Igor Finogenov in an interview to journal “Dengi i Kredit”: New Strategy of Eurasian Development Bank for 2013-2017

In his interview to journal “Dengi i Kredit”, Igor Finogenov, Chairman of the EDB Management Board, spoke about the objectives set and plans concerning implementation of the new Strategy of Eurasian Development Bank for 2013-2017, which was approved by the EDB Council in June 2013.

In June 2013, the Council of Eurasian Development Bank (EDB)—— which consists of the Ministers of Finance, as well as heads of economic ministries and agencies of the governments of Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan——approved the Bank’s Strategy for 2013–2017. In his interview to journal “Dengi i Kredit”, Igor Finogenov, Chairman of the EDB Management Board, spoke about the objectives set and plans concerning implementation of the new strategy.

“Dengi i Kredit”: Mr. Finogenov, as we know, the Council of Eurasian Development Bank approved EDB’s Strategy for 2011–2013 in December 2010. Why was the issue of the new strategy brought up for discussion already in the summer session of the Council, since the 2010 Strategy expires only at end-2013?

Igor Finogenov: The Bank’s strategy covering the period until the end of 2013 has been implemented ahead of schedule. All of its key targets were exceeded already based on performance in 2012. As of January 1, 2013, the Bank’s investment portfolio reached US $ 4.6 billion, while its current investment portfolio made US $ 3.67 billion. According to the Strategy, these indicators were to reach the level of correspondingly US $ 4.36 and 2.66 billion by end-2013. One more fact to illustrate the Bank’s performance: under the Strategy, the investment portfolio growth over the three years was to make US $ 1.782, while the amount of new projects actually exceeded US $ 1.943 billion over 2011 and 2012.

In essence, it means that EDB has been developing even faster than our participants assumed when adopting that document. But the Bank’s development is not limited exclusively to its portfolio growth. EDB is scaling up and diversifying its activity. The geographic scope of the Bank’s operations has expanded: Kyrgyzstan joined EDB in 2011. EDB has expanded its product line and introduced new instruments of financing. The Bank makes arrangements to finance projects by pooling financing from different sources and combining different instruments of financing to offer more attractive terms of financing to its clients.

In 2012, EDB’s Policy of Environmental and Social Responsibility was approved and became effective. Its objective is to reduce the negative environmental impact and negative social effects of investment project implemented with EDB support. The Bank’s investment activity, inter alia, aims at ensuring more efficient use of natural resource, conservation of the environment, and sustainable socio-economic development in general.

EDB communicates with other international financial organisations to coordinate our programmes, provide consistent recommendations to borrowing countries concerning their stabilisation programmes, as well as jointly implement investment projects.

The level of information and analytical backing of integration developments has improved considerably. The EDB Centre for Integration Studies has been created and its research is popular with national governments and supranational bodies (the Eurasian Economic Commission in particular), as well as with the experts community.

The EurAsEC Anti-Crisis Fund, whose resources are managed by EDB, is dynamically expanding its activities. In 2011, the ACF Council approved a US $ 3 billion financial credit for the Republic of Belarus. Five tranches of the credit were disbursed in 2011–2013 based on staged implementation of the Stabilisation Programme of its government aiming at stabilisation of the balance of payment and improved competitiveness of the economy.

— Does EDB monitor and assess the economic and integration effects of its investment activities? What do they consist of specifically?

— At the beginning of this year our investment portfolio had the potential to generate additional trade between the Bank’s member states of US $ 1.6 billion per year. It brought about mutual investments in projects at the level of US $ 1.6 billion.

EDB-supported projects could generate about US $ 3.7 billion of additional gross output in related industries of the member state economies on average per year. In the long run, if actually operated, the Bank-supported projects can help generate US $ 4.5 billion of additional output in the member state economies.

According to the Bank’s assessment based on business plan analysis and monitoring of the results of investment project implementation, EDB-supported projects have promoted creation of 18,000 jobs and annual tax payments to the budgets of member states at the level of US $ 588 million.

— What are EDB’s priorities under its new Strategy?

— The Bank will focus on financing projects to develop the energy, transport, and municipal infrastructure in its member states. EDB will promote better energy efficiency of the economies by financing projects related to reducing the energy intensity of enterprises and improving resource saving indicators. And, finally, the Bank will continue financing projects to promote the development of trade and economic ties and attraction of mutual investments to deepen the economic integration of its member states.

It should be noted that the new Strategy covers a longer period. This time, the horizon of strategic planning is five instead of three years. Thus, the Bank can focus on addressing long-term challenges and reducing the impact of financial market volatility on the Bank’s performance.

— What is your opinion about the key aspects of the new Strategy?

—Under its new Strategy, the Bank will aim at further improving the results achieved and its efficiency in the light of intensified integration developments in our region, and strengthening of the Customs Union and Single Economic Space in the first place.

The key indicator of the Bank’s activity is the annual volume of new projects,——its investment portfolio growth——which will make at least US $ 1 billion. Thus, the size of EDB’s investment portfolio will reach at least US $ 10 billion by 2017.

