Emerging market development banks come to fore

By bne IntelliNews April 15, 2013

Ben Aris in Moscow -

Emerging markets have been inexorably linked to development banks over the last few decades. International financial institutions (IFIs) were a font of both advice and funds in the lean years, but as more and more of the emerging markets are now standing solidly on their own feet, they have been setting up their own development banks and taking over the job of investing into infrastructure or building institutions.

The most recent example of an emerging world development bank was the attempt to found a BRICS development bank at the eponymous summit this March between Brazil, Russia, India, China and South Africa. The collected heads of some of the fastest growing markets in the world all backed the idea, but the devil was in the details.

"Russia supports the establishment of this financial institution. We are working on the basis that if established, it will operate according to market principles," Russian President Vladimir Putin said during a business breakfast for the BRICS leaders. "[The BRICS are] the largest market in the world. Our countries are home to 40% of the planet's population. The BRICS states possess enormous natural resources, have a developed industrial base and professional personnel, and create almost 30% of the global gross product."

It is this wealth and hive of activity that needs to be marshaled by the development bank for everyone's mutual benefit.

But establishing a multinational institution funded by a group of disparate countries is not a simple task. The assembled finance ministers failed to agree on the bank's size or how the member countries would contribute to the capital. It was agreed the bank needs $50bn in capital, but should contributions be made equally by each member government or in proportion to the size of their economies? China's economy is four-times larger than Russia's and India's is 20-bigger than Brazil's.

So it is back to the negotiating table, but these problems should be solved in time because the bank is seen as an alternative to the western-dominated World Bank, International Monetary Fund, Asian Development Bank or European Bank for Reconstruction and Development. While traditional IFIs still have a role to play in principle, the emerging markets will be best served by helping themselves and each other in the long run.

And several emerging market development banks are already operating. Russia's Vnesheconombank, formally the manager of Russia's state pension fund and international debt manager, has been increasingly acting as a de facto development bank for several years already, investing money into infrastructure projects and supporting large-scale investment programmes.

Likewise, Kazakhstan's Samruk-Kazyna is formerly the depository of the country's oil reserve fund, but increasingly it has been acting as a development bank. Ukraine's government suggested setting up a development bank this March on the basis of the Ukrainian Bank for Reconstruction and Development (UBRD), which was founded in 2004 and is supposed to be one of the major innovations of the State Economic Stimulation Program for 2013-2014. And even Belarus has got into the development bank game after it set up a development bank this February.

While most of these projects are still either on the drawing board or at a very early stage, the most advanced and active of all the regional development banks is the Eurasian Development Bank (EDB), which was set up jointly by the government's of Russia, Kazakhstan and Belarus in January 2006.

The EDB is already a true development bank in that it has made more than $4.5bn worth of inter-regional investments, especially into infrastructure, to the mutual benefit of its now six member countries. Today, the bank's members are the Republic of Armenia, the Republic of Belarus, the Republic of Kazakhstan, the Kyrgyz Republic, the Russian Federation, and the Republic of Tajikistan.

As a sign of the bank's growing importance, in April it was given the status of "outreach partner" for the duration of Russia's presidency of the G20, which began in January. The bank will lead projects that link the economies of the G20 and countries that are not members of the EDB, so broadening the function of the bank significantly.

"It is a great honour for us and a big responsibility," comments Igor Finogenov, Chairman of the EDB Management Board, on the event. "We have serious work ahead of us and will try to meet the expectations associated with our participation."

Developments are sorely needed at the moment. Driven by the needs of long-term economic development rather than just profit, development banks tend to be counter-circular with their investment decisions. Moreover, the infrastructure structure and public works projects they typically back are also a tonic to depressed economies and a boon at the moment as all the countries of the world struggle to emerge from the aftermath of the 2008 crisis.

"From our point of view, it is especially important that the role of international and regional development banks as catalyzers of the investment process was discussed [at the first G20 financial track meeting in February]," says Finogenov. "These development institutions are capable of covering risks that cannot be accepted by private investors and even certain countries."

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