Concert of nations rather than a Chinese orchestra

Expert №26-27 (950)
Alexandr Ivanter

First VEB Deputy Chairman Petr Fradkov believes thatthe NewDevelopment Bankcould speed up a process of the BRICS countries’ payments in national currencies.

Multilateral financing institutions to be formed within BRICS and SCO are excellent instruments for infrastructure development in their member countries. Russia will have to learn to use them building up its own long-term economic advantages.

Changes in the balance of forcesbetween global economic centers of power have been occurring at a quickened pace in the past two decades. The current pool of global leaders headed by the U.S. is losing its positions on the backdrop of increased economic and political influence of a whole number of other powers, the largest and the most dynamic of which are members of BRICS. The Western countries’ total GDP increased by 20% after the year 2000, but the rest of the world’s GDP doubled over this period. In terms ofannual average economic growth rates,non-western countries surpassed western countries by five times over this period.

The BRICS association functioning for a long time as a forum of five large, dynamic countries with emerging markets has been transforming in the past years into an economic bloc. In last July, a number of principally significant documentswere signed at the BRICS summit in Brazil including a Memorandum of Understanding and Cooperation between BRICS Countries Export-Import Agencies, an Agreement on Cooperation in Innovations, an Agreement on Creating the BRICS Countries Conventional Currency Reserves as well as an Agreement on Establishing a New BRICS Development Bank.The last one has been already ratified by Russia, Brazil and India. The South African Republic and China are planning to complete this work until late June. A Strategy of Economic Partnership of Five Countries up to the Year 2020 is expected to be signed at the 7th BRICS summit to be held on July 9-10. The document includes lines of cooperation in two dozens of sectors ranging from power engineering to telecommunications. In addition a multilateral memorandum on cooperation between BRICS development institutions and the New Development Bank(NDB) is being prepared for signing.

BRICS Bankis being launched

NDB is designed to fund infrastructure and sustainable development projects in the BRICS countries. NDB registered capital is agreed upon at the level of 100 billion dollars, with founding countries making a decision on equal shares of their participation in capital – 20% for each country. Each country’s expenses on forming authorized capital is to amount to 2 billion dollars within seven years. Then, the Bank will be able to raise funds on international capital markets. NDB is open to other countries’ participation. Developedcountries are entitled to be the Bank’s partners rather than its borrowers. Developing countries can be both members and funds recipients. And the BRICS countries reserve at least 50% of the total number of votes.

NDB’s functions are to extend loans and guarantees, participate in capital of managing companies responsible for implementing infrastructure projects, render technical assistance in preparing and implementing them. “Taking into accountBRICS determination to encourage payments between BRICS partners in national currencies, NDB could play a special role in this process, specifically,by acting as principal partner in hedging currency risks including with regard to transactions conducted by BRICS national development banks”, says First Vnesheconombank Deputy Chairman Petr Fradkov. So far, payments in national currencies are not very common in the BRICS area although there are exceptions. For example, this MayVnesheconombank and the China Eximbank signed an agreement on providing funds by the Chinese party in yuans. There is no doubt that it is a qualitative breakthrough in the cooperation of the two countries’ financial institutions. Moreover, we can see a tendency toward changing the approach to funding, that is, a shift away from framework bilateral agreements in favor of agreements on funding specific agreements. A future agreement with the China Development Bank (CDB), which is now being worked out by specialists of the two banks is going even further, it provides for funding a whole cycle of projects including pre-project preparations. And it is funding pre-project preparations where BRICS national banks can in our opinion cooperate efficiently with NDB.

NDB is being created a part of an interstate rather than an interbank cooperation mechanism. Key players of the process are finance ministries of the founding countries. But we shouldn’t underestimate national development banks’ role in in creating and future activity of NDB, especially taking into accounta large scale of transactions to be conducted by some of them. For example, a scale of credit transactions conducted by the Brazilian Development Bank (BNDES) amounts to 88 billion dollars a year(the World Bank’s respective indicator is 52 billion dollars a year).

A staff composition of NDB’s governing and executive bodies is to be formed on the basis of Vnesheconombank’s employees. VEB’s representativeis assigned to a position of NDB’s Vice President from Russia.It is not surprising that the situation is developing this way because VEB is quite experienced in a joint participation in funding projects both with BRICS countries national development banks and with multilateral financing institutions for example the European Development Bank (EDB). This experience will be needed in the process of building relationship inside NDB.

India’s representative, former CEO of one of the largest Indian private banks ICICI KundapurVaman Kamath will be NDB’s first President. The Bank is expected to be managedon a rotation basis by representatives of all member countries. The Bank is to be headquartered in Shanghai.

