the direct and venture investment industry in China is the most developed among all the countries of Southeast Asia.
— What are the prospects for RUSNANO's investment in the Pipe Metallurgical Company (TMK)? After all, you have been part of the capital of TMK for quite some time. Are there any time horizons for the withdrawal?
— Yes, we have long been part of the company’s capital. We observe its business and finances in depth. I am personally a member of the Board of Directors of TMK. We believe that the company is very professionally managed and has growth potential.
Sooner or later, of course, we will withdraw from it. We are a financial partner, rather than a strategic one. But I would not like to set dates. There are various scenarios that also depend on trends in the company’s stock price. The market conditions will determine the specific time, optimistically assessed by us.
— What is the offer that RUSNANO is ready to accept for selling its stake in Novomet?
— Do you offer to buy? I am ready to bargain!
I can say that Novomet, beginning almost as a startup, has become today one of the leaders in the Russian petroleum engineering industry. The company, founded by a strong team of Oleg Perelman, has a high technological potential.
These are real nanotechnologies, as with powder metallurgy, as well as with coatings. We are talking about submersible pumps operating in an aggressive oil environment in fields with hard-to-recover oil. The materials requirements there are very high. That is why we see demand from investors for the company. The company is non-public, but this year Novomet earned a record profit, while revenue in 2018 reached a historic high of RUB 23 bln, which is 13% more than in 2017. At the same time, the volume of export revenues increased by more than 20%. The company moved from import substitution to export: Novomet service centres are already operating in the United States and Canada.
In response to your question, I will say very definitely—we will not sell cheap.
— Tell us, please, why MP Management LLC (a JV of RUSNANO with a company of Viktor Kharitonin, the owner of Pharmstandard) was established?
— This joint venture is the management company of an investment fund that we plan to create in the field of nuclear medicine.
Let me remind you that RUSNANO launched PET-Technology, a national nuclear medicine network in Russia. In July, we withdrew, selling our share (49.9%) to Pharmstandard. After that, the company returned to us with a proposal to build and develop this network further. With the participation of RUSNANO, PET Centres opened in 11 cities and towns in 10 regions of the Russian Federation. We are considering, not just to “scale up” the experience, but we also have an idea to upgrade this technology. For example, available isotopes and radiopharmaceuticals can help to detect cancer. And if you make an upgrade by switching to new isotopes (this is possible on the same cyclotrons), you can move from the diagnosis of cancer to the diagnosis of cardiovascular diseases. This will greatly expand the potential of the project as a whole.
But, of course, it is necessary to move geographically to other regions, expanding access for the population to high-precision diagnostics services.
— What is the volume of investments in the project?
— We’re not revealing that yet. The project is being set up.
— Nevertheless, if RUSNANO becomes a Tesla shareholder as part of the purchase of the Maxwell Technologies project by Elon Musk’s company, what will you do with this stake? Will you sell or keep it to evaluate Musk’s corporate governance?
— Now the deal between Maxwell Technologies and Tesla has been suspended.
But I must say bluntly that in this transaction we are far from paramount players. RUSNANO obtained Maxwell shares in 2017, when it acquired one of our portfolio companies, Nesscap.
If this deal with Tesla takes place, we will receive 0.07% as a result of the swap and, naturally, we do not plan any active policy. Our strategy will be purely financial and absolutely pragmatic. We will look at the forecasts for the growth rate of Tesla shares, which, as we know, still have considerable problems with profits. Based on this, we will make a decision on the timing of our withdrawal from the company.