The head of EDB gives an interview to Kommersant Vlast
Eurasian Development Bank will mark its tenth anniversary in 2016. Dmitry Pankin, Chairman of the Management Board, told Kommersant Vlast why mathematics loses to politics in Georgia and Moldova, how Belarussian plants and Kyrgyz power plants recover, and what to do with the Armenian road.
Q.: In your lobby there's a picture of the Eurasian continent. Is the bank's goal to expand from Spitsbergen to Sri Lanka?
A.: Our goal is not to unite geographical Eurasia under the brand of Eurasian Development Bank, but to promote trade and economic ties in it. A group of countries with strong links – Russia, Belarus, Kazakhstan, Armenia, Azerbaijan, Turkey, and China – is standing out in trade and investment flows. Some of them have become EDB members. In the lobby we have just a nice picture reminding that we need to look for countries with a common investment space.
Q.: Why don't you finance projects beyond the Eurasian Economic Union if the bank aims to deepen economic integration in Eurasia?
A.: Such investment is theoretically possible if the EDB members express strong interest. However, there have been no such projects to date. Our priority are projects in the bank's member countries and this is stated in our charter.
Q.: What is your target audience?
Our shareholders, in the first place. We are revising the bank's strategy to determine our target group beyond the shareholders more precisely, but it has not been approved by the bank's council yet and I cannot give you a definite answer.
Q.: Do the bank's shareholders have equal shares in its charter capital and decision-making?
A.: Russia has contributed US $1 billion and Kazakhstan US $500 million. Other contributions were nominal: Belarus US $15 million, Tajikistan US $500,000, and Armenia and the Kyrgyz Republic US $100,000 each. We try to ensure that decisions are made by consensus. We had no contradictions in practice, not a single time. The most significant disputes arise between Russia and Kazakhstan, yet they don’t try to take advantage of one another. Tajikistan and the Kyrgyz Republic would hardly consider issues pertaining to the bank's budget or structure. It is the main shareholders who comment on these issues.
Q.: Why does the bank need Tajikistan, which is not a member of the EEU? Is it an attempt to support its national identity despite low-quality institutions?
A.: I won't speak for the EEU, but as far as I know negotiations with it are underway. What matters for us is mathematics. Integration is based on intense trade linkages. Our countries are Tajikistan’s largest investment partners. If Tajikistan faces an economic collapse, it will have serious negative effects for Kazakhstan, Russia and all its neighbouring countries. The region is experiencing huge economic problems that can be cushioned, by us in particular.
Q.: Will the bank admit new members?
A.: We negotiated with China, Vietnam and Iran, but there has been no final decision. In the case of Uzbekistan, for example, we have strong economic ties, but the Uzbek side's political course is that any processes associated with the EEU are unacceptable and they don't want to join EDB. For the time being, we decided to have six countries as members. However, the bank is an open structure and ready to expand its membership.
Q.: You're like NATO. It is also open to everyone.
A.: Not quite. In each case we need to analyse whether the shareholders are interested in admitting a new member and whether the candidate state is interested in it. For example, there's potential in working with Azerbaijan and objective reasons for it to become our member. However, it is not ready to join EDB as yet.
Q.: Our relationships with former Soviet Union countries are full of mutual inhibitions and the two courses – the economic and political ones – are strongly intertwined. We lack skills for effective integration.
A.: I agree. Mathematics loses to politics in this context. If to speak about pure economics, we surely can work with Ukraine, Turkey, Azerbaijan, or Uzbekistan. All of them have strong trade and investment ties with the EEU countries. However, it is clear that there can be no talks with Ukraine or Turkey at the moment, while the ties with Georgia and Moldova are significantly weaker. Mathematics does not work here.
Q.: Why most of your projects are in Russia, Kazakhstan and Belarus? Are you not at all interested in the Kyrgyz Republic and Tajikistan?