Pre-project investments should pay back

We can also see good prospects for increased cooperation between SCO countries’ financing institutions. The SCO Interbank Consortium (SCO IBC) is already cooperating. A remaining issue on the agenda is the creation of SCO Development Bank. Options of institutional platform for its creation is now under consideration. One of them is to establish this bank on the basis of the Eurasian Development Bank (EDB) with its headquarters in Alma-Ata. But there is little chance that this scenariowill be put into practice. First, being EDB members Armenia and Belarus are not SCO members. Second, one of EDB’s important functions is tomanage the Eurasian Fund for Stabilization and Development of the EurAsEC (the Fund’s largest project is a financial credit for supporting the balance of payments of Belarus, in 2011-2014 five tranches of this credit were disbursed for a total amount of 2.56 billion dollars). Delegating these functions to a SCO Development Bank appears not to be natural.

An idea to set up a special institution responsible for pre-project work – an SCO International Project Financing Center (IPFC) – looks more realistic. A concept ofIPFC was initiated by VEB and was backed at an informal meeting of SCO IBC banks heads in China this January. One of the options under discussion sets forth that an SCO IPFC will be set up on the basis of - Vnesheconombank’s subsidiary – the Federal Project Finance Center (FPFC). IPFC functions are to address a whole range of objectives associated with preparing investment projects including preparation of feasibility studies anddesign estimate documentation, investment analysis and raising project financing. IPFC analogues are operating as part of the International Finance Corporation (IFC), (IFC is affiliated to the World Bank), the EBRD and a number of other international and national development institutions for example in India and Kazakhstan.

“IPFC is an international institution being established at the initiative and with the cooperation of national development banks, capable of raising private financing, operating through project preparation centers in relevant development banks – explained the idea of establishing this new institutionAlexandrBazhenov , Director General of the FPFC. Selecting and preparing projects are rather expensive, the cost of such work amounts to no less than one percent of project expenditure estimates and it is associated with high risks. IPFC’s task is to provide pre-project activites with resources and competences to minimize investors’ risks. It is principally important that funding of pre-project preparation should be reimbursable and profitable”.

Thus efforts being made by VEB to prepare a credit agreement with the China Development Bank are of special importance because this agreement is designed to fund a full cycle of investment projects including a pre-project preparation mentioned aboveby Petr Fradkov.

Candidates for a pool of projects

A substantial objective in the period of establishing new BRICS and SCO financing institutions is to form a portfolio of projects - beneficiaries of the Bank’s future investments. Here we mean selection and qualitative pre-project “packaging” of the most important infrastructure projects on the Russian territory.“The Russian side handed over a package of 37 projects intended for multilateral cooperation to its partners”, said Sergei Katyrin- President of the Russian Chamber of Commerce and Industry - in his interview to RIA Novosti.

A Memorandum on cooperation between the Russian Transport Ministry, RZHD, the National Development and Reform Commission of China and the China’s Railways upon the Construction of the Moscow-Kazan High-Speed Railway was signed in May in Moscow. Regulatory-legal and financial framework for implementing a project on this high-speed railway as well as joint manufacturing of equipment and its localization are being so far agreed upon.

This railway should become the first project on the way of creating a high-speed transport corridor Moscow-Beijing, which is an important component of an idea advanced by the Chinese side to create a transcontinental transport route from China to Europe – the New Silk Road (China’s One Belt One Road Initiative). This belt is supposed to run from the east to the west through 18 countries with a population of morethan3 billion. China also proposed to build the 21st Century Maritime Silk Road – aseries of shipping routes linking Chinese ports with Belgian Antwerp. A tandem of Chinese megaprojects provides for creating maritime and land transport routes with a total length of 11 thousand kilometers.

Last December, China established a Silk Road Fund - a special institution with capital of 40 billion dollars. It is designed to fund infrastructure projects as part of a new global transport corridor. Its main instrument is entering into capital of companies – operators of projects. And the National Development and Reform Commission of China formed a list of 1043 top-priority infrastructure projects worth 371 billion dollars. They are interested to implement these projects on PPP terms. A significant part of them,as may be supposed, are in line with the strategy for developing a New Silk Road economic belt.

China also initiated the establishment of Asian Bank for Infrastructure Investments (ABII) with capital of 100 billion dollars to fund projects in power engineering, transport and logistics. The ABII is to extend financing on the terms of national loans as is the case for example with the World Bank. There are about five dozens of states among the Bank’s founders both Asian (India, Indonesia, Bangladesh, Korea, Pakistan, Kazakhstan, Uzbekistan), Far Eastern (Qatar, Kuwait, Saudi Arabia, Israel) and European (Great Britain, France, Germany, Italy, Switzerland, Russia).So far, the US and Japanare turning a cold shoulder to participating in the process of establishing the Bank.

A similar specialization of ABII and NDB opens up an opportunity for syndicated lending for especially large-scale strategic projects. Nevertheless, as specialists note, possible differences in credit ratings, terms of foreign funding and corporate governance practice might cause incompatibility of these financing institutions’ credit policy, differences in procedures for examining projects and assessing risks.

