ARKA - Аn exclusive interview of Dmitry Pankin about new projects in Armenia, the stability of the Russian economy, oil prices, and exchange rates
Dmitry Pankin, Chairman of the Management Board at Eurasian Development Bank, told ARKA in an exclusive interview about new projects in Armenia, the stability of the Russian economy, oil prices, and exchange rates.
ARKA: Mr Pankin, what is the essence of the agreement to provide an investment credit to Armenia, which was signed recently? What is the amount this document envisions to provide? What are the possible benefits for Armenia from the new project?
Dmitry Pankin: During the recent visit of Eurasian Development Bank’s delegation to Armenia, we signed with the government of the country an agreement to finance the upgrade of irrigation systems from the Eurasian Fund for Stabilisation and Development. This is a strategically important project.
It is part of Phase 3 of the long-term national programme to rehabilitate and reconstruct the irrigation and drainage network in Armenia. The project will make it possible to save up to US $2 million a year in expenditure on electric power and network operation and maintenance. Preliminary estimates suggest that the expected growth in irrigated areas will be 10,433 ha and project beneficiaries will reach some 114,000 people.
The most promising sectors in Armenia today are mining and agriculture. I would like to dwell on the second one. Because of the sanctions, the Russian market has changed significantly and these changes are favourable for Armenia. If it has production capacity it will be able to expand its presence in the market. I believe that Armenia, with the help of the above projects to reconstruct irrigation systems and support agricultural production, will be able to produce competitive agricultural goods for export, to Russia in particular.
The project intends to reconstruct reclamation canals throughout the irrigation system, which functioned earlier with outdated pumps and required significant power supplies. Now we make a shift to natural irrigation and, consequently, green technology.
In accordance with the agreement, the five-year project to modernise irrigation systems, with a total finance of US $50 million (US $40 million to be provided by the EFSD as a soft loan, and US $10 million to be co-financed by Armenia) is expected to start in 2016. The loan is provided for twenty years, including a ten-year grace period, at 2% p.a. These conditions are very beneficial for the country.
ARKA: What other projects are of interest to the Bank and the Fund it manages?
Dmitry Pankin: The mission of development banks is to engage in infrastructure projects. These include roads, electric power, the construction of bridges and dams. In Armenia we signed an agreement on the construction of the North-South road transport corridor. The project value totals US $150 million. At present, we prepare to consider another phase of its construction and wait for necessary economic substantiations. We also work on a project, which can be deemed, to a certain extent, as continuation of the irrigation project. I mean the construction of the Mastara water reservoir, which is needed for irrigation systems to function. We have already got confirmation that the feasibility study for this project will be financed from international funds. We also consider (although we have not made a decision yet) commercial projects. In the electric power sector, for example, we consider participation in the reconstruction of electrical grids. It is a known fact that the decision to raise tariffs in Armenia caused certain difficulties. On the one hand, tariffs need to bring a return. On the other hand, it is no secret that monopolies tend to include in these tariffs various unrelated costs. For this reason, here we need a very accurate and weighted approach. If independent audit is of the opinion that the costs are reasonable and need to be covered by tariffs, this will make it possible to finance electric power projects.
ARKA: Do you still work with Armenian banks?
Dmitry Pankin: Yes, we do. We have provided US $10 million to Ardshinbank and US $15 million to each of Ameriabank and VTB Bank (Armenia) as part of our small and medium-sized business support programme. To date, EDB’s cumulative investment portfolio in Armenia approximates US $125 million.
ARKA: What about EDB’s loan of US $300 million for the stabilisation of economic situation in Armenia?
Dmitry Pankin: Everything is as planned. Macroeconomic steps have been agreed in full with the government of Armenia. The project has been approved by all expert councils and submitted for approval to the EFSD Council. After the Fund’s Council passes its official resolution to provide the loan, we will agree on the terms and conditions and, after that, the agreement will be ratified by the Armenian side. We don’t rule out the possibility that the first tranche of US $100 million will be provided before the end of this year. The next two tranches are expected to be disbursed in
ARKA: Can economic difficulties in the EDB member countries influence the Bank’s investment policies in them?