A.: The bank is a ‘two-pocket’ structure. In addition to our own funds, we manage the Eurasian Fund for Stabilisation and Development (EFSD). In Armenia, the Kyrgyz Republic, Tajikistan and Belarus the bank operates primarily through the fund. We've lent US $515 million to Armenia, US $285 million to the Kyrgyz Republic, and US $110 million to Tajikistan. The loans have been funded by the EFSD. It is difficult to find an investment project in these countries with acceptable risks and for this reason we need state guarantees. In accordance with IMF terms, Armenia, the Kyrgyz Republic and Tajikistan enjoy preferential lending conditions. The interest rates for the approved loans were 1.5-2.1% for Armenia, and 1% for the Kyrgyz Republic and Tajikistan, and the average repayment period was twenty years. We cannot afford such rates, because we borrow in money markets under 5-6% per annum. This was the reason for establishing the EFSD from contributions made, in the first place, by Russia and Kazakhstan – to finance EDB member countries' projects on beneficial terms.
Q.: One of EDB's projects was a loan to Sukhoi Civil Aircraft (SCA). Why did the bank consider the creation of Russia's short-haul SSJ-100 airliner as a successful project? In the end, SCA has failed to compete with Embraer and Bombardier. Armavia has returned the aircraft and the biggest importer is Mexico's Interjet.
A.: The bank's logic is simple: the loan has been repaid without delay and we have withdrawn from the project. We provided the money and had them back. As for the idea of SSJ-100 as a breakthrough project for the Russian aviation, I would agree with you: it's hardly an unequivocal success.
Q.: If you evaluate projects not as a chairman of the bank's management board, but, for example, as a public official, which of them could be considered a success?
A.: There's no one-hundred percent success. An unconditionally successful project, however, is Pulkovo. The terminal has been launched and it is a typical project for a development bank.
Q.: What was the integration effect from the bank's financing of St. Petersburg's airport?
A.: We're not prohibited from financing airports in Russia, but I would agree that the integration effect in this case was nil. The Western High-Speed Diameter is a very good road, which was not overestimated in terms of costs, but it also has not contributed to inter-country cooperation. The project with BelAZ is a good one. They buy spare parts from Russia and supply trucks to us and Armenia. However, here we have issues with loan performance: the company has had delays and the loan is being restructured. In other words, the project has an obvious integration effect and is in line with our mission, but it has issues with repayment. We try to find projects where, for example, investment is made in one country, parts are supplied from another country, and finished products are channelled to a third country. A great example is Kazakhstan's Zarechnoye, a joint venture producing and concentrating uranium ore. Its consumer is Russia's Atomredzoloto. We also lend to the Minsk Electrotechnical Plant, which receives supplies from and exports its products to Russia. Kazakhstan's OMS Shipping has got a loan from the bank to build five tug boats to arrange shipments in the Caspian Sea between Russia and Kazakhstan. One tug boat has been built but is not used for trans-border shipments. The deadlines for building the other four boats have been missed. A great idea was with Kazakhstan's Ekibastuz GRES: to use Russian turbines and supply electricity to Russia's Basel. However, the Kazakh partners had a decrease in proceeds and had to stop the unit because of falling energy prices. At present, we are discussing a project with Kazakhstan's Alma TV, which plans to lay a fibre optic cable to connect Russia, Kazakhstan and China. We are also interested in Asia Auto, AutoVAZ's subsidiary assembly shop in Kazakhstan. The parent company is facing lower demand at the moment, but the logic is to look two to three years ahead when demand will grow.
Q.: Is there such a drastic lack of projects in the Kyrgyz Republic and Tajikistan?
A.: Through the EFSD, we are engaged in the reconstruction of the Nurek, Kairakum and Toktogul HPPs. The Kambarata HPP is at the approval stage. These plants need upgrades, dam repairs and new equipment. They don't supply electricity to us but the integration effect is ensured by Russian machinery supplies for Kyrgyz hydro power plants.
Q.: What is the extent of the bank's involvement in the Chinese Silk Road Economic Belt project?
A.: We need to take into account China's interests and how we can interact with it. China is interested in building lateral communications from the east to the west. We are interested in creating not only lateral, but also longitudinal corridors such as North-South. China has built a motor road through its western regions and the eastern parts of Kazakhstan. We have two very interesting projects of logistics terminals in Astana and on the Kazakh-Chinese border, which we'll most certainly launch. The latter is in the Khorgos International Centre for Border Cooperation between Kazakhstan and China. Our calculations show that sea shipments are by far cheaper: for example, container shipment from Shanghai to Rotterdam costs US $700 by sea and about US $2,000 by rail. We should not be too sure about China's land corridors to Europe since their cost effectiveness needs confirmation. Inter-regional economic cooperation is significantly more important now and it needs local logistics centres. Another important construction project is the road from China through Kazakhstan, which ends in an open field in Orenburg Region. We want to extend this road with a northern corridor to the Belarusian border to transport Chinese goods through Russia to Europe. We are also considering a road reconstruction project in Belarus with the Eurasian Bank for Reconstruction and Development (EBRD). The road begins on Kazakhstan's border in Orenburg Region, passes Tambov, Lipetsk, Orel and Bryansk and connects with the M1 motorway on the Belarusian border.
