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Special Report: Eurasian Development Bank

Section sponsored by EDB


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in Tomsk Oblast, construction of the transhipment terminal at the Ust-Luga Commercial Seaport (North-West of Russia), modernisation of the Siberian Coal Energy Company’s (SCEC) coal operations in Siberia, and others. The EDB also financed a project to construct a modern spinning factory in Tajikistan, and participates in a programme to help finance small and medium-sized businesses in Tajikistan and Armenia. "Of all the project investments being considered by the bank presently, 50% relate to projects in Russia, 34% to projects in Kazakhstan, 11% to projects in Armenia and 5% to projects in Belarus.

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he Relations between the members of the Commonwealth of Independent States (CIS) are becoming closer – and the Eurasian Development Bank is the face of that. Russia and Kazakhstan founded the EDB in 2006 to help finance crossborder projects between member states that would develop and promote "sustainable economic growth and mutual trade and economic ties." Since then, the EDB has added new members Armenia, Belarus and Tajikistan, in the process assuming the role of the CIS' answer to the European Bank for Reconstruction and Development (EBRD), funding investments in core sectors such as power, transport, high tech, agriculture and finance. Russian President Dmitry Medvedev travelled to Kazakhstan in September to meet his Kazakh counterpart, Nursultan Nazarbayev, in the town of Ust-Kamenogorsk, where the two presi-

dents cemented relations by signing off on 27 investment agreements. "There is no alternative to deeper integration [with Russia]," Nazarbayev said, adding that the two economies are more commodity oriented than he would like and that one solution is to develop innovative technologies. This was Medvedev's second trip to Kazakhstan. During the previous trip in September 2008, he attended with

in addition to its direct investment, also acted as arranger and secured the participation of the German banks WestLB and Bayerische Hypo- und Vereinsbank. Since then, the bank has invested in dozens of projects, including nuclear fuel at the Zarechnoye uranium deposit in Kazakhstan, reconstruction of the power generating units of Ekibastuz GRES-2, the purchase of farm machinery for Kazakh grain producers,

"There is money there available if we want it and following the Russian sovereign deal, it is much cheaper than before" Nazarbayev the opening ceremony of an ore mining and processing works at the Voskhod chromite deposit in Aktyubinsk Oblast. This was one of the first investment projects by the EDB, which,

development of sea transport in the North Caspian region, as well as similar investments in Russia such as the construction of a wagon works in Leningrad Oblast, a wood processing complex

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Better terms With its infrastructure focus, the EDB is providing crucial financing for many of the economies in its member states. Moreover, with its strong financial credentials and supranational status, it can raise funds on the international capital markets that are currently inaccessible to commercial banks, and so acts as a conduit for cheaper capital. "A good bank knows its own markets, and the global market. Our commitment is to foster economic development and enhance integration processes in our member states. To do this, we utilize our global scope and our specific knowledge of the Eurasian markets. We are investing in the future of our region," the EDB says.

Increased traffic along the Volga-Don canal means there is an urgent need for an alternative route between the Caspian and Azov-Black Sea basins. The Eurasian Development Bank is working with the governments of Russia and Kazakhstan on plans to build a new canal.

The bank enjoys solid credit ratings, thus in August Standard & Poor's affirmed EDB's long-term and shortterm ratings assigned to the bank's foreign currency liabilities at 'BBB' and 'A-3' respectively, with a "stable" outlook. S&P said the bank's reputation was bolstered by its strong capitalisation, which "reduces risks associated with difficult operating conditions." The bank also has 'BBB'/'A-3' foreign currency ratings from Fitch Ratings and Moody's Investors Service, respectively.

There are two potential routes being considered for the Volga Don 2: one that would run alongside the existing canal, and a southern Eurasia route. An open tender was held to select a consultant to carry out the assessment, won by an association of several design institutions headed by the Russian Gidroproyekt institute, which started work in July 2009.

And the bank has continued to improve its creditworthiness by increasing the average duration of liabilities from one year to approximately five years, through shifting its emphasis from borrowings under bilateral and multilateral agreements to market debt issues.

