Dmitry Pankin gives an interview to RIA Novosti
Dmitry Pankin, head of Eurasian Development Bank (EDB), told RIA Novosti about joint projects with the Asian Infrastructure Investment Bank and the New Development Bank BRICS and about how to balance development objectives and economic efficiency.
Q.: Having come to EDB, you planned to adopt a new strategy for the bank, to make it more specialised and focused on infrastructure projects. What was your progress this year? Did the shareholders support you?
A.: We discussed the new strategy with the shareholders at the bank's council, received their opinions and prepared a final version. It will be submitted to the strategy committee in April and we expect to have it approved at the next meeting of the EDB council in May.
We don’t consider major infrastructure projects anymore because they require tens of millions of dollars in investment. Discussions with the shareholders have shown that the member countries are short of budget money to provide significant additional capitalisation to the bank.
Accordingly, the bank's revised strategy will be to focus not on major strategic infrastructure initiatives but integration projects and to search for value chains where several member countries participate in production. The strategy is based on these objectives. It does not exclude infrastructure projects, but in this respect we’ll most probably work with other development banks. We will consider smaller projects with US $100-200 million in investments that are part of larger infrastructure projects.
Q.: Are there any projects already where you can participate jointly with other development banks?
A.: In January I met with the president of the Asian Infrastructure Investment Bank (AIIB) and we have prepared proposals for them. We are also in contact with the BRICS bank (RIA: the New Development Bank). I believe that by the end of the year our negotiations will have results.
One of the large projects we proposed to the AIIB for joint finance is a road in Russia, from the Kazakh border to the Belarusian border. The project intends to build the Russian section of the China–Western Europe transcontinental transport corridor, running through Kazakhstan, Russia and Belarus. It will be a 2,000 km, category 1 toll road. Construction will cost US $6 billion. The Meridian route connects Kazakhstan and Belarus through Russia's southern regions. It begins on the Kazakh border in Orenburg Region, passes Tambov, Lipetsk, Orel and Bryansk, and ends in the M1 motorway on the Belarusian border.
Q.: EDB closed 2015 with a loss of US $140 million and the bank has changed its team. Is there any connection between the two events? Are you not satisfied with the portfolio? What do you expect of the new team
A.: I think it is natural that a new manager changes the team. Some changes were caused by the fact that the founders and I had serious concerns about the loan portfolio. When we audited it and understood how many non-performing loans we had in it and the amount of additional provisions we had to create (around US $200 million), we had many questions to the previous management.
We plan some more changes but the team has been formed in general. The shareholders are keen to see results from the new team because it is no good that the investment portfolio has shrunk over the past two years.
Q.: Do you plan to show a profit?
A.: Yes, sure. The bank's losses in the previous year were due to additional provisions, which had not been formed earlier. They should have been formed but, if they were, the bank wouldn't have shown profit in 2014. At present, the bank is profitable. This quarter we expect a profit of US $12 million. A development bank does not need to generate great returns such as, for example, 10% on investment. It's more important to us to implement projects of strategic significance to the founders. However, the bank must not be loss-making. We do generate small and stable profit.
Q.: What profit do you expect this year?
A.: Around US $40 million in 2016 would be a normal indicator.
Q.: Another Russian development institution, Vnesheconombank (VEB), has also faced serious problems, in particular because of having many risky assets in its portfolio? Do you believe that the Russian authorities will solve these problems and preserve the institution?
A.: Any development institution is in a very difficult situation. First, it must be economically viable and not generate losses. Second, it must fulfil the founder's objectives, including political ones. Accordingly, the government would not give a good project to VEB since it is charged with the most complicated and risky projects. The management has a very serious challenge. They need to balance between complying with the shareholder's instructions what to do and what to finance and ensure the bank's economic stability.
Q.: Is this balance at all possible? Moreover, is it possible to persuade the shareholders?
A.: Our task is somewhat easier: multilateral institutions are less exposed to the risk of having so politicised, bad portfolio. As for our portfolio (RIA: formed before the new team came to the bank), its quality was rather because of the management. The management had initiated non-performing projects that resulted in big provisions. As for VEB, the management will have to negotiate and explain.
Q.: Is there any sense in having such an institution for financing knowingly problematic projects if the management cannot be always responsible for its decisions?
A.: VEB is not an isolated case. Other countries also have such institutions. Some of them are rather successful. There should be a balance between political interests and economic efficiency.
Q.: As for non-performing assets, how do you solve the issue with Mechel's debt to EDB?
A.: The debt has been restructured. We have agreed on repayments in instalments. They must repay the debt before June 2018. We applied to a court and had negotiations with Mechel at the same time. Finally, we have come to an acceptable arrangement and Mechel has complied with the revised repayment schedule as yet.
Q.: Does EDB make borrowings now? Do you need to borrow in the lending market?
A.: There's no such necessity for the moment. We made some targeted placements this year.
Q.: Until now, the bank has provided loans at a fixed rate. Do you consider a floating rate?
A.: Yes. The bank considers issuing bonds with a floating rate if it has a project with an interest rate linked, for example, to the consumer price index. In this case the bank can borrow from the Pension Fund of Russia, or raise other funds.
