Gennady Zhuzhlev: Russian business underestimates neighboring countries
Former Soviet Union now looks pretty diverse both in the economic development of former Soviet republics and in the nature of political regimes and style of decision-making and conducting of business. However, for these countries integration in many sectors of the economy is natural. Long-term development institutions are established for successful implementation of large projects. RBC talks with deputy chairman of the Executive board of the Eurasian development bank Gennady Zhuzhlev on integration processes in the former Soviet Union and prospective joint projects.
RBC: Gennady Efimovich, Eurasian development bank was created to finance development projects mainly in the former Soviet Union. The founders of the Bank are several states with very different levels of development and ways of managing the economy. How does the Bank organize cooperation with its members?
Gennady Zhuzhlev: Yes, indeed, members of the Bank are countries with different economic potential and conditions. Main founders are Russia and Kazakhstan. They account for the bulk of the investment portfolio: 43% of funded projects to date are located in Kazakhstan, 40% are in Russia and another major Bank’s participant is Belarus (accounting for 10% of the portfolio, although it became a participant of the Bank only in 2010 year. Our goal is economic integration of the former Soviet Union and economic relations can be developed with the help of investments. Therefore, we allocate long-term loans for projects that facilitate integration and growth of economies of member-countries.
RBC: Tell us about the biggest and most interesting investment projects of the Bank.
G.Zh.: One of our most interesting projects is construction
of the third power unit of Ekibastuz State district power
Why is this project so important for Russia? Besides the fact that this company provides 8% of all electricity in Kazakhstan, it still provides energy to Russian industrial enterprises in the Urals and Siberia. But recently there has been growing demand for electricity in Russian regions adjacent to Pavlodar region of Kazakhstan, where there is a power plant. The third power unit of 600 MW is being built under the project. Part of this energy will be exported to Russia. There is an agreement on mutually beneficial rates.
State district power plant uses coal, which is produced by another Russian-Kazakh joint venture — coal mine «Bogatyr Komir» (by the way we also opened a loan facility for this enterprise in the amount of US $50 m for production development). Russian-Kazakh engineering company will build and assemble objects on the power plant. In general the project employs a number of related businesses...
The total project cost is about US $900 m. We are funding it through provision of a syndicated loan with VEB in three currencies — dollar, ruble and tenge for 15 years — our part — US $385 m. Moreover, credit facility of the EDB is offered in three currencies — dollar, ruble and tenge.
It should be noted that in due time the EBRD was ready to finance this project, but they offered loan only on conditions of western equipment supply. Of course, it was much easier and more accurately from the point of economic development to attract loan from us.
This is not the first loan, which we allocate to Ekibastuz
State district power
RBC: Is integration between countries a prerequisite for allocation of loan by you?
G.Zh.: It is desirable. For example, since April 2008 to December 2010 with our help there was implemented the project on construction of wood processing plant in Tomsk region. This enterprise manufactures MDF mats. There are only three such enterprises in Russia. But two of them are in the European part and they are owned by foreigners, and Tomsk plant is the only east of the Urals. In this region there are no competitors. This is a large high-tech robotic manufacturing. There are only two hand operations — logs loading into the machine at the beginning of the production and loading of finished MDF in cars or carriages — in the end.
Integration here means that 30% of finished products will be delivered to Kazakhstan and Central Asia amounted up to US $50 m a year. As for the Russian market — when the company produces 264 thousand cubic meters of MDF per year these products will cover up to a quarter of the Russian market.
The project was implemented by LPK Partner-Tomsk (Wood Processing Plant Partner-Tomsk). The total investment amounted to about US $270 m. We have allocated US $95 m for 12 years. These were loans for construction works and purchase of equipment.
However, we have purely Russian projects. For example, we have allocated RUR 2.8 bn to «Yakutugol» owned by the group «Mechel» for construction of more railways and other infrastructure in the South Yakutia. These funds were used for the development of Elga coal deposit — one of the largest in Russia and Eurasia.
RBC: Can you tell us about projects that are still being planned?
G.Zh.: We usually talk about projects once they are approved. At the stage of negotiations we say nothing. But we can tentatively say about the project at a very high stage of readiness. For example, we can say that we are ready to participate in the investment program of BelAZ. This is the legacy of Soviet industrial capacity, which was preserved and increased in Belarus. It is unique enterprise which manufactures heavy machinery. Only two companies in the world — «Caterpillar» in the USA and «Komatsu» in Japan — produce dump trucks of such load class in addition to BelAZ.
Due to our loan production efficiency will increase by tens percents, and total economic impact of the project will amount to hundreds of millions of dollars.
We have approved this project, now we are waiting for clearance of necessary decisions from Belarus.
RBC: Any project has risks. Nowadays due to difficult macroeconomic situation these risks increase. Do you put on the possibility of the next global crisis? And generally, what is the influence of global crisis on your allocation of credits for projects?