A feasibility study was commissioned in 2009 by the bank, and a draft final report has been submitted to agencies appointed by the governments of Kazakhstan and Russia. The two governments will have the final say on whether the project goes ahead. The two seas are currently connected by the Volga-Don canal, which connects the Volga River and the Don River at their closest points. However, capacity on the canal, which was completed in 1952, has been exhausted. "It was therefore decided to assess the available options of a new waterway connection between the Caspian and the Azov-Black Sea basins," explains Vladimir Yasinsky, the EDB’s director of strategy and research. “In view of its inter-governmental status, the EDB was mandated by the governments of Kazakhstan and Russia to finance the comparative study of the technical and economic parameters of the projects.”

Building a new connection between the two bodies of water is “no small undertaking,” Yasinsky stresses. The existing Volga-Don canal took four and a half years to build. The canal is 101 kilometres long, with a minimum depth of 3.5 metres, and vessels making the full journey have to pass no less than 15 lock gates. "The project developers were given the task to integrate the new canal options into existing infrastructure and other prospective international transport routes,” Yasinsky says. “This approach is economically sound, as it will allow the economic potential of the regions concerned to be increased considerably. The new route will become part of the Black Sea international transport infrastructure and Eurasian infrastructure, new multimodal transport and logistics centres, and comprehensive regional economic development.”


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The bank has been actively raising money from a number of sources, including syndications from international banks and several large bond on the Russian and international capital markets. The EDB issued a $500m, five-year Eurobonds in September 2009, which was priced to yield 7.375% – the lowest level among CIS issuers at the time. The Russian government's Eurobond issue in May is a boon for the EDB, as it

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sets a new benchmark for interest rates and lowers the bar for quasi-state issuers like the EDB. "There is money there available if we want it and following the Russian sovereign deal, it is much cheaper than before," says EDB Chairman of the Executive Board, Finogenov. More recently, the EDB has been put in charge of administering the EurAsEC's Anti-Crisis Fund, which has been set up by member states to help those impact-

ed by the global economic crisis. Since the crisis, the bank has found itself on the front line of dealing with the fallout. Tajikistan was especially hard hit, as its economy was already reeling from two extremely severe winters; the EDB made its first $70m loan to Tajikistan earlier this year on extremely favourable terms.

power station in Kazakhstan, for example, will increase Kazakhstan's power exports to Russia and assist the reunification of the two countries' power systems.

Next-generation integration in Eurasia Clare Nuttall in Almaty

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ecent years have seen several major steps toward integrating the markets of the former Soviet Union. The establishment of the Eurasian Development Bank (EDB) four years ago has been followed by the launch of the EurAsEC Anti-Crisis Fund and this year's creation of the Customs Union between Russia, Belarus and Kazakhstan – the latter a significant move towards the creation of a single economic zone within the post-Soviet space. Set up in 2006, the EDB has become an increasingly powerful force for this Eurasian integration. Its founding share-

holders, Russia and Kazakhstan, have since been joined by Armenia, Belarus and Tajikistan. In addition to the typical development bank roles of facilitating economic growth and the emergence of healthy market economies, the EDB's mission focuses specifically on the expansion of trade and other economic ties in its member states. It aims to act as a catalyst for integration among its members. The bank's lending in the energy sector in particular has helped to increase integration within the region. The investments into additional capacity at the Ekibastuz GRES

Other EDB investment projects that have an integration dimension are as diverse as funding the reconstruction of Pulkovo Airport, construction of an ore mining and processing works at the Voskhod chromite deposit in Aktyubinsk Oblast in Kazakhstan, industrial development of the Zarechnoye uranium deposit in Kazakhstan, mass production of the new Russian regional Sukhoi Superjet 100 plane, and construction of a wagon works in Leningrad Oblast, Russia Unionised This year saw the establishment of the Customs Union of Russia, Belarus and Kazakhstan, which became operational on July 1. "Integration processes in the post-Soviet space have accelerated lately, in particular with the establishment of the Russia-KazakhstanBelarus Customs Union," says Evgeny Vinokurov, head of the economic analysis division within the EDB's strategy and research department. Vinokurov believes the creation of the Customs Union to be "a more advanced form of integration" compared to previous forms of interaction between the post-Soviet countries. In fact, it is one of the key steps towards the creation of a single economic area in the region along the lines of the EU. For its members, the establishment of a customs territory with single customs

