The Kazakhstanskaya Pravda - Igor FINOGENOV: Customs Union Unique Features – Integration of the Formerly Single Economy on a New Market Basis

Ten billion tenge has been provided by the inter-state Eurasian Development Bank to implement the project of electric locomotive assembly by Electrovoz Kurastyru Zauyty LLP in Astana. It is the 26th project implemented in Kazakhstan with financing provided by the Bank.

As you know, the Bank itself was conceived by the heads of state of the Russian Federation and the Republic of Kazakhstan. And it was established by our two countries. It is currently a powerful financial institution and one of the largest investors in the FSU countries financing infrastructure projects and projects promoting further integration. Igor Finogenov, Chairman of the EDB Management Board, speaks about the important directions of capital flows of the Commonwealth countries, the Bank’s role in integration developments, and forecasts.

— Igor Valentinovich, half a year has passed since your previous interview for The Kazakhstanskaya Pravda. How have EDB indicators changed?

— We are happy to have participated in such a project as Electrovoz Kurastyru Zauyty LLP, which is of great importance to the republic and the CIS countries. Our financial contribution is estimated at 44 % of total investment. When we set about financing the project, we realized the importance of this plant for Kazakhstan as it will promote the development of the republic’s transport infrastructure and the single railway network of the CIS countries.

The number of Bank-financed projects in Kazakhstan is currently close to 30. Among the major ones are construction of the third power generating unit of Ekibastuz GRES-2 Power Station, equipping the coal mining company Bogatyr Komyr with new machinery, and development of gold production by the Altyn Almas company.

In summer 2012, the Bank provided an additional credit line of 3.1 billion tenge to the Kazakhstani joint-stock company Batys Transit in the framework of the project «Construction of North Kazakhstan-Aktyubinsk Oblast Interregional Power Transmission Line». We have also financed the commercial development of the Voskhod chromites deposit (US$ 60 million). The EDB projects in Kazakhstan’s agricultural sector have been implemented with such companies as APK-Invest, Kazexportastyk, and Ivolga Holding.

In general, we have got about 80 projects in our investment portfolio totaling over US$ 4.6 billion. The projects are implemented in all Customs Union member states and mainly pertain to infrastructure. One quarter of the projects by their investment size is related to power generation; 34 % — to transport; 7 % — to the chemical industry; about 3 % — to metallurgy; and 6 % — to the agro-industrial complex.

— Does the Bank monitor utilization of resources by borrowers?

— Definitely! We inspect primary documents and require payment confirmation. Independent consultants are involved in some of the projects. All that allows to minimize the risk of untargeted use of funds.

In the process of project selection, we use a filter, which «weeds out» a number of projects from the total pool of applications. One of the main reasons why a project does not meet the Bank’s requirements is insufficient contribution of the party initiating the project. It should constitute at least 20 % of the budget. And in cash. Another aspect is the financial model, the target markets for the product. A third reason for rejection can be insufficient integration or social effect, while it is the key objective for our Bank. Thus, our «funnel» is tough and narrow: on average, only 2 out of 10 project applications are allowed to go through it. Our front office is sometimes indignant about it, but the reverse side of the coin is the high quality of the EDB portfolio.

— Is the number of Bank member states expected to increase?

— The EDB welcomes new members. Countries and international organizations become its members on decision of the Bank’s Council after they have acceded to the Agreement on the Establishment of the EDB and made their contribution for the acquired shares following the established procedure. It is a strategic objective of the EDB to expand the geography of its operations through attracting new members.

In particular, we take note of the interest in cooperating with the Bank on the part of Mongolia and Vietnam. The President of Vietnam has recently visited Kazakhstan. During the visit, the Vietnamese side demonstrated their willingness to strengthen trade and economic ties with Kazakhstan and the Common Economic Space countries. Therefore, the issue of Vietnam’s potential accession to the Bank is expected to be discussed.

— In what currency does the Bank finance projects and why do our countries have such insignificant turnover in rubles and tenge?

— The EDB provides financing in dollars, Euros, Russian rubles, and Kazakhstani tenge. The key reason for limited use of local currencies for mutual settlements and project financing is the high level of dollarization of our economies, as well as presence of objective factors, owing to which freely convertible currencies are used in foreign trade. The phenomenon of dollarization reflects preference given by CIS economic agents to more stable and convertible foreign currencies. For example, the level of financial dollarization-the ratio of foreign currency deposits to total deposits-isestimated at 23 % in Russia, 31 % in Kazakhstan, and 64 % in Belarus. As to using local currencies in foreign trade, the example of Kazakhstan is vivid. According to the statistics collected by the Customs Office of the Republic of Kazakhstan, in October 2012, only 0.5 % of the country’s exports and 2.2 % of its imports were paid for in local currencies. A similar picture is observed in trade with the CIS countries. Correspondingly, 1.7 % of exports to the CIS countries and 3.8 % of imports from the CIS countries were paid for in local soft currencies.

