Dmitry Pankin: Kazakh projects make up a lion’s share in EDB’s portfolio

15 June 2017 Delovoi Kazakhstan, Kazakhstan

The Astana Economic Forum is taking place in the capital. It brings together economists, politicians and financiers from a host of countries. It is not for the first time that Dmitry Pankin, Chairman of the Management Board at EDB, takes part in the AEF. In the run-up to the forum he gave an exclusive interview to Delovoi Kazakhstan. Prior to starting the interview Dmitry Pankin joked that, although EDB is headquartered in Almaty, he visits Astana more often, which confirms the growing importance of the capital of Kazakhstan.

The head of EDB had a meeting with President Nursultan Nazarbayev in April. The president emphasised that the bank had been established in the interests of the Eurasian Economic Union and offered EDB to consider extending more loans in tenge in Kazakhstan, as well as co-financed loans for projects initiated by the EAEU member countries. This and other topics were highlighted in our interview with Dmitry Pankin.

Mr Pankin, the world has a great deal of economic forums. Why is the AEF of interest to you?

Its agenda pays significant attention to power sector investment and economy digitalisation, including the financial sector. It is interesting that the same issues were the focus of the St. Petersburg Economic Forum two weeks ago. It is an important emerging trend and the dynamics is extremely high.

The AEF is a well arranged forum with a pool of high-level experts. This makes it possible for the participants to have as many meetings as possible and reach agreements with partners (both existing and potential) in a short period of time. How does it happen usually? You come, drink some tea, tell how it is going and, when you come to the point, at least an hour has passed...

I would make a mutinous statement that forums should have long breaks and short sessions so that people can solve their issues with a cup of coffee...

Those who know how and want to work manage to do a lot, including drinking coffee and speaking at sessions (laughs).

Does the AEF have reputation with businesses?

In Kazakhstan, the AEF is the number one economic forum because it follows strictly the formula: the high relevance of the topics discussed and the high level of participants. It is a quality dialogue floor for communication between the government, businesses and experts at various levels.

One of the topics discussed at the forum is the investment attractiveness of Kazakhstan and national branding. How does EDB, which has been working in Kazakhstan since its establishment and has implemented many projects, assess the country’s investment climate?

Figures describe investment climate better. In Russia, the accumulated foreign direct investment is US $258 billion and in Kazakhstan US $120 billion, while the sizes of the economies is ten times different.

Kazakhstan continues to make up the largest share of EDB’s investment portfolio – US $2,289.4 million, with almost 36% of projects in the power sector.

Does the AEF have real economic results?

If to view the forum as a business project, I think it pays back.

And what are future benefits?

One of the main topics at the forum – the power sector – is rather acute, especially for Kazakhstan. On the one hand, we see excessive capacity. For example, we lend to the Ekibastuz plant and it closes some units because it is difficult to sell electricity. At the same time, the capacity that should be soon decommissioned is growing. If demand for electricity starts to grow (and it did by 9% over the recent six months) and capacity begins to be decommissioned at the same time, we’ll arrive at another problem. This is a complicated bunch of issues.

As a development bank, we pay attention to the need to restore power exchange mechanisms. The system that existed previously was the single power system of the Soviet Union. Many problems were solved by transmitting electric power from one region to another. Unfortunately, the Central Asian power ring is closed at the moment...

The bank had several unsuccessful projects, including the notorious Ivolga. Did this change your attitude to Kazakhstan as a country for investment?

We would prefer to be more optimistic about Ivolga, but we are not at the moment... We are in the process of litigation with the pledger and the guarantor who is Ivolga’s owner. We try to recover losses. This does not mean, however, that something is wrong with Kazakhstan, but, rather, that the bank’s previous team should have been more cautious with the client. We’ve inherited a similar client in Russia – the Tomsk wood plant. It has gone artificially bankrupt. We are in the process of litigation with them as well.

What lessons have you learnt? Did you stop lending to private businesses?

The issue is not about private businesses, but about that all risks should be assessed. In the case of Ivolga all these risks had been evident, but the loan was approved for some reason.

Does this mean that the bank continues to pursue its policy – infrastructure projects, but did toughen its requirements at the same time?

Yes, risks should be assessed more thoroughly. As for the strategy, integration projects are at the forefront, they are the most important.

At the recent SCO forum you said that international and national development institutions should consolidate and coordinate their efforts. Are you concerned that there is no focus on the most important objectives and money is dispersed, or was it something else that induced you to make this conclusion and suggestion?