One of the Silk Road’s land components – the Europe-Western China Motorway shows a high degree of readiness on the eastern side: China is completing the construction of its section of the motorway this year (with a total length of 3500 km) in 2016 - Kazakhstan (2700km). But the business situation with regard to the Russian section of the motorway (it is to run through the Orenburg region, Bashkiria, Kazan, Moscow and Saint-Petersburg, with the section’s total length in Russia being 2200 km) is very disappointing. Individual regions are performing engineering survey worksand laying out the roadat their own cost but at the federal level the project is frozen so far, because of the crisis despite the legally binding documents signed by our country under this project as early as in 2007.

Russian President Vladimir Putin put forward an idea of connecting of the New Silk Road Project to economic mechanisms of the Eurasian Economic Union (UAEU). In May, President of the People’s Republic of China Xi Jinping backed the initiative. In this situation instruments and institutions of SCO, specifically, IPFC might be especially needed.

A balance of interests is important

The signing at the summit level of more than three dozens of large-scale long-term economic agreements on cooperation between Russia and China that took place in May in Moscow is a qualitative breakthrough in the bilateral relations. It’s premature to say that we have found an adequate substitute for western capital and technologies, access to which was closed last year by sanctions for an indefiniteperiod of time. But in any case,two things are certain: the West has failed to impose a total foreign-economicblockade on our country and despite sanctions and selective anti-sanctions, Russia was able to avoid a temptationof self-sufficient development and self-reliance in all directions.

How long and irreversible is the current thaw in relations between Russia and China going to be? The question remains open. An answer to it will depend on a factual content of framework agreements signed in Moscow by the leaders of the two countries.

Let’s be realistic: a balance of interests is not going to emerge automatically. We have already witnessed examples when financial participation of Chinese business in major raw materials projects on the Russian territory was stringently tied to guarantees to use Chinese technologies and Chinese equipment on a preferential, non-tender basis.“And we can understand them pretty well. They have a lot of long-term money and infrastructure demand inside China is subsiding, the economy is slowing down and they need export supplies and offshore ordersto maximallyutilize their production and construction capacities”, explains Vnesheconombank Deputy Chairman Sergei Vasiliev. Last year, China’s outgoing foreign direct investments reached 116 billion dollars and China became the third world’s largest capital exporter (after the US and Japan). But so far, Russia accounts for no more than 1.5% of accumulated Chinese outgoing direct investments.

We often fail to receive counter guaranties for a transfer of technologies and competences, for assimilating novel technologiesand developing new markets because our business, diplomatic services, specialized governmental institutions and agencies do not often have enough perseverance and consistency. The only reassuring thing is that the Chinese will build infrastructure in Russia and they won’t take it away with them.

In this respect, multilateral mechanisms for economic cooperation could in some cases ease bilateral contradictions and in others help us to receive bilateral agreement performance guarantees.

Russia is quite capable of using all these instruments for cooperation both for promoting is own interests in the BRICS and SCO multilateral area as well as for supporting Russian exports. Lately, VEB has been placing special emphasis on this line of its activity working in close contact with line ministries and agencies to upgrade the exports support system. The Russian Export Center came into being as part of Vnesheconombank. It integrates all financial and non-financial instruments for exports support, said Petr Fradkov. A unique feature of the Center is that itoperates as a single window – a sort of the exporter’sassistant, aconnecting link between the customer and relevant institutions. Its activity is designed to simplify procedures associated with export support.

Blocs of new leaders

BRICS is an alliance of the international monetary and financial system reformers aimed at promoting interests of member countries’ economies with due regard to their role in the global economy. Wecan’tget an adequate evaluation within the Bretton wood institutions (the World Bank, the IMF, the Asian Development Bank, EBRD and others). The total proportion of the BRICS countries’ votes at the IMF is a bit more than 11%, with the Bloc’s proportion in the global GDP being almost 28% ( according to IMF estimates this proportion evaluated by purchasing power parity exceeded that of the Big Eight). Moreover the BRICS countries account for 18% of the world’s trade, a third of earth’s land area and as much as half of the world’s population.

The BRICS stock exchange alliance cross lists 7000 companies of member countries with a total capitalization of more than 8 trillion dollars.

Best operation practices and competences in expert examination and project structuring being applied by Bretton wood institutions will be borrowed and used by institutions being set up. BRICS financial institutions should be regarded as additional rather than alternative ones to the functioning multilateral institutions. The BRICS countries development institutions including Vnesheconombank have a multi-year experience of cooperation. Specifically, an informal association of G20 countries’ development institutions was set up not long ago. It gains momentum year after year and seeks a formal status. The BRICS countries’ banks are members of this association.