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tariffs, and the abolishment of customs duties and economic barriers is set to boost trade and investment between its members, and result in the launch of more trans-border projects. The Customs Union "will provide an opportunity to the member countries to employ the benefits of specialisation and develop production chains, thus increasing the effectiveness of national economies and the union as a whole," says Vinokurov. Moreover, the creation of the Customs Union is just the start of the process, with Russia, Kazakhstan and Belarus forming a core around which the other countries in the region are likely to gravitate. "The formation of an 'integration core' gained momentum with the establishment of the RussiaKazakhstan-Belarus customs union, with further prospects of establishing a single economic area," says Vinokurov. "The Customs Union Commission might come to represent the first truly supranational institution in the 20 years of attempts at reintegration in the post-Soviet region. It is obvious that the Customs Union will facilitate trade turnover between its member countries and increase their attractiveness as a destination for investment. The postSoviet 'troika' will strengthen its position in key markets, for example, on the world energy and grain markets." This gravitational pull has already started, with Kyrgyzstan and Tajikistan being the first countries to show a serious interest in joining. The big prize, however, would be Ukraine, which alongside the three Customs Union members was a signatory to the September 2003 agreement on the formation of the single economic area. "The prospects for the region's economic integration with Ukraine are most thrilling, albeit less certain," says Vinokurov. "It is Ukraine whose presence can impart true completeness to the region's economic integration. Joining the Customs Union and the single economic area, in our view, is beneficial to this country's economy, especially its petrochemistry, metallurgy, mechanical engineering and agribusiness. This fact allows us to hope that 'the eastern direction' will receive due attention in Ukraine's foreign policy."

Silver linings Despite its overall negative impact on the Eurasia region, the international economic crisis has had a silver lining in that it's spurred on integration. Russia has supported several of the poorer CIS countries, providing substantial packages of assistance to Armenia, Belarus and Kyrgyzstan. On an international level, the governments of Armenia, Belarus, Kazakhstan, Kyrgyz Republic, Russia and Tajikistan agreed in June 2009 to set up an anti-crisis fund within the framework of the EurAsEC (Eurasian Economic Community). The EDB was appointed manager of the fund. Plans to launch the $8.5bn fund were drawn up at the peak of the crisis, with the key aim of minimising the impact of the crisis on economies within the community. To achieve this, the fund has two main areas of activity. First, it provides budget support, helping member governments to reduce the impact of the crisis on vulnerable social groups. It also provides investment loans, which are to be targeted at projects with the

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sure that scarce resources are used wisely," says Sergei Shatalov, managing director of the fund. The first investment from the fund was a $70m budget support loan for Tajikistan, transferred in August. This will be used to support social spending within the country. Tajikistan has the lowest percapita income among member countries and was quick off the mark to request a loan and prepare detailed project documentation. According to Shatalov, an application from the Kyrgyz Republic for a similar loan is also moving fast. "The other countries are middle income and are more interested in the infrastructure development loans. We are considering financing requests from Armenia and Belarus, and may also provide an infrastructure loan to the Kazakh government," says Shatalov. In general, Kazakhstan and Russia – the two main contributors to the fund – do not plan to tap its resources for their own ends, but they are interested in using it to support projects with regional

