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4

Risk management

The goal of risk management is to ensure the fulfillment of REC Group’s strategic objectives while maintaining a high level of financial stability and the ability to timely fulfill obligations.

When managing risks, the REC Group seeks to meet or outdo the best practices used in the financial industry, adapt to the specifics of the activities of the state export support institution.

The most significant risks arising out of the REC Group activities are credit, market and liquidity risks, ALM risk, operating risk and other non-financial risks.

Figure 8
Most significant risks
Financial risks
High risk
  • Credit risk
    • Commercial risk
    • Political risk
    • Concentration risk
    • Migration risk
    • Counterparty risk
    • Residual risk
Moderate risk
  • ALM risk
    • Interest risk
    • Exchange risk
    • Structural exchange risk
  • Liquidity risk
  • Security portfolio risk
Non-financial risks
High risk
  • Operating risk
    • Internal fraud risk
    • External fraud risk
    • Customer and business practice risks
    • HR and labor security risks
    • Material assets damage risk
    • Main internal system shortage risk
    • Execution risk, service risk, process management risk
  • Compliance risk
  • Strategic and business risk
  • Reputational risk
Moderate risk
  • Regulatory risk
  • Model risk

The REC Group’s risk management system covers all significant risks and is based on the following principles:

  • Decision-making should be based on the appropriate analysis of the associated risks associated.
  • Management structures should be implemented in such a way as to minimize potential conflicts of interest.
  • Risk management function is independent.
  • Information transparency should be ensured: management and external users should regularly receive information on the risk exposure.
  • Risk management process should ensure the engagement of all employees involved in current operations and control.
Figure 9
REC Group’s risk management system
Risk management system
  • 1
    Functions, management, organizational structure
Integrated risk management
  • 2
    Risk appetite and standards
  • 3
    Capital and performance management with respect to risk
  • 4
    Reporting
Risk management
  • 5
    Credit risk
    • Processes (transactions, monitoring, losses)
    • Limits
    • Metrics, models
    • Reporting
  • 6
    Market risk
    • Limits
    • Metrics, models
    • Reporting
  • 7
    Liquidity risk
    • Limits
    • Metrics, models
    • Reporting
  • 8
    ALM risk
    • Limits
    • Metrics, models
    • Reporting
  • 9
    Operating risk
    • Self-assessment of risks and control
    • Loss data collection and incident handling
    • Risk and control indicators
    • Reporting
  • 10
    Other non-financial risks
    • Model management
    • Principles of Non-Financial Risk Management
    • Reporting
  • 11
    Risk identification and assessment
  • 12
    Information infrastructure and data system

The target level of Group’s financial stability is determined at the level corresponding to the sovereign credit rating of Russia.

Based on the indicated prerequisites, the REC Group formulates its risk appetite statement as follows: Implementing the strategic objectives, the REC Group is ready to bear risks that do not jeopardize its financial stability (its capital shall be adequate to the external credit rating of Baa / BBB).

Capital adequacy, as well as risk appetite indicators established for all significant risks in 2018 corresponded to their target values, confirming the high level of financial stability of the REC Group.

4.1

Credit risk

Credit risk is a risk of losses incurred by the REC Group as a result of non-fulfillment, untimely or incomplete fulfillment by the counterparty of financial obligations under the contracts.

Credit risk is the most significant risk for the financial unit of the REC Group. Therefore credit risk management is a key competency for the REC Group.

The main credit exposure is associated with the foreign counterparties from different regions and industries.

In 2018, the REC Group of companies continued to improve the end-to-end risk management system in general and credit risk in particular within the framework of the agreed development goals of the REC Group to increase non-resource exports from Russia, including by ensuring the widest possible access to financing and insurance instruments for all participants in the export transactions.

To make an informed decision on the appropriateness of the operations exposed to credit risk, the REC Group uses unified approaches to assessing financial and non-financial information about the counterparty’s activities in the process of analysis.