The share of projects generating integration effects should make at least 50 % of the current investment portfolio. Those include the projects financed, among other things, with investments originating from other EDB member states; generating trade between the Bank’s member states through supplies of equipment, materials, or final products in the framework of project implementation; and involving creation of new or support of existing joint ventures and transnational groups, formation and development of common markets, use of consistent technological solutions, etc.

At the same time, the composition of the Bank’s investments by industries should reflect its strategic and sector priorities, including investment in energy and energy efficiency, transport, telecommunications, municipal, and other infrastructure projects.

— Has the Bank’s mission changed in the light of the new Strategy adopted?

— The mission of Eurasian Development Bank remains unchanged.

The recent review of activities of about a hundred of development banks undertaken by the World Bank highlights their focus on a small number of the most topical development objectives and ability to form a ‘pipeline’ of viable projects as the key to their success.

This is exactly our case. EDB’s mission is clearly formulated as that to facilitate regional economic integration and is implemented primarily through investing into large-scale infrastructure projects, including transnational ones.

— What are the mechanisms to implement the new Strategy?

—The Bank will continue its operations to raise funds in stock markets to get financial resources for its investment activity. That will be accompanied with efforts to reduce the cost of operation funding, inter alia through diversification of its sources, potentially including attraction of deposits——in part in local currencies——from savings and stabilisation funds of its member states and the EurAsEC Anti-Crisis Fund on a fee-paid basis.

The Bank will continue its cooperation with international development institutions in the area of coordination and joint implementation of investment projects.

EDB sees the World Bank Group, the European Bank for Reconstruction and Development, the European Investment Bank, and Asian Development Bank as its key partners for investment. In addition, the Bank will further participate in the work of donor councils in those member states, where such councils have been created (Kyrgyzstan, Tajikistan).

In the framework of memoranda and agreements on cooperation signed with leading development banks, the Bank will hold consultations and engage in joint activities to share knowledge and expertise in the area of macroeconomic analysis, monitoring and appraisal of investment projects and sovereign loans.

EDB will continue its cooperation with the committees and commissions of the United Nations Organisation: the Economic Commission for Europe (UNECE), the Economic and Social Commission for Asia and the Pacific (ESCAP), and the UN Development Programme.

The Bank will also provide information and analytical support to integration developments using the capacity of its Centre for Integration Studies entrusted with the functions of organising fundamental research, preparing relevant reports and recommendations to the governments of member states in the area of regional economic integration, primarily in the context of the Customs Union and Single Economic Space, as well as the Eurasian Economic Union.

We will hold consultations with governments and international organisations on joint use of water resources in Central Asia, implementation of energy efficient programmes, and a range of other topics. Publication of series of industry research devoted to different aspects of economic integration in Eurasia and topical issues of sustainable economic development will continue.

To ensure quality growth of its investment portfolio, the Banks will continue expanding its line of financial products. The share of provisions in EDB’s balance sheet portfolio, which is the key indicator of investment portfolio quality, should not exceed 5 %.

— The Bank has six member states, which are close geographically and historically, but differ greatly in the scale and structure of their economies. How does the new Strategy take these specifics into account?

— Based on the national strategies and development programmes, the Bank’s Strategy for 2013–2017 defines country priorities reflecting the specific features of its activity in each of the member states. They take into account the needs of their economies and development of their competitiveness, as well as our resources. This approach facilitates formulation of such goals, which are topical for each country, and provides instruments available for their implementation.

In Armenia, EDB will focus on infrastructure projects aimed at reducing the country’s transport dependence and ensuring its energy security. Export growth can be generated through project and investment financing of projects in mining, metals, and processing industries.

To ensure the country’s food security and improve its external competitiveness, the Bank will support projects in the agro-industrial sector involving modernisation and introduction of modern technologies, as well as creation of vertically integrated agro-industrial enterprises with an export potential. The Bank will also support projects to facilitate food imports, primarily from EDB member states, on conditions acceptable for the republic.

Financing of the banking sector will continue in the framework of targeted programmes aimed at supporting small and medium business development and export and import operations with other member states of the Bank.

In Belarus, EDB supports implementation of the State Programme of Innovation Development for 2011–2015. We will continue financing of enterprises of the real sector of the economy with a high export potential: transport and agricultural machine building, chemical and food industries. The Bank will facilitate introduction of leasing products to promote the goods of Belarusian manufacturers in the markets of other member states. Investment in power generation will continue: development of the network facilities, new and efficient power generation, and other projects promoting reduction of the country’s dependence on imported energy resources and improvement of its energy efficiency.

In addition, EDB will support implementation of projects related to the transport infrastructure to help Belarus realise its transit potential.

Financing of the banking sector will continue in the framework of targeted programmes aimed at supporting small and medium business development as the institutional basis of the market economy.