G.Zh.: Possibility of the global crisis is initially taken into account when considering the project. As we provide loans only for long-term projects — for a period from 7 to 15 years — during this period at least one crisis will happen for sure. We can ignore this. So when we evaluate the project, we calculate its rate of return in the worst conditions. It should be fully covered at all times by funding sources.
For example, we allocate funds for construction of carriage
works in Tikhvin (Leningrad region). The project implementation started in
2008. And next year prices for carriage dropped dramatically as demand for
transportation fell. But even taking into account those prices the project shown
its recoupment. Even if prices stayed at the lowest level, the plant still
would have taken its place in the market and put to other carriages. The fact is
that Tikhvin plant applied advanced technologies that can make more durable «truck»,
on which the carriage is put. The run of conventional «truck»
If I get projects which rely on future favorable situation (say, nowadays the project makes no profit, but after a year, according to analysts, the market situation will change and we’ll make lots of money) — I reject such projects at once. We have ruled out «opportunistic» funding when the arguments for loan allocation are good indicators in the industry or enterprise at the moment. It’s not for us.
The project, which is funded by us should work and provide for repayment even in crisis. If external conditions are better it will be good, this means the project will be quickly recouped. Only such an approach ensures repayment of our investments.
RBC: Do you think that commercial bank can allocate loans guided by these principles?
G.Zh.: These are unique principles. It all depends on loan term. The fact is that commercial banks tend to lack «long» resources. Unfortunately current requirements to commercial banks and securities regulatory framework do not encourage them to finance long-term projects, i.e. for a period from 7 to 15 years. Therefore, they are forced to rely on investment only for a short period. We are able to fund large-scale projects, providing long-term loans up to 15 years. We are the bank of development; our goal is to help economies of the Bank’s member-countries to cope with crisis.
RBC: And if the country is constantly experiencing economic difficulties? Indeed the EDB implements fairly large-scale projects including in very poor countries (such as Tajikistan).
G.Zh.: Yes, we have implemented project on construction of a spinning mill near Khujand — it works successfully, spins... By the way, the project was implemented several months after Tajikistan entered the EDB — autumn of 2009. We have invested US $22.57 m there with a total investment — US $29.75 m and we are confident that the project will be profitable.
For us — it is a refund with interests, and for the country it is production of export products with a significantly higher added value than raw cotton and creation of additional jobs that Tajikistan badly needs. So cost-effective and payback projects can be implemented in poor countries as well.
RBC: New countries became Bank’s participants, in particular, in 2011 Kyrgyzstan joined the Bank. How is joining of new members reflected in the Bank’s work?
G.Zh.: One of our strategic goals is expansion of geography of Bank’s operations. We accept new members and seek to increase their number. Last year we added Kyrgyzstan, Mongolia has some interest in participating in the EDB... We do not accept new participating countries as shareholders, which will bring a lot of money. They are our partners in the integration, countries where new and interesting projects can be implemented but their contributions are symbolic.
Of course some countries participate not symbolically — for example, the contribution of Belarus in accession to shareholders amounted to US $15 m.
Last year in Kiev there was the first meeting of the working group on cooperation with Ukraine. If we add Ukraine, the volume of Bank’s operations will increase dramatically — there is in fact a very large market in Ukraine. In general benefits from Ukraine’s accession could be enormous, because it is actually restoring of lost economic ties established during the Soviet era. Soviet industry united Russia, Belarus, Kazakhstan and Ukraine. There are many integration projects where Ukraine can take part (for example, there are some interesting projects in the field of machine engineering). So joining of Ukraine to Bank’s shareholders would be very logical and natural. We understand that much depends on political factors. Economic benefits are obvious. We just have to wait.
RBC: Last year the Bank took part in Islamic finance. Please tell more about this project.
G.Zh.: We organized attraction
RBC: Can such transactions be popular? Earlier some Russian banks have tried to participate in such projects, but these transactions were not particularly popular.
G.Zh.: I think Islamic finance transactions do not comply with accounting standards that are set in the Russian legislation. It is quite difficult to reflect these transactions in documents and report them to the Bank of Russia. Therefore for Russian banks it is difficult to work in this segment. We are a supranational bank, and so we can be engaged in such transactions on free conditions.
With regard to the further spread of this type of financing, I think this is an additional source of resources for infrastructure projects. Many institutional organizations that manage large funds provide loans on conditions of Islamic finance. This is a huge market and we can not ignore it. Member-countries of the EDB (including Kazakhstan) have attracted loans on various conditions of Islamic finance. The potential of this market is hundreds of millions of dollars. And we can help to attract these funds to finance projects of our clients.
RBC: What would you like to point out in economies of countries you invest in?
G.Zh.: I’d like to note that these are very interesting economies, and there can be very lucrative transactions. Russian businesses underestimate projects in neighboring countries. Perhaps they are afraid to invest in these economies, as there are major differences in legislation and regulatory framework. Clearly, it’s hard to go where you do not know local conditions. Here we can help.