Chairman of Management Board of Eurasian Development Bank Dmitry PANKIN:
EDB EYES INVESTMENT PROJECTS WORTH $1 BILLION IN KAZAKHSTAN
Chairman of the Management Board of the Eurasian Development Bank (EDB) Dmitry PANKIN told Interfax-Kazakhstan in an interview that the EDB searches for interesting projects and has funds to finance them.
- Dmitry Vladimirovich, could you tell us please the value of EDB’s investments in Kazakhstani projects?
- Currently, all approved projects of the Eurasian Development Bank (EDB) amounts to $5.5 billion and half of them are in Kazakhstan. We plan to finance projects worth $1 billion in Kazakhstan this year.
- It was earlier said that the Development Bank of Kazakhstan negotiated with EDB to join the Ekibastuz GRES-2 project. Did you reach any agreement on it?
- In fact, the Development Bank of Kazakhstan demonstrated an interest in joining the Ekibastuz GRES-2 project, but there were no definite offers from them. We are now in talks with other companies that are interested in joining the project. I think that the pool of investors might change in the near future. We are also in talks about restructuring the loan of the project.
I would like to highlight that Ekibastuz GRES-2 meets its commitments to its creditors in spite of the tough economic conditions of the project.
- Could you say more about the problems of Ekibastuz GRES-2?
- The Ekibastuz GRES-2 needs to understand where to deliver the surplus electricity power. The decision about a new shareholding structure will depend on future power supplies. There are talks underway about power supply to both China and south Kazakhstan. These decisions will be very tough and will need a careful consideration.
- You earlier said that EDB considers the possibility of joining the Azia Avto project. Are there any decisions?
- Yes, EDB carefully examined Azia Avto’s request for providing a line of credit to their AvtoVAZ assembly plant in Kazakhstan. We have not made a decision yet. We saw that the production capacity of AvtoVAZ in Russia is low. One of the most important requirements of our bank is the high rate of sales and AvtoVAZ does not comply with it. We have to ask the question if it is wise to create new production plants if the existing ones do not operate at full capacity? We are still in negotiations, because we have not rejected the project, and we cannot make a positive decision until AvtoVAZ provides us with a guarantee or we participate in the capital of the company.
- EDB signed four agreements during the Kazakhstan-Russia Interregional Cooperation Forum in October 2016. What is the status of these projects?
EDB and Eurasian Resources Group (ERG) signed a $95 million revolving loan facility agreement. The full amount has been financed and the funds are used to finance iron ore supplies from Kazakhstan to Russia. [The agreement on opening a $95 million revolving credit line envisages pre-export financing for iron ore supplies from ERG’s major enterprise JSC Sokolov-Sarbai Mining and Processing Integrated Works (SSGPO) based in the city of Rudny in the Kostanai region]. Currently we are discussing the issues relating to the expansion of cooperation with ERG and the financing of long-term investment projects.
EDB also signed a letter of intent with Interskol Group to finance its operations. The bank will provide a loan facility to finance a project for import substitution of engineering products. We are currently discussing the financing structure. Our proposition is that 30% of the financing should come from the company owned funds and 70% from the bank. I think we will launch this project.
The bank is also working on its other agreements signed during that forum. EDB is negotiating with the administration of the Chelyabinsk region the agreement signed with Troyitsk Metallurgical plant. [Construction of a metal manganese plant in the Chelyabinsk region and supply of manganese ore from Kazakhstan's Zhairem GOK]
EDB is also working on the agreement signed with Russian Copper Company Ltd, as well. I think the decision will be made within two months.
- What can you say about the warehousing and distribution center near Astana that Patokh Chodiev intended to build in cooperation with EDB?
- We always require a personal guarantee from company founders, and as you know, it is one of the most important things during negotiations. We have not reached any agreement on this project and it is currently frozen. The main problem is that the initiator of the project has not given his personal guarantee yet.
- Why not? Do they not believe in project’s success?
- It is very difficult to give your personal guarantee when it comes to a project that costs billions of US dollars. You have to be 101% sure of your project. Believing is not enough.
- What can you tell about Polymetal and Alaigyr projects?
- We are still working on the Alaigyr project, and the Polymetal project is one of our running projects.
- Following President Nazarbayev’s instruction a committee was recently formed to deal with non-performing loans of agricultural companies, including Ivolga Holding. What do you think about that?
- The creation of such a committee demonstrates that the Kazakh government takes necessary steps to solve potential problems. This is a good sign for EDB as we finance agricultural projects too. EDB is also a member of this committee.
The bank issued loans to two agricultural companies in Kazakhstan: Ivolga Holding and KazExportAstyk Holding JSC. Both these loans are non-performing. The situation with Ivolga Holding is much more complicated because the company owner does not even take action to restructure its non-performing loan.
- What is the current status of the situation regarding Ivolga?
- Ivolga is not fulfilling its obligations: neither in terms of money nor grain. We are seeking to recovery both debt and collateral through court. The collateral comes in form of a leasehold estate and grain receipts. We are also suing Ivolga’s general director Vasily Rozinov as the personal guarantor of the company’s loans. The court proceedings are now underway.
- What is the liquidity situation in the bank? Does the bank plan to borrow money in the near future?
