EDB’s head: our competitors in Russia are not international development institutions, but commercial banks, but they are also our partners

EDB’s Chairman of the Management Board Dmitry Pankin told in an interview to Interfax about EDB’s financial performance, non-performing and promising projects, plans for funding, and possible membership expansions.

In 2016, EDB had a profit of US $160 million. Was it primarily due to the recovered provisions?

The provisions were the primary and most important factor. We obtained a state guarantee from Belarus for BelAZ and this gave us US $60 million in profit. The other two factors provided us with another US $50 million each. In particular, we reduced our operating costs by 40% against the planned figures. This means we decreased salaries and the number of personnel, discontinued some rents, reduced consultation costs and all other excessive expenses. The third is that we have significantly improved the work of our treasury. The treasury manages around US $1.5 billion and the planned return on this portfolio was 2.5-2.7%. We managed to ensure 5%.

How?

We’ve changed the model. We’ve withdrawn from the U.S. treasuries and begun to invest in the securities bearing Russian and Kazakh risks. We had many interesting transactions. For example, we borrowed in the euros and placed this money into the dollars. We also worked at the tenge market. Foreign currency transactions were efficient.

Did you reduce investments in the U.S. treasuries because of the expected decline in their profitability?

Yes, because of this and the expected increase in interest rates. We withdrew from the securities that we expected would impair and invested in other instruments.

You said you had reduced the bank’s staff. By how many employees?

The staff was reduced by around five per cent. Now we have 250 employees. We’ve also decreased salaries.

What financial results does the bank want to achieve in 2017? What profit do you expect to gain?

It’s important to us that the bank has profit, but profit is not the main objective for development banks. Our main objective in 2017 is to enhance the investment portfolio. We plan to have US $30 million in profit, but I believe that it will be greater. Although we won’t get US $160 million as in 2016. In January we had a profit of US $7 million.

Don’t you expect a significant recovery of provisions this year? Do you still have non-performing loans?

We do have large non-performing loans where we try to recover money. For example, LPK Partner-Tomsk owes us around US $90 million, or approximately RUB 6 billion, including penalties and interests. The net debt, excluding penalties, is some RUB 4 billion. We’ve sued the borrower and its guarantors.

The other, most serious non-performing loan is that of Kazakhstan’s largest grain holding Ivolga. They’ve failed to repay around US $60 million, while the principal plus interests and penalties reach approximately US $100 million. We are also suing its main beneficiary Vassily Rozinov. We are trying to foreclose the collateral, including the rent of 200,000 hectares of land and grain in the elevator, although it has been found out that there’s no grain. We hope we’ll be able to do this (Interfax: foreclosure).

If you get these non-core assets what will you do with them? It’s difficult to sell them during the crisis...

We’ll send our employees to work in agriculture (laughs). Surely, we’ll look for ways to sell them. Our task is to have the money repaid in a legitimate way: to foreclose and sell.

Does the bank still have non-core assets obtained as a result of its work with non-performing loans?

No. We did have some facilities in Tajikistan and Kyrgyzstan. In fact, we became their owners and then leased them out to the project initiators. The figures are not big there, just several million dollars.

You said that your main task is to enhance the investment portfolio. Your strategy is to increase it by more than 50%, to US $3.3 billion. How will you do it?

We’ve re-formatted our team. New specialists joined our project groups. We are currently considering projects worth US $3.3 billion. EDB’s share in them approximates US $1.2 billion. It is clear that not all of them will be financed, but we’ll work with many of them.

Will you resource base be sufficient? What sources will be used to enhance the portfolio?

EBD has a good capitalisation. It has an equity of approximately US $1.7 billion, which equals our balance sheet portfolio. We can easily achieve the equity to portfolio ratio of 1:2; we do have resources for this. The problem is that our resources, equity and liquidity included, are in foreign currencies. We could enter the market and make a placement in the Eurobonds. Yet, there’s no demand for finance in the dollars or euros. It’s difficult to find such projects. There are more projects in the roubles and tenge.

The most important thing to us is to decide on funding in the tenge. Before the new year we received a loan facility of KZT 17 billion (around US $50 million) from Kazakhstan’s National Bank. They also approved another KZT 10 billion of funding through the National Bank and then we will issue bonds. So, we plan to approach the market with our tenge bonds in the spring.

What will the amount be?

I think around US $100-150 million, or KZT 30-40 billion.

Do you plan to enter the Russian market in rouble bonds this year?

If everything goes on well with the projects, yes, we’ll need to. At present we often buy the roubles using swaps, which means we place our currency to attract the roubles. It’s cheaper than issuing bonds. If we placed bonds, the rate would be 9.5% (for three to five-year securities), while using swaps we obtain the resources at a rate of less than 9%. It’s enough to cover our current needs.

Are you considering any projects at the moment with the rouble financing that would require approaching the Russian market?

Yes. We have big projects, for example, the third section of the Central Ring Road in Moscow, which involves a syndicate of banks. We can provide around RUB 9 billion.

What approximate amount will need to be borrowed in the Russian bond market? Or will you consider this in the light of a specific project?

We’ll probably be able to fund using swaps. We’ll see how the rouble liquidity will develop. Or, we’ll probably enter the bond market.

