EDB’s Chairman of Management Board gives an interview to Interfax Kazakhstan
Russia’s President Vladimir Putin said that Eurasian Development Bank had approved projects worth several billion dollars in Kazakhstan. What portion of EDB’s investment portfolio does Kazakhstan account for?
EDB’s current portfolio of approved projects exceeds US $5.5 billion. Kazakhstan accounts for a half of them. We are also considering new projects in Kazakhstan that can be financed this year, for a total of approximately US $1 billion.
There were talks that the Development Bank of Kazakhstan (DBK) had negotiations with you regarding Ekibastuz GRES 2. Were any agreements reached with respect to it?
The DBK did express interest in joining the Ekibastuz GRES 2 project. However, we did not receive any specific proposals from it. We are negotiating this project with another two interested companies. It is possible that the pool of investors will change in the near future. We are also negotiating possible loan restructuring for the project.
I would like to mention that despite the economic difficulties Ekibastuz GRES 2 complies with its debt obligations.
What are the difficulties?
They need to figure out where to supply excessive electricity the plant generates. The resolution on the new composition of shareholders will be linked directly to the issue of power supplies. The plant considers supplies to China and southern regions of Kazakhstan. These will be complicated solutions, requiring in-depth analysis.
You said earlier that EDB was considering participation in the Asia Auto project? Have you made a decision?
Yes, EDB has carefully considered Asia Auto’s application for finance for the construction of an AvtoVAZ assembly shop in Kazakhstan. We have not made a decision yet. We see that AvtoVAZ’s facilities in Russia are not loaded fully and AvtoVAZ’s sales guarantees are of key importance to the bank. AvtoVAZ has not extended any such guarantees as yet. So, the question arises if there is sense in developing new production when the existing facilities are underloaded. The negotiations continue. We did not reject this project, but without guarantees and serious participation, for example, in AvtoVAZ’s equity we’re not ready to respond.
In October, EDB signed four agreements at the Russia-Kazakhstan Interregional Cooperation Forum. At what stage are these projects now?
We signed a US $95 million revolving loan facility agreement with Eurasian Resources Group (ERG). The loan was extended in full. They will finance raw material supplies from Kazakhstan to Russia (Interfax Kazakhstan: the loan agreement with the Sokolov-Sarbai Mining Production Association (SSGPO) intends to finance the supply of iron ore concentrate to the Magnitogorsk Iron and Steel Works). We are now discussing the enhancement of cooperation between the bank and ERG in financing long-term investment projects.
We signed a letter of intent envisioning the bank’s participation in financing Interskol’s operations, in particular an import substitution project in mechanical engineering. We are currently discussing our contribution. What we propose is that 30% will be financed from the company’s own funds and 70% by the bank. We’re in the process of negotiations. I think this project will be launched.
As for the other agreements signed at the Forum, all of them are also in the process of consideration. As for the Troitsk Metallurgical Plant, we’re discussing guarantees with the administration of Chelyabinsk Region (Interfax Kazakhstan: construction of a manganese production facility in Chelyabinsk Region, with ore to be purchased from Kazakhstan’s Zhairem GOK).
The agreement with the Russian Copper Company is also being worked on to schedule. I expect the decision to be taken in the next two months.
What about the logistics centre near Astana Patokh Chodiev intended to build with EDB’s participation?
We always require founders’ guarantees. As you understand already, this is the most complicated issue during negotiations. We have not reached a compromise in this project yet and it was suspended. The problem is that the project initiator has not notified us yet about their readiness to provide personal guarantees.
Why? Don’t they believe in the project?
When it comes to personal guarantees for a billion-dollar project, one should be one hundred and one per cent sure in it. Simply believing won’t suffice.
What about Polymetal and Alaigyr?
We continue to work with Alaigyr. Polymetal is an ongoing project, everything is good with it.
A commission was established recently to the order of Kazakhstan’s President Nursultan Nazarbayev to work with non-performing agricultural holdings, including Ivolga Holding. What do you think about this initiative?
This means that the country’s government is taking measures to solve the problem. This is a very positive signal for EDB as a lender in agriculture. Eurasian Development Bank is among the commission’s members.
In Kazakhstan, the bank provided loans to two agroindustrial holdings, Ivolga Holding and Kazexportastyk. Both loans are non-performing. We’re more concerned about Ivolga since we don’t see any attempts on the part of its owner to restructure the non-performing loan.
What’s the situation with Ivolga at the moment?
Ivolga is in default: we’ve received neither money nor grain. We are working on claiming debts from Ivolga and enforcing the collateral. The collateral includes the rent of land and grain receipts. Rozinov, the head of the holding, has provided personal guarantees for Ivolga’s loans so we’re suing him as well. Court proceedings are under way.
What about the bank’s liquidity? Do you plan to borrow in the near future? If yes, what will be the markets and currencies?
The bank has liquidity to fund projects that are currently under consideration. We will consider borrowings if additional funds are needed. It is probable that the bank will place tenge and ruble-denominated bonds in 2017. The amounts and periods of these issues will be determined proceedings from the bank’s needs and market conditions.
You planned to issue tenge-denominated bonds in the spring? Do you know the exact time?
