The head of EDB gives an interview to Expert
Integration is a priority
Dmitry Pankin: «No country can be competitive in isolation from other countries in the international division of labour».
The beginning of 2016 marked the first anniversary of the Eurasian Economic Union (EEU), comprising Russia, Belarus, Kazakhstan, Armenia, and the Kyrgyz Republic as its members. The past year was not simple for the union participants. The fall in oil prices and the devaluation of the rouble entailed the weakening of the national currencies of Russia's economic partners, Belarus and Kazakhstan. Viktor Khristenko, Chairman of the Board of the Eurasian Economic Commission, estimates that mutual trade between the EEU countries shrunk by 25% and with third countries by 35%. Dmitry Pankin, Chairman of the Management Board at Eurasian Development Bank (created to strengthen trade and other economic ties in Eurasia), who took this post last year, is convinced that negative patterns do no mean that Eurasian integration should be given up. He told Expert Northwest why integration unions are the key to competitiveness and what the prospects for creating a single financial market in the EEU are.
Q.: After the devaluation of the national currencies and the fall in oil prices, did the EEU members become more inclined towards association, or towards pursuing their individual interests?
Dmitry Pankin: I would avoid connecting oil prices, devaluation and integration. Oil price and exchange rate fluctuations existed always, but they do not determine the attractiveness of integration. We should talk about longer-term tendencies associated with the need for the division of labour between countries, infrastructure, and the need to expand markets. At present, no country can be competitive in isolation from other countries in the international division of labour. We see the European economic community, the Trans-Pacific Partnership, the Customs Union. Such unions have long-term competitiveness in the international economy.
Q.: Did devaluation affect Eurasian Development Bank (EDB)? After all, Russia and Kazakhstan are its main shareholders.
Dmitry Pankin: Initially we decided that the capital of EDB and the Eurasian Fund for Stabilisation and Development will be denominated in the US dollars. For this reason, during the crisis period we can avail ourselves of new opportunities to finance local projects.
On the other hand, it became harder to find borrowers who would agree to take a currency loan and could then repay it. We are now looking for projects that will repay in dollars and euro and it is not that easy.
Q.: Will EDB specialise in investments in infrastructure projects as it was stated before? Is such specialisation possible without additional capitalisation?
Dmitry Pankin: As a classical development bank, we proposed our shareholders to focus on infrastructure projects. However, in this case we'll need significant additional capitalisation. We have nothing to do in large infrastructure projects with a capital of US $1.5 billion. Building a road from China to Western Europe, for example, will require dozens of billions of dollars in investments. However, with the current budgetary restrictions, neither Russia nor Kazakhstan can afford such significant additional capitalisation of the bank. For this reason, we can engage in large infrastructure projects to a rather limited extent only.
We estimate that for the bank to involve in large infrastructure projects it will need around US $10 billion. In this case we'll be ready to finance large road and energy projects.
Q.: Does this mean that you current portfolio is not only infrastructure?
Dmitry Pankin: Sure. The shareholders stated that projects with an integration effect were our key priority. They should involve interests of several EEU countries and produce a value chain. To put it simply, it is when chassis are manufactured in Russia, motors are installed in Belarus and bodies in Kazakhstan and then the end product is supplied to an external market.
For us, the most important criterion is that the added value is created in different countries. This is not necessarily infrastructure. This can be industrial production, or chemicals. The main thing is that several countries need to participate in a project.
Q.: Do you see promising projects in the North-western region, which would meet your integration requirements?
Dmitry Pankin: The difficulty with St. Petersburg is that it's harder to find projects here, where interests of several EEU countries would intersect. However, we did have interesting projects in the region, which met our infrastructure logic. These were the reconstruction of Pulkovo Airport and the development of the Western High-Speed Diameter road. These projects were important in that they helped to sophisticate the mechanism of public-private partnership and interaction with other development banks.
Q.: One of the projects that comes to mind is the China–Western Europe transport corridor, which could go through the North-western region.
Dmitry Pankin: Theoretically, yes. It is possible to fulfil such projects in the region and all member states of our bank would be interested in them.
Q.: Does EDB compete with the Asian Infrastructure Investment Bank for projects?
Dmitry Pankin: The demand for investment is so high that there's room for everyone, including the Asian Infrastructure Investment Bank, the Asian Development Bank, the World Bank, and our bank. At the same time, we all have many ideas how to spend but there are very few ready, elaborate investment projects with understandable returns on investment and clearly estimated risks. So, there will be rather strong competition between the banks for such projects.