Kazakhstan is faced with the challenge of improving the competitiveness of those sectors, which are not related to primary commodities, reducing the energy intensity of its economy, and attracting investments. In this context, the Bank stands ready to participate in financing projects implemented in the framework of the Governmental Programme on Accelerated Industrial-Innovative Development.

EDB will also take efforts to engage international financial organisations, banks, and investment funds in co-financing investment projects in Kazakhstan.

In addition, the Bank stands ready to facilitate implementation of investment projects to help bring new technologies to the economy, develop the automobile manufacturing, chemical industry, glass and pipe manufacturing, inter alia through supporting joint ventures created with other member states. EDB will support projects of enterprise modernisation in such sectors as machine building, power generation, petrochemical and light industries.

To boost the export potential of the economy, the Bank will continue its support of export-oriented projects in the agro-industrial sector.

In Kyrgyzstan, EDB gives preference to investment projects in the power generation, transport, and mining industries, as well as in developing modern information and telecommunication technologies.

In the framework of targeted programmes implemented through the banking sector, the Bank will support small and medium business development in agriculture, light and processing industries of the country.

In addition, EDB is prepared to support projects aiming at the human capital development, projects in the education and health sectors through their co-financing with the donor club and providing assistance in the framework of its Technical Assistance Fund programmes.

In Russia, in 2013–2017 the Bank’s focus will be on financing large-scale infrastructure projects in the area of power generation, transport, communication, as well as projects in those sectors, which are not related to primary commodities, aiming to reduce the energy intensity of the economy and introduce resource and energy efficient technologies.

We will continue our efforts in providing technical assistance to create the International Financial Centre in Moscow.

The Bank will provide targeted financing for projects related to small and medium business development by implementing targeted programmes through the banking sector.

In Tajikistan, EDB will continue supporting projects in the power generation sector by providing expertise and technical assistance to develop required technical and engineering documentation, and subsequently participating in investment project financing.

The Bank will provide assistance in developing export-oriented enterprises and facilitate agriculture diversification and productivity improvement, and participate in addressing the issues of food security by providing targeted financing, inter alia to develop vertically integrated agro-industrial enterprises.

Taking into account the importance of the transport infrastructure for the country’s economy, EDB stands ready to support projects aiming at servicing foreign trade, improving the quality of transport services and logistics, renewal of vehicles and fixed assets.

We will also continue providing targeted credit lines to financial institutions to ensure access of small and medium businesses to financing: targeted lending to small and medium businesses, financing of agricultural producers, trade finance, and financing leasing operations.

— What do you see as the key role of your Bank for the national economies?

— I think that in the present-day world, the key objective of international development banks, and our Bank in particular, is to help address the fundamental challenge of the post-crisis world — promotion of long-term investment.

Long-term investment growth certainly requires a favourable regulatory and legislative environment and creation of a pipeline of truly high-quality projects. With these conditions satisfied, international development banks can play quite a significant role in that. Owing to their status, they are able to cover a range of specific (non-commercial) risks that other participants of such projects are unable to undertake. Their special status includes their international legal capacity, property and legal immunity, tax and customs exemptions, as well as other privileges, which help them avoid the risks related to potential changes in the legislation and banking regulations in member states. Compared to other participants of infrastructure projects, it is easier for development banks to create a consortium and promote successful placement of project bonds. EDB is already looking into the ways to promote these financial instruments through creating and implementing guarantee arrangements and subordinated financing mechanisms.

The problem of insufficient financing of infrastructure, especially in the case of transnational infrastructure, is quite acute in the former Soviet Union countries. During the first decade of transition to the market economy, all of our countries financed only a small fraction of investment into infrastructure needed by their economies for sustainable development. The insufficient financing resulted in severe power shortages hampering the development of small and medium businesses; operating costs of commercial trucking company exceeding any economically justified standards; and massive losses of agricultural producers owing to the lack of a modern road network.

I would like to give just one example of how EDB addresses the problem of insufficient infrastructure financing in its member states.

Central Asian countries have an impressive energy potential, but coordinated efforts of the hydro power generating sectors of all the five countries in the subregion are called for to ensure its efficient use. In the Soviet Union times, that was ensured in the framework of the “Central Asian Energy Ring”. Today, not all the countries of the region support the regime of joint operation of the energy systems. The losses resulting from isolated operation of the national energy systems are significant, while the region is already faced with severe power shortages. Taking into account the projected rates of growth of both Kazakhstan and its neighbours, these shortages will be only intensifying.

In this context, EDB is actively involved in modernisation of the generating and network facilities in Kazakhstan and Russia. In Kazakhstan, the Bank finances rehabilitation of Ekibastuz GRES −2 power plant and expansion of its capacity that promotes stabilisation of power supply of the Northern region in Kazakhstan and Southern Siberia in Russia. Today, the Bank is actively reviewing proposals concerning modernisation of the generating and network infrastructure in Kyrgyzstan and Tajikistan.

The editors would like to thank the Chairman of the EDB Management Board for sharing his views on EDB’s activity and new Strategy.