Dmitry Pankin: EDB should focus on projects which envision cooperation between several countries
Dmitry Pankin
Chairman of the Management Board at Eurasian Development Bank
Q. Mr Pankin, will the current situation in the foreign exchange market when the currencies of Russia, Kazakhstan and Belarus have depreciated almost simultaneously influence the policies of Eurasian Development Bank?
A. If yes, the influence will be only positive because we go away from a very dangerous and unhealthy situation when only one side (Russia) pursued one type of foreign exchange policy - actually, the free floating with very limited interventions by the Central Bank, and the foreign exchange authorities of Belarus and Kazakhstan tried to restrain their currency rates. This caused disproportions in the market. In their search for cheap goods people tried to speculate in the market by buying some goods in Kazakhstan and Belarus to sell them in Russia. When such disproportions exist it is difficult to understand how the situation will evolve and for how long the artificial rate will be maintained - two, three or four months - and, therefore, it is difficult to make investment solutions and invest in production. For this reason I believe that the transition of all countries to the free and actually single foreign exchange policy (single in terms that it is based on a common principle) will obviously foster integration. In fact, it will simplify our work on financing investment projects, which involve several countries.
Q. Actually, this is the coordination of foreign exchange policies, the necessity of which you emphasised before.
A. It follows its natural way or, as we're used to put it, life made it happen. The main thing is not to hinder the logical stream of events.
When the Eurasian Economic Union began its work it immediately faced the negative global economic situation: the Chinese, American and Russian financial markets fell down. Q. How will this influence Eurasian economic integration? Will it affect its pace or, on the opposite, have some mobilising effect?
A. Two points of view are possible: an optimistic and a pessimistic one. In the second instance, Eurasian integration is deemed a nonsense, which will end when the crisis strikes. Everyone will scatter and concern themselves with survival. An optimist is sure that these events will make us stronger because difficulties consolidate us. I believe that a reasonable balance should be looked for. Some factors promote integration. Some complicate it. The first group includes, in my opinion, that in the context of low oil prices the economies of Russia, Kazakhstan and Belarus have one common task - to diversify their structure and overcome their extremely high dependence on hydrocarbon exports. In this case our common task is to unite efforts and try to set up competitive production facilities, which will be able to compete, produce and be in demand in the foreign market. When we consolidate our efforts - Kazakhstan, Belarus, the Kyrgyz Republic, Armenia, and Russia - we have more opportunities. We have more opportunities to find some competitive niches and create a product, which will become a success in the global market. This is, obviously, an argument for the efforts.
On the other hand, Armenia and the Kyrgyz Republic were interest in integration with the Russian market because, to a significant extent, it is a major source of sales and money for citizens of these countries who work in Russia. It is no secret that public budgets are dependent, to a certain extent, on these money transfers. In a crisis this market provides fewer opportunities for sales and the amount of transfers decrease. This will surely result in some difficulties in integration.
Q. The global economy is unstable and it is obvious that some member countries of the Eurasian Economic Union need to apply for loans and subsidies, including to Eurasian Development Bank. In particular, according to recent information, Belarus counts on a loan. The question is divided in two parts. Are there negotiations with Belarus on a loan and how successful are they? Do other countries apply for financial support? Or, maybe, this should be called not 'support' but some stabilisation loans?
A. To be more precise, we have the Eurasian Fund for Stabilisation and Development (EFSD) totalling US $8.5 billion and Eurasian Development Bank is the management company for this fund. One of the areas of the fund's work is to provide financial credits. The fund provided a credit to Tajikistan at some point. Now, it provided US $2.6 billion to Belarus. Q. What are your bank's functions? A. We analyse the macroeconomic situation in the country and formulate conditions based on which the fund will provide money. These conditions must be complied with by the governments and include macroeconomic objectives and tasks, which must be attained if credits are provided.
We currently have an application from Belarus for another credit for a total of US $3 billion. The first tranche has been provided. We'll see how the macroeconomic situation will evolve, which conditions are met and which are not and will provide the following tranche accordingly. In our opinion, negotiations are constructive and significant progress has been achieved.
One of the conditions of the previous credit to Belarus was the liberalisation of the country's exchange rate policy. The games when several exchange rates existed, everything was regulated by administration, and the free market did not have place have ended. The massive infusion of credits into the Belarusian economy, when it was strongly stimulated by means of loans, which were actually subsidised by the government, has also been cut and to a significant extent. We see this as a positive sign. Now we continue negotiations, which are rather constructive and are about achieving a balanced budget and a certain level of payback on housing and utilities tariffs. We have also achieved progress and mutual understanding with respect to this issue.
Q. The last question is rather traditional. What are EDB's policy priorities for the nearest one or two years in a wider global context?
A. Recently (ECC: on 28 August 2015) we had a meeting of the Council in Astana, where we discussed, among other things, the revision by the bank of its development strategy. The countries would surely be interested if the bank finances major integration projects and becomes similar to other development banks such as the Asian Development Bank, the Asian Infrastructure Investment Bank, or the European Bank for Reconstruction and Development, and serves large projects similar to the construction of the Beijing-Moscow highway or the Caspian oil pipelines. However, projects of such a scale require significant capitalisation in the bank, which is problematic in the current and next year given the budgets of Russia and Kazakhstan.
The focus will be on operations within the bank's available capital and on the activation of fund-sourcing opportunities. They do exist. At present, with a capital of US $1.5 billion we can attract US $4-5 billion in the market. This won't be a significant problem. The main thing we need are investment projects. The Council has formulated priorities, the top of which is that, in the first place, we must work on integration projects and this is the specifics of Eurasian Development Bank and what makes it different from all other banks in our space. Our bank should focus on projects, which envision cooperation between several countries When a product is manufactured in a number of countries this can create value-added chains. Some value is added in Russia, some in Belarus, etc. This is how we see a product made by several countries and we can consider this as an actual integration process. It is very important to find such projects. It is not that simple. The number of such projects is insignificant and they often require considerable labour and financial costs in terms of preparation and elaboration. We are ready for this process.