The main problem now is the shortage of quality, elaborate projects. The cause for this is not the lack of people who could calculate everything. In the current investment climate, it is very difficult to achieve results in any investment activities. In this context it is necessary to quantify markets, and prove profitability and resistance to external shocks.
Q.: Is it probable that the SCO bank will be formed on the basis of EDB, or has this idea been finally abandoned?
Dmitry Pankin: There were many talks about the SCO bank. The idea was promoted by Uzbekistan, the Kyrgyz Republic and Tajikistan, which simply lacked resources and wanted to have more banks to provide them with money. China was another initiator of creating the SCO bank. It was important to China to channel its huge currency resources and form a system for their use. China has fulfilled its intentions, in many aspects, by creating the Asian Infrastructure Investment Bank. In my opinion, after this the SCO bank has become a side-line idea. At the same time, it was not abandoned officially and the SCO documents point out to the need to continue work on creating the bank.
Q.: What is the situation with non-performing loans at your bank? Did they increase significantly?
Dmitry Pankin: Non-performing loans appeared not this year. They just finally came to light and they reflect what happened in the bank before. Now, when the new management came, we analysed the actual situation with projects. Non-performing loans at our bank make up approximately 10% and, in general, this does not differ significantly from other banks. In the Russian banking system the average level of non-performing debts is 8%, and in Kazakhstan 12%.
Q.: Did the bank become more conservative in project consideration?
Dmitry Pankin: The approach to projects should definitely be revised to factor in all associated risks and the decision making process. When we reviewed non-performing projects we found out that many risks had been clear beforehand and had been indicated by the bank's risk management specialists, but they had not been taken into account by the management when it made decisions.
Q.: When could a single financial market form for the EEU countries?
A.: It is clear at present that we need to coordinate financial supervision, banking supervision and regulations, and should apply identical rules for banking operations in the EEU, as well as requirements for supervision over insurance companies. It is understood and there are plans to create a single supervisory space. It will be significantly more difficult to coordinate macroeconomic and monetary policies. If Russia decided to switch to a floating rate of exchange, this means that Kazakhstan and Belarus cannot continue to fix their national currencies' rates. Objectively, this makes all countries to come to common monetary regulation terms.
Q.: Is the single currency a compulsory condition for integration? When can this happen?
Dmitry Pankin: It took several decades for the European Union to launch a single currency. Integration processes began as early as in the 1950s. First, a single customs space was formed. Then the countries began to coordinate the fluctuations of their national currencies with respect to each other and their monetary policies. Then a single payment unit appeared. And only in four decades of the integration process the European Union arrived to the single currency. This was the final stage of a very long and complicated process. I would not exclude the possibility of launching a single currency in the EEU in the future, but would not try to speed up it.
Q.: Is the inclusion of new members in the EEU on the agenda?
Dmitry Pankin: It is clear that the EEU is not a closed union in terms of its membership. It can offer a range of statuses such as an observer, or a partner. Several countries are interested in establishing strong economic and trade ties. I think that new members will appear but, proceeding from the EU's experience, it is very important not to hustle the process. In the pursuit of expansion, the EU admitted countries such as Greece, which in terms of their economic and political development were not ready to accept EU financial policy restrictions and standards. As a result, the too fast admission of new members led the EU to the verge of collapse. For this reason, it is very important that the admission of new members be not a purpose in itself, but develop along with the strengthening of coordination and do not result in the provision of softer, exceptional conditions for new members.
Q.: Does this mean it is too early to state that one of the countries can join the union?
Dmitry Pankin: We can say that certain countries are interested in rapprochement but cannot say that there's any schedule for accepting new members.
Q.: There were discussions at some point that EDB would be vested with export support functions. Is this still on the agenda?
Dmitry Pankin: This was discussed indeed and the Eurasian Commission in particular stated that the bank should be more active in supporting exports of the EEU countries. The problem is that each country has its own export support system. At the same time, it would be difficult to say that the existing institutions meet all export needs in the EEU. I think that our task should rather be in financing integration projects.
Q.: Do you factor in export potential when considering projects?
Dmitry Pankin: Our task is not to support exports, but to support projects with value chains, including those with the export potential. It is important that products are not simply made in Russia and then sold in Kazakhstan. It is necessary that products are made as a result of cooperation, for example, between Russia, Kazakhstan and Belarus.
Q.: Do you agree that, in the end, it is necessary to focus on exports, not import substitution?
Dmitry Pankin: I would agree with that. It's more important to create production, which would be competitive in the global market. It's not import substitution that matters, but the creation of products, which would be successful in foreign markets and sold both in the country and beyond.