To take timely measures and minimize losses, the REC Group monitors the credit and insurance portfolios, identifies in advance risk factors that can entail incomplete performance by the counterparty of its obligations to the Group.

Throughout 2018, the REC Group continued the further development of credit risk analysis and assessment systems within the framework of previously created single Competence Centers for EXIAR JSC and EXIMBANK OF RUSSIA. Besides, it introduced and tested in EXIAR JSC and EXIMBANK OF RUSSIA the internal system for counterparty rating and managing the limits on operations exposed to credit risk.

In 2018, the REC Group took a number of measures to improve the methodology and processes for assessing and controlling credit risks as part of the procedure for minimizing/preventing of external and internal risk factors growth, namely:

  • updated credit risk assessment methodologies;
  • taking into account the target segment of the REC Group customers, improved the methods for assessing the credit risks of legal entities (non-financial organizations) and financial institutions with due regard to the counterparty’s country risk, as well as the specifics of the available product line of EXIAR JSC and EXIMBANK OF RUSSIA.
  • updated internal regulations on reserves for possible losses that might occur when conducting the operations exposed to credit risk. As a rule, the Bank first classifies credits to finance the operations exposed to credit risk (if applicable) in terms of clarifying a possible settlement reserve;
  • updated the internal systems for counterparties rating, as well as the procedures and methods for setting and controlling the limits on operations exposed to credit risk.

Also, the approaches to the analysis of macroeconomic and country risks were improved, at the Agency level. In December 2018, the group approved the Methodology for the classification of countries and calculation of internal country limits for EXIAR JSC.

Approaches to credit risk assessment, which had been reviewed in 2018, allowed to provide a sufficient degree of protection against the combination of risks, which met the state priorities for export support in the implementation of state foreign economic policy and the tasks of increasing the competitiveness and the volume of non-resource export of Russian business in the global markets through the formation of comprehensive export support tools by providing guarantee, credit and insurance export support.

In the future, the REC Group will improve the unified processes and approaches for managing credit risk to increase the overall effectiveness of the risk management system while fulfilling the goals and objectives of the REC Group as a state export support institution.

4.2

Compliance risk

Compliance risk is a risk of incurring losses by the REC Group due to the internal (non-compliance with the legislation of the Russian Federation and contractual provisions) and external factors (imperfect legal system, impossibility of resolving certain issues through negotiations, violation of the terms of contracts by the group customers and counterparties, sanctions imposed on the group or counterparties by the authorized bodies, etc.).

A distinctive feature of compliance risk is that the group can significantly reduce, and sometimes avoid, the occurrence of risk by fully complying with applicable legislation, by-laws and other regulatory legal acts, internal regulations and procedures.

The goal of compliance risk management is to prevent the risks (preventive legal work) rather than to prevent the adverse consequences. The REC Group ensures the acceptable risk level determined by it in accordance with its own strategic objectives.

To minimize compliance risk, the REC Group uses the following basic tools:

  • ensures the availability and implementation of the relevant management procedures, including procurement, ensuring the correctness of operations;
  • develops internal procedures and ensures that the REC Group has internal documents regulating contracts and agreements execution procedure, as well as the interaction of employees within the REC Group;
  • ensures the implementation of legal and reasonable procedures for the selection of counterparties to conclude agreements on the procurement of goods, works, services with the REC Group;
  • ensures the validity of contracts and agreements concluded by the REC Group, implementation of all necessary procedures for confirming the validity of transactions concluded by REC, control over the availability of the necessary powers for the signatories, confirmation of the legal capacity of REC’s counterparties when concluding contracts and agreements;
  • ensures the proper fulfillment of contractual obligations by the REC Group;
  • engages external consultants on issues requiring special competences (knowledge of the foreign laws, knowledge of industry-specific Russian law), if necessary;
  • develops standard forms of contracts and agreements;
  • approves drafts of all internal regulatory and administrative documents, as well as draft decisions of the management bodies of the REC Group;
  • provides advanced training to employees, etc.