Q.: You met with the chairperson of the Asian Development Bank's board of directors to discuss construction of the North-South corridor. What did you sign with them?
A.: A US $3 billion agreement on joint financing in Kazakhstan, Armenia, the Kyrgyz Republic and Tajikistan until 2021. EDB will provide US $1 billion and the ADB US $2 billion. We also signed a protocol on additional financing for the North-South road in Armenia. EDB is ready to provide US $320 million and the ADB intends to finance the feasibility study. We are now discussing technicalities.
Q.: Where will the road go?
A.: It will be a motor road from Iran, through Armenia, to the Georgian border. Armenia has no other options despite complicated relationships between Russia and Georgia. The economic logic works: the trucks moved and continue to move along the Georgian Military Road to Russia. Armenia has more problems in this context since the road passes through villages, all but hen houses. We want to reconstruct the road to increase commodity flows.
Q.: Has the bank been affected by sanctions, which have obvious impacts on the Russian economy?
A.: The bank noticed them although as an international financial institution we are not subject to sanctions. We operate in international markets and have eurobonds in dollars and euro. In our lending policies we need to comply with sanction requirements and, for this reason, we cannot lend to companies on the sanction list.
Q.: Is it possible that the bank will be interested in small- and medium-sized businesses in the EEU member states, or is it for major players only?
A.: Development banks work with small-sized businesses. The EBRD and the ADB have such programmes. We do not have such a priority for the moment because we are interested in integration projects, starting from US $10-15 million on average.
Q.: EDB closed the year of 2015 with a loss of US $140 million. I believe this is not too good for a bank.
A.: I also think so. When I came to the bank and audited all the loans I found out that additional provisions of about US $200 million were needed. These provisions were not on the bank's balance sheet before. The Tomsk Wood Processing Plant, for example, paid interest on time, so everything seemed fine. However, when we analysed its performance we understood that the project was loss-making, its profits were negative, and repayments had been postponed. Ivolga, Kazakhstan's largest grain producer, had been granted postponements of principal repayments but we found out that there was no grain that had been provided as collateral and that the client was unable to repay. We had to make additional provisions for such projects. These provisions formed the loss you mentioned.
Q.: How will you remedy the situation?
A.: We'll initiate court proceedings against bad-faith clients, foreclose on the collateral, and look for a buyer to sell the respective facilities. In the case of BelAZ, we are negotiating state guarantees with the government. The second part of work is to rearrange the bank's internal organisational structure. We need to understand why loss-making projects were financed. Is it because of economic volatility or were those our mistakes in project selection? The third point is to find internal reserves and cut costs. We have already had staff reductions, cancelled some rents, and negotiated rental reductions. The fourth point is to raise interests where rates are lower than the market rate and improve management of the treasury portfolio: we have invested over US $1 billion in the U.S. treasury bonds. This is a good and reliable investment, but it does not pay back. We have reformatted our portfolio to increase the share of investments in Kazakh and Russian securities with a sovereign risk.
Q.: I'll quote you: "The bank does not lack money, but lacks projects."
A.: The overall economic situation is bad. The falling oil prices affect everything. The country's main export proceeds and consumer demand have decreased. The world's oil prices are the most important factor. Another difficulty is the lack of ideas. As a rule, there's an idea how to spend but not how to guarantee that a plant, terminal or road will become self-sufficient and profitable. We have upgraded Ekibastuz GRES, but nobody buys its electricity. We need to calculate risks thoroughly and this requires significant costs and efforts. In addition, I have to acknowledge that the bank was passive and did not look for projects. We are now restructuring our work so that our research department look for interesting economic niches, the project department find companies with goods ideas, and our specialists ensure that projects be brought to the final stage of risk calculation.
Sourse: Kommersant Vlast (Russia)