The Russian authorities are refusing to allow private companies to build and own strategic parts of the infrastructure. Ex-Prime Minister Mikhail Kasyanov has proposed a state alternative to finance Eurasian infrastructure projects.

Yana Galukhina and Maxim Rubchenko

On June 25th, former Russian prime minister Mikhail Kasyanov presented an original idea to the public. He proposed creating a specialized investment bank in Russian to finance infrastructure projects across the great expanses of Eurasia. The basis of this new investment bank, the ex-prime minister believes, should be the International Investment Bank (MIB) and the International Bank for Economic Cooperation (MBES). By merging these two banks and adding enough money to increase their capital to 5-6 billion euros, it would be possible to finance future construction projects such as pipelines, highways, and railroads to the tune of 30-40 billion euros. “I am ready to head such a financial institution,” Kasyanov stated. According to Kasyanov, Putin had already charged the cabinet with reviewing these proposals and on June 24, Prime Minister Fradkov forwarded them to the appropriate ministries.
The president’s friendly reception of the ex-prime minister’s idea is easily explained. The pitiful state of Russia’s infrastructure has been the subject of many a speech. The catastrophic lack of roads and their wretched condition were discussed at the last cabinet meeting. The lack of oil and gas export pipelines does not allow the natural resource industries to take full advantage of their potential. The resources earmarked for the infrastructure are not sufficient to keep existing structures in decent condition, let alone expand them. The Finance Ministry thinks it more important to maintain the budget surplus and the Stabilization Fund. Private companies have the money to build roads and pipelines, but current legislation practically prohibits them from making investments, as the infrastructure cannot be private property. Under such conditions creating a special organization completely controlled by the state that would not depend on the federal budget for day-to-day operations seems to be the only way out of the impasse. However, a plethora of questions arise, naturally.

Who’s this then?

The MIB and MBES are two international banks founded during the Soviet era to service economic dealings between the member states of the Council for Economic Mutual Assistance (COMECON). Both were registered with the UN and have offices in Moscow on Prospekt Sakharova. After the collapse of the USSR a giant hole appeared on these banks’ balance sheets, as the Soviet Vneshekonombank (VEB) had borrowed several tens of millions of dollars from the two banks. The MIB and MBES, in turn, borrowed similar amounts from their foreign partners. The problem of these debts was resolved recently. The Russian government paid off the VEB’s debts to these banks via eurobonds maturing in 2010 and 2030. These securities were also used to pay the MIB and MBES’s foreign creditors. Today the MIB is back in the black and as of May 1, 2004had a charter fund of 2 billion rubles. No information has been made public regarding the financial status of MBES. According to specialists, it is performing slightly worse, but after additional restructuring, it is completely realistic that the MBES will also be brought around.
The fact of the matter, however, is that the reason these banks were founded is ancient history. Today they mostly provide short-term loans for export operations, pre-export financing, and banking for various foreign trade operations conducted by state companies. The banks have not had particularly brilliant success in this arena, and analysts are fairly pessimistic about their future. “MIB and MBES are destined to focus on state project servicing, as it always is with state banks,” says Natalia Orlova, an analyst at Alfa Bank. “Otherwise, this kind of bank starts to feel pressure from competitors and they become less attractive in terms of profitability. The state then starts to worry that its assets are losing value. Then it either auctions them off or starts looking for foreign strategic investors. In other words, it brings in a new management team to develop a standard banking business. Similar precedents were set in Poland and other Eastern European countries. Initially, the state banks maintained the status quo, but then the banking market developed faster than they did. At some point, they started to lose value and became unattractive to investors.”
The idea Kasyanov has suggested opens up a whole new promising future for these banks. “What Kasyanov is proposing is a more concrete target for these banks. They will have a clear understanding what they are supposed to be doing,” believes Sergei Suverov, Director of the Analysis Department at Zenit Bank. “Moreover, merging these two banks into one large bank will benefit everyone. The main problem with the Russian banking system is its scattered quality and its lack of specialized banks. The idea of founding a large, specialized bank with state participation has a right to exist. But investment in infrastructure projects does not bring fast returns, and that is why this specialized bank should be supported by the state.” Other analysts are more cautious in their views of Kasyanov’s initiative. “It’s clear that these two banks, the MIB and MBES, are a certain brand remembered across the former Eastern Bloc. I’m not sure, though, whether this is a good thing or not,” says Oleg Solntsev, a leading expert at the Center for Macroeconomic Analysis and Short-Term Forecasting. “Most likely, this project does make some kind of sense. But the details will make all the difference, and we still don’t know enough about this idea.”

Where will the money come from?

The main obstacle in the way of Kasyanov’s idea is MIB and MBES’s lack of funds. They do not have enough resources to manage large projects. The ex-prime minister sees the Central Bank as one possible source of money. In his memo to the president, he recommended transferring 2 billion euros to the new bank’s charter capital from the Central Bank’s reserves. However, it is unlikely that Bank of Russia officials will be thrilled with this idea. The Central Bank, wary of repeated monetary emissions and the inflation they cause, is not hiding its distaste for the “productive” use of its reserves.
One other potential participant in the new project is Kazakhstan, which has long expressed interest in creating an institution promoting infrastructure projects across Eurasia. However, no private companies, according to available information, would have a part in the new bank’s capital.

A question of personalities

Kasyanov’s project, with all its minuses and vagueness, is a clear move away from stalemate and an attempt to find a way out of the unhealthy situation when private companies are prohibited from investing in export infrastructure, primarily for oil and natural gas. “There is no direct need to create a special investment institution for infrastructure projects,” argues Kakha Kiknavelidze, analyst at Troika Dialog Investment Company. “Companies could arrange their own financing. At present, they aren’t, but that is more of a political problem than a financial one. A specialized bank could consolidate resources and make it easier to reach a decision on major infrastructure projects. That is its only positive point.”
In Russia, as experience has shown, no single government project, no matter how useful, ever gets started without the personal interest of some high-ranking official. Thus, if Mikhail Kasyanov will be personally involved in promoting infrastructure projects, then the issue of building an oil pipeline to Murmansk or Nakhodka will finally be decided. No other ways out of the stalemate seem to exist.

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