"Integration processes in the post-Soviet space have accelerated lately, in particular with the establishment of Russia-Kazakhstan-Belarus Customs Union" largest growth and job-creation impact. Other factors to be taken into account in selecting projects are their contribution to promoting development and economic diversification, and providing social benefits in terms of poverty reduction and support for vulnerable and low-income groups. As the manager of the EurAsEC AntiCrisis Fund, the EDB works in close cooperation with other multinational development organisations including the International Monetary Fund, the World Bank and the European Bank for Reconstruction and Development. "This is very important, because only with such coordination can we make

benefits. This could include investment into projects to rehabilitate the Central Asian common electricity grid. The Kazakh government is considering a project under which a new transmission loop will be constructed that would help Kyrgyzstan and Tajikistan, which have power generation capacity in abundance, to export electricity to Kazakhstan. In addition to benefits for the three Central Asian countries, the new grid would also help to stabilise the power supply situation in South Siberia after the Sayano-Shushenskaya disaster. Member countries of the Anti-Crisis Fund are already starting to see a recovery. "Russia is expected to have 4%


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real growth in 2010, while Kazakhstan and Belarus are clocking in at over 7%... Growth has also revived in Tajikistan and there are some green shoots of growth in Armenia," says Shatalov. "2010 is the first post-crisis year, but how sustainable that growth will be depends on the policies of the countries. The Anti-Crisis Fund supports sustainable economic policies aimed at a viable budget, viable balance of payments, sustaining social policies and stimulating future growth."

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Shatalov hopes the fund will remain an ongoing concern, and points out it is intended not only to help the EurAsEC countries through the current economic crisis, but to provide support in the event of other shocks and natural disasters. Tajikistan, for example, needs funds for rehabilitation work after mudslides and avalanches caused up to $600m worth of damage in May. Despite these advances in integration in recent years, there are still many more steps that can be taken. The EDB recom-

mends concentrating on priority sectors for the development of its member countries. These include sectors such as transport – Vinokurov points out the importance of Eurasia's role as a land bridge between Europe and Asia – in addition to other infrastructure sectors, power generation and distribution, and telecommunications, as well as the financial sector. The post-Soviet countries have much to gain from investments especially into new infrastructure that will advance each of them, while bringing the region closer together.

States plus former member Georgia. Tracking integration within the region is important to the EDB, since part of its mission is to assist economic integration of its member states, all of which are CIS members.

EDB indicators show progress towards integration Clare Nuttall in Almaty

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ntegration within the post-Soviet space has accelerated recently, according to a set of indicators created by the Eurasian Development Bank. The EDB's System of Indicators of Eurasian Integration (SIEI) tracks 10 years of disintegration and integration between the former Soviet countries. The data show that the uneven pace of integration for much of the post-Soviet era has been followed by several moves

towards greater integration, in particular the establishment of the Customs Union between Russia, Belarus and Kazakhstan. The international economic crisis has also resulted in increasing ties within the region. The SIEI was created by the EDB's research department to measure numerous aspects of integration within the CIS-12 countries – the 11 members of the Commonwealth of Independent

The SIEI, which was devised using the experience of European and Latin American integration, consists of nine general and two consolidated indices to measure integration in the region. Different indicators have been developed to measure various aspects of the process, including the integration of trade and labour markets, and cooperation in the key areas of agriculture, education and energy. Mixed progress The first set of results, published in 2009, reveals wide variations in the degree of integration in different regions and spheres of activity. In a number of areas, integration has actually declined over the last decade, although within specific regions and around certain regional integration cores it has grown. The consolidated integration index for CIS-12 suggests that the overall level of integration has decreased. At the same time, the EurAsEC-5, which consists of Belarus, Kazakhstan, Kyrgyzstan, Russia and Tajikistan, became more integrated during the 2000s. This is true to an even greater degree than with the core EurAsEC-3 countries – the three Customs Union members.