Dmitry Pankin: I would like to draw your attention to the following. Commercial banks usually cut down finance in crises, because it becomes more risky and loss-making. In such a situation it is better for them to maintain liquidity than provide loans for investment projects. Conventional development banks have another position. They do the opposite thing during crises: they expand lending because their mission is to stimulate economic growth, which is especially important during crisis periods. For us, it would also be better to boost lending. Unfortunately, we have many non-performing loans, unrelated to Armenia. These are, in particular, Mechel (Ed.: one of the world’s leading mining and metallurgical companies) and grain projects in Kazakhstan. Our credit portfolio has shrunk significantly over the two recent years. For this reason, EDB’s strategically important task today is to break this trend and enhance its work, and to form a more effective team to work on project finance and the expansion of lending despite the difficult situation, crisis events, lower production, and the lack of investment projects. We have the potential. In Russia, we are one of the few banks, which are not under sanctions. This makes it possible for us to attract funds from Western capital markets.
ARKA: The IMF in its October review forecast that Armenia’s economic growth in 2015 might reach 2.5%. Do you agree with these estimates by the fund?
Dmitry Pankin: EDB’s forecasts were close to those made by other international institutions. However, Armenia’s performance in the second quarter and in the first six months of this year surprised us. No one predicted that the Armenian economy would grow by more than 5% in the second quarter and 3.8% in the first six months. That said, the forecasts for the third and fourth quarter are not that cheerful as for the first six months of the year. Therefore, I’d prefer to wait with forecasts and won’t say that Armenia is strongly ahead of the EEU countries, almost all of which have negative dynamics. Russia’s decline in the first six months was 3.4%, Belarus 3.3%, and Kazakhstan had an insignificant growth of 1.7%.
ARKA: When should stable economic growth be expected to restore in the EDB member countries, and what needs to be done for this?
Dmitry Pankin: The possibility that the prices of energy resources and raw materials will restore in the next two years is weak. Consequently, the possibility that the EDB economies will grow actively in this period is also weak. However, every cloud has a silver lining. What do I mean? In the 2000s, salaries in our countries grew faster than labour productivity. This, to some extent, helped to solve political tasks: the population needed support, so salaries and social payments were stimulated to grow. However, labour productivity remained low. This resulted in that the countries lost their competitive advantage on the global scale. It turned to be more profitable to manufacture in China, Vietnam and Malaysia with their cheap and industrious labour, but not in our countries. What is happening now is an adjustment. Devaluation in the EDB countries and reductions in salaries will cut costs to a certain extent and the situation will begin to straighten out. In my opinion, this should also stimulate subsequent economic growth, possibly, in two to three years.
ARKA: I cannot avoid the question about the behaviour of the Russian ruble? What is your forecast?
Dmitry Pankin: The ruble is clearly tied to oil prices. If oil costs US $50-55 per barrel, the ruble will probably fluctuate in the current range. If oil prices grow, we can expect that the ruble will appreciate significantly. If oil prices drop to US $40 per barrel (I don’t believe in US $30 per barrel), we should expect the ruble to devaluate. In any case, there’s no sense in making any forecasts today.
ARKA: Will the Russian economy withstand a price of US $40 per barrel?
Dmitry Pankin: Our calculations suggest it will. It is possible that the ruble will go down further, as will growth rates, but there will surely be no collapse.
ARKA: Russia’s financial authorities say that they are less frightened of oil prices than the low pace of economic reforms. Do you agree with this opinion?
Dmitry Pankin: Unfortunately, we failed to break Russia’s dependence on the oil market. The talks about economic modernisation, the formation of another structure, which would be independent of oil prices, the production of competitive goods, or the creation of a favourable investment climate, had no effect to date. The key to future success is not to wait when oil prices grow, but to diversify the economy and form production, which would be competitive in the global market. This is the only way to success in the current conditions. It can be said that the crisis creates certain opportunities: expenses are cut, salaries drop, resources cheapen. In this circumstances we need to try to find market niches to develop.