- EDB has sufficient liquidity to fund the projects that are being approved. The bank will borrow money whenever it needs additional funds. In 2017, the bank will issue bonds denominated in Tenge and Ruble. We will determine the volume and the period of the bond issue according to the needs of the bank and conditions of the market.
- The bank planned to issue Tenge-denominated bonds in the spring. Have you set a specific date and the maturity period?
- I think it will not happen until the end of April. We are currently in close cooperation with the National Bank of Kazakhstan. I do not rule out that it might have a five-year maturity period. We attract funds in Tenge using currency swaps at a lower rate than issuing our Tenge-denominated bonds. Therefore, this is not so urgent for us to place bonds.
- Do you have any problems with funding?
- Our main problem is to find eligible projects for financing. Should there be more projects that meet EDB’s strategy requirements, we would increase our borrowing in both foreign currencies and Ruble but funding in Tenge might be a problem.
- Why is that?
- The Tenge market is smaller than the Ruble market, and even smaller than the Dollar and Euro markets that offer favorable conditions to borrow money. However, the demand from project initiators for the Dollar and Euro is low. Who will borrow foreign currency? Export-oriented companies mainly operate in the mining and oil sectors. We do not work much with oil companies, they are not the priority sector of development banks, but we work with mining companies and they take dollar loans.
- EDB started to provide market-making services for KZTRUB pair in 2016. Does the bank plan to continue this practice?
- Currently, the bank provides market-making services for KZTRUB pair on Moscow Stock Exchange and KASE. We also plan to bolster quotes on SWAP operations within this currency pair and if there is a demand, we will encourage quotes on forward currency contracts. As we gain access to the local currencies of other EDB member states, we plan to consider membership questions on local exchange markets.
- However, this is not typical of the development banks, is it?
- We believe that an increase in the liquidity in the foreign exchange market and the development of risk hedging instruments help to reduce the costs of foreign trade operations in local currencies between EDB member countries, which in turn facilitates the integration processes.
- Please, tell us about EDB’s loan portfolio in 2016. What can we expect in 2017?
- The bank’s loan portfolio saw a decrease in 2014-2015. In 2016 our investment portfolio increased by 10% to $2.4 billion. Due to large loan repayments, the bank was able to extend loans amounting to $1.7 billion dollars in 2016.
In 2017, we set a goal to significantly increase the bank’s investment portfolio to $3 billion and this is real. For instance, EDB is discussing a $200 million project with Bogatyr coalmine. We are working on several projects in Kazakhstan, a runway in the Almaty airport, restoration of Aktau seaport, Alaigyr zinc deposit in Kazakhstan and a great number of large projects in Russia.
We have modernized our approach to working with investment projects. Currently, we already have investment projects worth $1 billion.
- What are your profit targets for 2017?
- In 2016, the bank’s profit amounted to $160 million. This is a good profit for a development bank. We saw that the modernization of the bank’s business model produced very positive results. We expect to earn $60-70 million in 2017. We earned $12.7 million in the first two months of this year.
EDB as a development bank has no priority to generate more profit, but we can't afford to be in the red either. What's more important for us is creating a pool of projects with integration projects accounting for at least 50%.
- What other countries may join the EDB?
- We drew a list of countries that have the most intensive trade and investment relations with Russia and Kazakhstan. The list includes the following countries: South Korea, China, Japan, Iran, Turkey, India, Israel, Singapore etc. We cannot say that we have reached any agreements on membership with them. The list also includes neighboring countries that are in close economic and financial cooperation with Kazakhstan and Russia, for example Uzbekistan and Azerbaijan. They may be interested in joining EDB as well.
- What countries are most involved and interested?
- Iran and South Korea showed a particular interest in joining our bank and other countries are in touch with us.
- What about China?
- A few years ago we had intensive negotiations with China. We discussed that China’s share in the EDB’s capital will be equal to Russia’s $1 billion, but the negotiations slowed down later. After the creation of the Asian Infrastructure Investment Bank (AIIB), China offered to work with us through AIIB.
- How would you assess the investment climate in Kazakhstan? Is the single-window-for-investors system really efficient?
- The single window system is of vital importance for SME investors, while large investors are always directly in contact with the heads of the investment projects. I think the procedure for the interaction of large investors with the project initiators is well established.
The volume of the direct investments in Kazakhstan stands at $119 billion and in Russia at $256 billion. Russia’s economy is ten times bigger than Kazakhstan’s, but the volume of direct investments in Russia is twice as much as in Kazakhstan and it shows that Kazakhstan created conditions that are more favorable for investors compared to Russia.
However, the level of SME investing in Kazakhstan is low and the country should modernize its single window program for SME investors.
- Is it realistic?
- You mean, is it realistic to change the economic awareness of society, approach to business, entrepreneurship and services in the post-soviet countries? In my opinion, it is not a matter of the economy, like the creation of a favorable tax regime, but it is a matter of the social model. A few years ago, Nursultan Nazarbayev said during the Astana Finance Forum that it is a matter of the mentality: it is necessary to build a new society, a real civil society, in which social ladders will work on the principle of professionalism, rather than clan affiliation. This is relevant not only for Kazakhstan, but also for the other EDB member states.
- Thank you for your time!
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