In spite of the efforts taken by governments of our countries, households and enterprises stick to their preferences developed over the time of the so-called «monetary chaos» of the beginning of the 1990s and then strengthened during the period of macroeconomic instability. When a local currency becomes unstable, the economy is affected by high inflation, and economic agents are willing to optimize their asset portfolios relying on more stable currencies. On the other hand, it should be noted that dollarization has a stabilizing effect on economic agents’ behavior, and accumulation of international reserves is important for financial macroeconomic stability. That explains the complexity of addressing the issue of dollarization.

It should also be noted that there is a natural need to actively use freely convertible currencies in foreign trade in general. The composition of foreign trade flows of our countries is characterized by a high share of exported raw materials and a low share of trade of the CIS countries. With such a composition of foreign trade in place, there are no objective reasons to intensify use of local currencies even to make payments related to mutual trade. It is our common disease that will gradually give way only when our countries’ development becomes normal with financial risks subsiding, exports being diversified, integration developing, and the share of mutual trade increasing.

— How do you see the Customs Union current development and what essential challenges does it still have to address?

— Key benefits of the Customs Union need time to show. But in general, the start was successful. The success seems even more unexpected since just 4—5 yearsago it was hard to predict it. The achievements of post-Soviet integration in recent years could be related to two factors: growth of real «bottom-up»integration in the 2000s and the global economic crisis. The effect for Russia and Kazakhstan from creation of the Customs Union and the Common Economic Space is significant. In absolute terms, over the period of 2011—2030, it will be US$ 632 billion for Russia (in 2010 prices), US$ 107 billion for Kazakhstan, and US$ 170 billion for Belarus. The effect from integration into the Common Economic Space can be also significant for Ukraine — about 6 % of additional GDP growth by 2030.

The coming two years will be the years of integration development. 17 framework CES agreements should be detailed in 52 regulatory acts with all the accompanying implementation documentation. In 2014, Presidents of the three integration participant countries are expected to sign the Agreement on the Establishment of the Eurasian Economic Union (EAEU) to come into force in 2015. Parallel to that, technical efforts will be under way for Kyrgyzstan to join the Customs Union. Its accession will make it possible to start practical work on Tajikistan.

The Customs Union is still to address a whole range of challenges. First, macroeconomic policies need to be coordinated. Second, common «rules of the game» should be established for the economic space. This includes common rules of access to public procurement, equal-opportunity access to services provided by monopolies, and a huge array of technical regulations and standards. The process of building foreign economic policies and trade relations of the Customs Union with the rest of the world-from the EU to Vietnam and NewZealand-is also developing.

— Today there is much emphasis on the potential beak-up of the EU, Euro instability; hence, what mistakes of the European Union should our countries take into account while developing integration?

— There is a cliché built deeply into our «integration DNA» that we must follow the EU experience in everything, replicating all of its stages. However, our integration is different in substance. The EU is based on merging thirty independent European states into a quasi-state. While our basis is different in principle. Two decades ago we used to be a single state with a single economy. And on a day-to-day basis, we see the extent, to which the single economy of the Soviet Union determines the current infrastructure and production ties between enterprises.

For instance, the Europeans have just approached the issue of mass labor migration and its regulation. While in our case, labor migration was the first element of post-Soviet integration, effectively coming ahead of flows of goods, services, and capital. Our specific feature is integration of the formerly single economy on a new market basis and that enables member countries to move forward at a faster pace.

But the lessons learned by Europe are still important. The EU serves as a fine example of what should not be done, especially in the part of currency integration. Twenty years ago the Europeans agreed on the Maastricht criteria covering the public debt level, budget deficit, and inflation. The problem is that they have never been complied with by a number of countries. The debt crisis in Southern Europe is a result of non-compliance with these criteria. To achieve our goals, we just need to ensure compliance with the rules established.

— What are the concerns related to the global economic situation?

— Generally speaking, the CIS countries are developing quite dynamically. In 2012, the CIS economy maintained satisfactory rates of growth. Crude hydrocarbon prices continue to be quite high, which is a significant factor bolstering the economic development of hydrocarbon exporting countries — Russia, Kazakhstan. It also had an indirect positive effect for labor force exporting countries — Tajikistan, Kyrgyzstan, and Armenia.

Due to the new stimulus package adopted by the ECB and the FRS in September, oil prices are likely to remain high. According to the consensus forecast of various international organizations, the average price for Brent oil is estimated at US$ 107 per barrel in 2013. A large share of economic activity in the CIS region is that of oil exporting countries. Therefore, continued rates of growth are an obvious scenario.

— What are the Bank’s targets for 2013?

— To achieve not only integration objectives, but also to ensure a social and economic effect of project implementation.

Interviewed by Alevtina DONSKIKH