Aren’t you interested in the Eurobonds?

Not now. We have excessive dollar assets and lack new projects in the dollars. However, we don’t exclude the possibility of placing the dollars and then converting them via swaps.

And how do you evaluate, as a participant in the foreign exchange market, the Ministry of Finance’s decision to buy currency to balance the rouble exchange rate in the medium term?

I am not sure that the Ministry of Finance’s goal is to balance the rouble. Its goal is to ensure the stability of the public budget. There’s direct logic: if the oil price today is US $55 per barrel and the budget was formed counting on US $40 per barrel, then certain additional revenues appear. For the Ministry of Finance it is important to balance the budget and avoid budget shocks if oil prices fall.

Some analysts believe this was lobbied by Russian exporters because they benefit from it as they have their revenues in foreign currency. Actually, currency purchases restrain the acceleration of the rouble...

Whether rouble acceleration is restrained or not is the responsibility of the central bank. The Ministry of Finance does not act on its own, it makes orders to the central bank. The central bank may, if it wishes so, sterilise the Ministry of Finance’s purchases by its own transactions.

They said the transactions would be in the market...

Yes, they did. The central bank fulfils not only the Ministry of Finance’s transactions, but its own as well. It can fulfil the Ministry of Finance’s transactions but abandon its own plans to purchase foreign currency. The key issue here is the position of the central bank.

If to return to the projects under consideration, should any transactions be expected in the near future?

We plan to sign an agreement on the Central Ring Road and close the transaction before March. As for Beloporozhskaya HPPs, we also plan to sign these agreements in a month or two. In addition, we want to close the transaction on the modernisation of the water and wastewater treatment plant in Saint Petersburg in the first quarter. We are also working actively on the Bogatyr mine and Kundyzy copper and zinc deposit in Kazakhstan. However, it is difficult to determine precise timeframes for these projects.

You said that EDB did not have problems with equity. Is it pressing then that other countries contribute to the bank’s capital? Or is it an issue of reputation? Is it necessary?

The issue is not pressing. It would be correct strategically and interesting in many terms. It is a political aspect promoting integration in Eurasia. When a country joins the EurAsEC it is a political step aimed at having common customs regulations and agreeing on non-tariff barriers. Deep integration and serious political decisions are needed for this. Joining the bank is a milder option, it’s simply about joint participation in project finance. Therefore, projects in Russia and Kazakhstan with the participation of companies from the respective country should be considered. Second, if a country with a higher rating such as South Korea or Singapore joins the bank this could raise our rating as well. We will be able to raise funds in the market at better rates. However, we don’t have any certain agreements or a "roadmap" yet.

So, this isn’t a short-time prospect.

Not this year for sure, but it’s quite possible in two or three years.

And what country would you like to see in the first place? Are there any projections?

We’ve conducted an analysis to see what other countries would want to become our shareholders. We’ve reviewed trade and investment flows and selected twelve countries, which could be interested in the bank membership. These include South Korea, India, Iran, Japan and Turkey. In Europe it is Finland since it has significant trade flows and investment projects in Russia and Belarus. Although since Finland is a EU country this would be hardly possible now. We have more hopes on countries such as South Korea, Singapore, Japan and India.

Do you feel competition with other development banks in the countries of your presence?

Kyrgyzstan, for example, is literally "flooded" with money and international financial institutions. It has a limited number of projects but obviously excessive funds from international development banks. As for the other countries, Armenia is now working on a decision to limit the budget deficit and reduce loans from international institutions. It does not have too many projects to lend to. In Russia we have no competitors because neither the World Bank nor the European Bank for Reconstruction and Development consider new projects now.

Do you compete with national development banks? For example, Vnesheconombank, which has recently changed its strategy and intends to re-orientate its operations...

Rather with commercial banks. It is not so much about competition as about cooperation. Let’s take, for example, the Central Ring Road. Gazprombank, Sberbank and we plan to participate in financing this project. The overall loan amount will approximate RUB 40 billion. This is a big project and it would be difficult and risky for one bank.

As for competition, it definitely does not concern VEB and even Sberbank. They have more money and low rates. I would like, however, to emphasise once again that we can compete but when we have a big project we can share risks. At the same time, it is often important to commercial banks to provide a full range of payment and other banking services in addition to lending. We don’t need this and can work with other commercial banks.

What about Kazakhstan? It also has its own development bank...

The situation is similar in Kazakhstan. It has projects we would like to finance but the Development Bank of Kazakhstan offers better conditions. In other instances we consider projects jointly and share risks. It would be interesting to work with the EBRD in Kazakhstan and we are considering possible joint projects.

Since 1 November 2016 the EBRD has become a market maker for the RUB/KZT pair. The respective volumes are not big for the time being, are they?

We have funds in the tenge and roubles. We observed that the spreads in the market were very high, if someone wanted to exchange. There is certain demand for such conversion transactions so we began to quote the RUB/KZT pair at the Kazakh and Russian exchanges. The volume of transactions is not big. It is not typical of a development bank, but since it is of interest to the financial markets of the Eurasian countries the exchange prospects for national currencies still exist. The RUB/KZT pair is the most liquid now. Later we’ll consider the Armenian dram to the Russian rouble and the Belarusian rouble to the Russian rouble pairs.