There is certain dispersal of money. I believe that development banks should step back from projects that can be financed by commercial banks. Who need international development banks? These are large, trans-boundary infrastructure projects. For example, the transport route from China through Kazakhstan and Russia to Western Europe. Or, the construction of power transmission lines between China and Russia, Kazakhstan and China, Kazakhstan and Russia. In such projects, shared by several countries, it is very important to have a coordinating authority. An international development bank may become such an authority. National development banks may join later and finance a part of these major projects. International and national development banks need to combine efforts to fulfil large inter-country projects that are too heavy for a commercial bank.

Does EDB have a mechanism for such interaction?

We are working on it now. There’s an interesting example: we finance the construction of two small hydropower plants in Karelia. The principle of this project is that the lenders will be EDB and another development bank. The investors are the Russian Direct Investment Fund (RDIF) and its foreign partners, including leading Near East sovereign funds and SINOMEC, China’s state-owned corporation. The guarantor is another Russian development institution – the Federal Corporation for the Development of Small and Medium-Sized Enterprises. We extend the loan in roubles and are funded in dollars by the New Development Bank BRICS. This is a complicated structure involving a large international bank, us as a regional development bank, and national institutions.

What are the other examples of the bank’s involvement in global programmes such as those connected to the Silk Road mega project?

In terms of integration, we are interested in the Meridian project. If it is brought into compliance with our requirements in terms of risks, we will take part in it. I mean the fulfilment of the Europe – Western China transport strategy. The total length of the route approximates 8,500 km, including 2,200 km in Russia, 2,800 km in Kazakhstan, and 3,500 km in China. By the end of the project, freight traffic is expected to rise by 2.5 times, to 33 million tonnes a year. The route will be from St. Petersburg to Moscow, then to Tatarstan, Bakhortostan and Orenburg Region, and then towards Kazakhstan. Then the road will go through Aktobe, Shymkent and Almaty towards China.

You emphasise the importance of risk assessment. Did you manage to avoid old mistakes?

The bank’s profit for the last year was US $160 million and the share of bad assets was cut to 6%.

I have a question to you as an economist. What do you think about the free floating exchange rate? Does this policy have any stumbling blocks or is it the only correct foreign exchange policy?

There’s a joke that democracy is the worst form of government, except for all the others.

It is difficult for an owner of an enterprise or an investor to forecast their future when exchange rates are sinusoidal. However, an artificially fixed rate would mean significant economic losses that would double adverse effects for manufacturers and investors.

Theoretically, everything is simple and clear: the central bank should smooth extreme fluctuations. The issue is how to understand what is extreme. Is it a speculative, spontaneous situation or does it reflect a longer-term tendency? It is easy to reason retrospectively. So, I believe that the foreign exchange policies of the Russian Central Bank and Kazakhstan’s National Bank are rather prudent. They try to avoid interfering with the market and making excessive interventions.

You activated work with securities and made an offering at KASE. Why do you need additional resources?

We need tenge to finance tenge projects in Kazakhstan. These are gas transportation projects, telecommunications and some others. We offered the first issue of our securities and investor demand has exceeded our expectations.

The issue of concern for all people irrespective of their profession is the future of the pension system. Should pension money work in the economy? Should it be invested in corporate securities or foreign ones? Should they be just put under lock and key?

These disputes are traditional. There’s positive international practice: it’s better for a country with significant dependence on oil and gas to invest in foreign assets. This helps to stabilise revenues to an extent.

Leaving money within the country would result in that when the economic situation is favourable our pension investment would be profitable as well, while when it is not, such as when oil prices and revenues of local oil companies slide, pension assets also get thinner. This is a double punch at the economy.

There is, however, a third option, both patriotic and profitable. For example, we need to build a road or a bridge in Kazakhstan. It would be correct if respective project costs remain within the country. Therefore, greater access to pension money would help to fulfil projects and not only leave money in the country, but augment it here.

Would you recommend our Single Pension Savings Fund to invest in your securities?

We have such experience already. The amount was not that great. The composition of our investors is impressive: ten investors purchased our bonds, including banks, insurers and management companies. The issue was rated at Baa1 by Moody’s.

To conclude, what are the spheres EDB is considering projects in Kazakhstan and with Kazakhstan’s participation today?

We’ll soon begin to finance the development of the Alaigyr lead and silver deposit where a new, innovative technology without the use of cyanides will be used.
In the near future, we plan to decide whether to finance the upgrade of Kazakhstan’s largest coal mine, Bogatyr. The project aims to improve efficiency and environmental safety of the production process. In telecommunications, we finance the creation of new and the upgrade of existing fixed assets. A KZT 26 billion loan has already been extended. Soon, we’ll also begin to finance operations of a major juice and drink producer who will supply products to Russia. In “green” energy we consider the construction of the first phase of the Astana EXPO 2017 wind farm with a capacity of 50 MW.

We also have many other promising, socially and economically important projects in Kazakhstan.

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