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EXCLUSIVE-Russia needs to boost its debt, VTB CEO says, bank ready to co-finance budget

* Russia doubles state borrowing this year amid pandemic

* VTB ready to co-finance budget spending - CEO Kostin

* VTB to boost state OFZ bond purchases - Kostin

* Non-performing loans amid coronavirus pandemic less worrying than in 2008-09 crisis-Kostin

* Full Kostin quotes in Russian

MOSCOW, Oct 28 (Reuters) - Russia needs to increase its state debt to support economic growth and VTB, its second biggest bank, is ready to ramp up government bond purchases to help finance budget needs, Chief Executive Andrey Kostin told Reuters in an interview.

Russia, trying to spend its way out of the coronavirus crisis, has doubled its offering of state rouble bonds to 5 trillion roubles ($66 billion) this year. Foreign investors and state banks are the main buyers of the bonds, known as OFZs.

To increase debt, Moscow temporarily increased Russia’s maximum spending ceiling, and Kostin said the time has come to start actively spending the National Wealth Fund, a rainy day $172 billion cushion, as well.

“I am an advocate of an increase in state debt, this is important for economic development,” Kostin told Reuters in remarks cleared for publication on Wednesday. “VTB is ready to finance the budget, especially if there are refinancing tools.”

The state-controlled VTB, which has a market capitalisation of nearly $6 billion, now holds 300 billion roubles in OFZ bonds and plans to double or even triple that amount, Kostin said.

He did not give the timeframe, but the bank later clarified it planned to increase its bond purchases by the end of this year.

Russia’s public debt is set to rise to 18.5% of gross domestic product this year from 12.3% a year before, softening an economic contraction to an overall fall of 4-5% in 2020 after an 8% slump in the second quarter.

Given that the Russian public debt is much lower than of most major economies, Moscow can affort to increase its debt further without accomulating risks, Kostin said.

VTB, like its rivals, saw an increase in non-performing loans and has had to triple bad loan provisions by 180 billion roubles so far this year, Kostin said.

He said that in a worst-case scenario, non-performing loans could reach around 7% of his bank’s total loan portfolio compared with nearly 10% seen during the 2008-2009 global financial crisis - “a non-crucial” development for VTB.

“We have passed the lowest point in regard to the economic contraction, and I can see from my clients that the situation is manageable,” Kostin said.

VTB, which has cut the 2019 dividend to 10% of net profit from a 50% target to beef up its capital, will return to the original target at some point, Kostin said, and may also issue subordinated debt to boost capital if needed.

Asked what has changed for Kostin, 64, after he underwent a coronavirus treatment earlier this year, he said: “We need to think now that the fight against pandemics, and ecology issues are of big importance... They should go on the global agenda in international relations, (and) be a priority at home.”

“Diseases, environmental degradation are throwing us back... These are much more important things than 5G,” he said, referring to the high-speed wireless technology now being rolled out. ($1 = 76.2604 roubles) (Reporting by Tatiana Voronova and Katya Golubkova Editing by Tomasz Janowski)

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