Business New Europe - Emerging market development banks come to fore
Ben Aris in Moscow
Emerging markets have been inexorably linked to development banks over the last few decades. International financial institutions (IFIs) were a font of both advice and funds in the lean years, but as more and more of the emerging markets are now standing solidly on their own feet, they have been setting up their own development banks and taking over the job of investing into infrastructure or building institutions.
The most recent example of an
emerging world development bank was the attempt to found a BRICS development
bank at the eponymous summit this March between Brazil, Russia, India, China
and South Africa. The collected heads of some of the fastest growing
markets in the world all backed the idea, but the devil was in the details.
«Russia supports the establishment of this financial institution. We are
working on the basis that if established, it will operate according to market
principles,» Russian President Vladimir Putin said during a business
breakfast for the BRICS leaders. «[The BRICS are] the largest market in
the world. Our countries are home to 40% of the planet’s population. The BRICS
states possess enormous natural resources, have a developed industrial base and
professional personnel, and create almost 30% of the global gross
product.»
It is this wealth and hive of
activity that needs to be marshaled by the development bank for everyone’s
mutual benefit.
But establishing a multinational institution funded by a group of disparate
countries is not a simple task. The assembled finance ministers failed
to agree on the bank’s size or how the member countries would contribute to the
capital. It was agreed the bank needs $50bn in capital, but should
contributions be made equally by each member government or in proportion to the
size of their economies? China’s economy is four-times larger than Russia’s and
India’s
So it is back to the
negotiating table, but these problems should be solved in time because the bank
is seen as an alternative to the western-dominated World Bank, International
Monetary Fund, Asian Development Bank or European Bank for Reconstruction and
Development. While traditional IFIs still have a role to play in principle,
the emerging markets will be best served by helping themselves and each other
in the long run.
And several emerging market development banks are already operating. Russia’s
Vnesheconombank, formally the manager of Russia’s state pension fund and international
debt manager, has been increasingly acting as a de facto development bank for
several years already, investing money into infrastructure projects and
supporting large-scale investment programmes.
Likewise, Kazakhstan’s
Samruk-Kazyna is formerly the depository of the country’s oil reserve fund, but
increasingly it has been acting as a development bank. Ukraine’s
government suggested setting up a development bank this March on the basis of
the Ukrainian Bank for Reconstruction and Development (UBRD), which was founded
in 2004 and is supposed to be one of the major innovations of the State
Economic Stimulation Program for
While most of these projects
are still either on the drawing board or at a very early stage, the most
advanced and active of all the regional development banks is the Eurasian
Development Bank (EDB), which was set up jointly by the government’s of Russia,
Kazakhstan and Belarus in January 2006.
The EDB is already a true development bank in that it has made more than $4.5bn
worth of inter-regional investments, especially into infrastructure, to the
mutual benefit of its now six member countries. Today, the bank’s members
are the Republic of Armenia, the Republic of Belarus, the Republic of
Kazakhstan, the Kyrgyz Republic, the Russian Federation, and the Republic of
Tajikistan.
As a sign of the bank’s
growing importance, in April it was given the status of «outreach
partner» for the duration of Russia’s presidency of the G20, which began
in January. The bank will lead projects that link the economies of the
G20 and countries that are not members of the EDB, so broadening the function
of the bank significantly.
«It is a great honour for
us and a big responsibility,» comments Igor Finogenov, Chairman of the EDB
Management Board, on the event. «We have serious work ahead of us
and will try to meet the expectations associated with our participation.»
Developments are sorely needed at the moment. Driven by the needs of long-term
economic development rather than just profit, development banks tend to be
counter-circular with their investment decisions. Moreover, the infrastructure
structure and public works projects they typically back are also a tonic to
depressed economies and a boon at the moment as all the countries of the world
struggle to emerge from the aftermath of the 2008 crisis.
«From our point of view,
it is especially important that the role of international and regional
development banks as catalyzers of the investment process was discussed [at the
first G20 financial track meeting in February],» says Finogenov. «These
development institutions are capable of covering risks that cannot be accepted
by private investors and even certain countries.»