Not earlier than in April, I think. We are working closely with the National Bank of Kazakhstan. It is likely that the bonds will have a five-year maturity period. We are attracting the tenge in the market using foreign exchange swaps at rates that are lower than if we issued bonds. For this reason, we don’t need to issue bonds at any price.
Do you have problems with funding?
We have more problems with projects. If we had more projects corresponding to our strategy, we could raise significantly more in foreign currencies and in the roubles. We may have difficulties with funding in the tenge, however.
Why?
The tenge market is smaller than that in the roubles, not to mention the dollar and euro markets, which provide good funding conditions at the moment. However, project originators have low interest in the dollars and euros. Who will borrow in foreign currencies? These are, in the first place, those who rely on exports, or, in other words, mining and the oil sector. However, we don’t have many projects with oil companies. This is not the domain of development banks. At the same time, we can extend dollar loans to the mining sector and do work with it.
In 2016, EDB worked as a market maker for the RUB/KZT pair in the foreign exchange market. Does the bank plan to proceed with this practice and why? What will be the currencies?
EDB is currently a market maker for the RUB/KZT pair at the Moscow Exchange and KASE. We plan to proceed with swap quotations for this pair and, should there be demand, forward quotations. As we get access to the national currencies of other EDB member countries, we plan to consider our membership of local exchanges.
This is not typical of development banks...
We believe that the improved liquidity of foreign exchange markets and the advancement of hedging instruments for payments in local currencies help to reduce costs in foreign trade transactions between the EDB member countries and thereby promote integration.
Did you loan portfolio decrease in 2016 and what are your expectations for 2017?
We had reductions in 2014 and 2015. In 2016, our current investment portfolio grew by approximately 10%, to US $2.4 billion. The balance sheet portfolio remained unchanged. New loans were compensated by repayments and it stood at US $1.7 billion as at the end of 2016.
Our task for this year is to augment the current investment portfolio significantly, to US $3 billion. This is a realistic objective. For example, we are discussing a US $200 million project with the Bogatyr coal mine. Several infrastructure projects are under consideration, including a runway in Almaty Airport, reconstruction of an oil terminal in Aktau, and the Alaigyr zinc deposit. We are also working on a host of interesting major projects in Russia.
We’ve changed our model for investment projects and are preparing projects worth over US $1 billion.
What are your plans for profit?
Our profit in 2016 was US $160 million. This is a very good figure for a development bank. EDB did not have such profit before. The previous year has shown that the bank’s new business model brings significant positive results. The forecast for 2017 is US $60-70 million. Over the first two months of the year our profit has already reached US $12.7 million.
I need to say that, as a development bank, EDB does not need to increase its profit. It’s true that we cannot afford losses, but our most important objective is to form a pool of projects with an integration component of not less than 50%. This is the task our shareholders set for us.
As regards the possibility that other countries will join EDB, what are the countries you stake on?
We’ve compiled a matrix of countries that have the most intense trade and investment relationships with Russia and Kazakhstan. The list of countries that can be interested in joining EDB includes South Korea, China, Japan, Iran, Turkey, India, Israel and Singapore, among others. However, we don’t have a roadmap of prospective membership yet. We’re exchanging letters. By the way, the list comprises not only faraway countries. It includes Uzbekistan and Azerbaijan as well – the countries that are closely connected with Kazakhstan and Russia by economic and financial flows. They also could be interested in EDB’s membership.
What are the countries with which these talks are the most intense? What countries express the most significant interest?
Iran and South Korea demonstrated apparent interest. As for other countries, we are exchanging information.
What about China?
The negotiations with China were very active several years ago. There were even deliberations that China’s share in EDB would be the same as Russia’s, US $1 billion. With time, the negotiations became less active. After the Asian Infrastructure Investment Bank (AIIB) was formed, China proposed to continue to work with it through the AIIB.
How do you estimate the investment climate in Kazakhstan? Is there a "one-stop-shop" for investors? The most recent president’s instructions were to strengthen work to attract investors. Aren’t all these instructions just words?
A "one-stop-shop" is more important to small and medium-sized investors. Large investors always approach the top management directly. As for large investors, I think that the work here is very effective.
The amount of accumulated direct investments is about US $119 billion in Kazakhstan and US $256 billion in Russia. In other words, Russia’s economy is ten times bigger than that of Kazakhstan and the amount of direct investments is only two times as high as in Kazakhstan. It is an interesting observation suggesting that Kazakhstan has managed to create relatively favourable conditions for investors, even more favourable than in Russia. It is not Singapore yet, where investors strive to engage. However, we cannot say that Kazakhstan’s investment climate frightens investors, or that investors are afraid of administrative barriers, possible commotions or future political perturbations.
There is also room for improvement, certainly. We talked that the investments by small and medium-sized businesses are insignificant. The work with investors should probably be directed this way.
How realistic is this?
Is it realistic that the social climate and attitudes to business, entrepreneurship and labour can be changed in all the post-Soviet countries? In my opinion, this issue goes beyond pure economics or, for example, providing favourable tax treatment. This is rather an issue of a public model. Nursultan Nazarbayev said at the Astana Economic Forum several years ago that the problem was in mentality: a new, real civil society needs to be formed where social lifts will be driven by professionalism, not clannish ties. This is important not only to Kazakhstan, but other EDB countries as well.
Thank you for the interview.