Q.: Did you decide to use the floating rate following the Ministry of Finance? Isn't it too risky in the current context?
A.: It is not risky for us. I wouldn't issue bonds for projects with a fixed interest rate. As for the Ministry of Finance, I would consider it risky in large volumes.
Q.: Do you consider any large projects at the moment?
A.: One of the most significant projects is AutoVAZ's assembly shop in Kazakhstan. It's complicated and we are considering it very carefully.
Q.: How much do you plan to invest?
A.: The total project value is US $500 million. Phase 1 will require US $330 million, including loans of approximately US $260 million, half to be provided by the Development Bank of Kazakhstan and half by EDB. We’ll analyse the project very carefully and discuss it with the council. There are also smaller projects.
Q.: What are your macroeconomic forecasts for this year?
A.: The key factor for Russia is the price of oil. Forecasting it is like playing thimblerig. Expert forecasts usually fail. So we use a purely mechanical approach: we take oil futures for the year and use them in forecasts. In January, for example, our forecast for the year was US $34.4. The base price has increased by now, so the forecast price will be higher. We expect Russia's GDP to stand at minus 1.5% in 2016 and the exchange rate 75 roubles per dollar. However, oil prices are of great importance. Now, when the price is higher, the results would be different, probably minus 0.5% for GDP and 65 roubles per dollar.
Q.: Do you believe that the rising price of oil is a stable trend?
A.: I'd prefer to avoid forecasts. However, a price of less than US $30 per barrel is too speculative. It is targeted on speculative expectations, a sort of a game.
Q.: You expect that GDP will go down this year. When will it recover?
A.: We expect GDP to decrease this year in any case. The fall may be not too significant but it is inevitable. We and other development institutions expect growth in 2017. The economy has already reached its lowest point with the current oil prices. Most experts do not expect oil prices to go down further. Salaries have been cut, and economic competitiveness has improved.
Q.: Will the growth you predict be associated, to a greater extent, with the rising oil prices or structural changes in the economy?
A.: I hope it will be associated with structural changes to a greater degree. Salaries in the dollar equivalent have decreased significantly and local production has become more profitable in many respects.
Q.: Do you see such structural changes in other CIS countries?
A.: There is potential for such changes. As yet, I haven't seen them in Russia as well. However, potential and opportunities do exist.
Q.: How would you evaluate the government's import substitution efforts?
A.: A better term, in my opinion, is "to create competitive production." The current situation, which is associated primarily with cost reductions, is an opportunity to develop competitive production. Import substitution is not that promising. The task is to become competitive in the global market. Without competitiveness, we'll attain nothing and remain a country with oil and gas only. If we want to be competitive we need to focus on productions with export potential, which can also supply the domestic market.
Q.: Many Russian companies in various sectors showed a profit this year. However, many of them prefer to increase dividend payments rather than to invest. Isn't this a concern?
A.: I do like this. I believe it is due to improved companies' transparency and better work of tax authorities. Previously, these amounts were hidden as costs or directed to offshores to build villas on the French Riviera for the companies' management. Companies had no official profits. The process is becoming more transparent: companies show dividends in Russia, pay taxes, and generate income for individuals. This is a very good process.
Q.: But what about investments as a necessary growth condition?
A.: I believe it is very difficult to invest when rises and falls take sharp turns and no one knows what oil prices and demand in Russia will be. Many large companies say they cannot invest now. These are, in the first place, raw material producers and metallurgical companies. However, if to talk about structural reform, this is not bad since production companies get an opportunity to create something new.
Q.: Do you expect the rouble to remain volatile? What about other CIS currencies?
A.: If oil prices change sharply, the currencies will be volatile. If prices remain as they are now, no sharp changes should be expected.
Q.: Do you believe that making the rouble float freely was a correct decision?
A.: I do. What happened in 2008? Some two hundred millions of dollars of reserves were lost without producing structural changes in the economy. Fortunately, the situation was smoothed over and there were no significant social problems. I believe it's important now to undertake structural reforms, which are possible with such significant changes in the rouble exchange rate. In my opinion, the decision not to spend international reserves on maintaining the rate was correct. Otherwise, we'll remain with the old economic structure.
Q.: Have other bank's shareholders arrived at the same conclusion?
A.: We have the example of Kazakhstan. In the first six months of the previous year Kazakhstan tried to maintain the tenge. What happened then? Their international reserves have shrunk. People and companies, in the northern regions especially, rushed to buy goods in Russia where they had become significantly cheaper after the devaluation. In the end, Kazakhstan has failed to maintain the exchange rate and made it float freely. It was a shock in the beginning. No one understood what rates to orient to. Now I see that the situation is normalising and the tenge is appreciating. Interest rates are decreasing. Belarus has also abandoned multiple exchange rates. We monitor the macroeconomic situation in Belarus and see that their foreign exchange policy has normalised and they do not maintain artificial exchange rates. All countries are moving towards freer exchange rates.
Source: RIA Novosti (IA, Russia)