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Evgeny Vinokurov, head of the economic analysis division within the EDB's strategy and research department, reports that the EDB's researchers "found very distinct spatial integration clusters in the CIS. "For example, the level of integration in the energy, agriculture and education sectors is higher in Central Asia than in the rest of the post-Soviet space. Integration in the post-Soviet space progresses at an uneven pace, both geographically and structurally," says Vinokurov. "In recent years, there was a sharp upturn in labour migration and student exchange, whilst integration in the trade, energy and agriculture sectors slowed down. The macroeconomic indices of post-Soviet countries were becoming increasingly divergent. It should understood, however, that these negative trends are partially attributable to the rapid growth of the post-Soviet economies." Another key finding was that overall, the smaller countries in the region – Kyrgyzstan, Armenia and Tajikistan – were the most engaged in economic integration (in relative terms). At the other end of the spectrum, countries such as Russia and Kazakhstan, with larger, more export-oriented economies, the relative role of economic ties with other postSoviet countries was less important. Unsurprisingly, the research shows that in trade and labour migration, the most intensive interaction normally develops between neighbouring countries. However, it also occurs around regional cores. "Russia is certainly the most important, but not the sole, 'integration centre' in the post-Soviet space; for example, Kazakhstan has become a desirable destination for many migrant workers in Central Asia," says Vinokurov. The Customs Union is a step towards the larger goal of a single economic area within the former Soviet Union, and it created a new "integration core" for other countries in the region. Kyrgyzstan and Tajikistan are already showing considerable interest in becoming members. However, the successful creation of the Customs Union has "put forward a whole set of sensitive issues to be addressed by the participating countries in a consis-

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tent and mutually acceptable manner," Vinokurov points out. These include access to energy resources , transport infrastructure and pipelines on a nondiscriminatory basis, as well as strengthening cooperation in the financial sector. Huddled together With the onset of the international economic crisis, the region has come closer together, EDB research shows. Russia's role as the major donor for the region is undoubted – the country has directed massive financial aid to its neighbours, in particular Belarus, Kyrgyzstan and Armenia. Even more important has been the creation of the EurAsEC AntiCrisis Fund, which is managed by the EDB. The fund's aim is to help less-developed countries of the region to stabilise their economies and to finance major investment projects. These are the steps within the former Soviet space. But the break-up of the Soviet Union in 1991 has opened the way for much wider integration in the Eurasian region. "Eurasian continental integration might become a crucial element of policy-making in the decades to come," says Vinokurov. "For the time being, there is still not enough recognition that the disintegration of the Soviet Union triggered a dramatic new process of economic integration across the entire huge Eurasian super-continent. It may involve the EU, the CIS states, China, as well as various states of west, south and southeast Asia." This could be hugely beneficial in sectors such as transport, energy, telecommunications and agriculture, in addition to security cooperation to address regionwide threats such as drug and people trafficking. The creation of a single, continental, supra-national integration organisation is unlikely, though, says Vinokurov, given the existence of the number of power centres within the region, including the EU, China, India, Russia and Turkey. He therefore forecasts a "spaghetti bowl" of multilateral agreements aimed at specific issues, with networking, corporate and informal links playing the key role.

"Russia is certainly the most important, but not the sole, 'integration centre' in the post-Soviet space"


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raising $500m in September 2009 after an extensive global road show involving both the EDB's top management and the finance ministers of its member countries, Russia and Kazakhstan. "The issue was extremely successful and well oversubscribed. On the back of that, one month later, we did a RUB5bn (€123m) issue in Russia, which was also very well received," says Krasilnikov. In the wings So far in 2010, the EDB has not carried out any issues, though the bank still has "plans for coming back to the markets," according to Krasilnikov. The main reason for its lack of activity in the first nine months of the year is that new funds are simply not needed. As of the end of 2009, total assets were $2.495bn, and by mid-2010 they were slightly higher at $2.521bn.

EDB ready to raise funds Clare Nuttall in Almaty

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he Eurasian Development Bank was quick to raise money on international financial markets in its first few months of operation. Four years on, the growth curve of the Bank has somewhat flattened, but all the funding tools are in place, allowing it to spring into action when required. Dmitry Krasilnikov, Managing Director, Corporate Finance, is confident the Bank will be able to raise money whenever needed. The EDB has been an active fundraiser since its launch in June 2006, raising its first syndicated loan just five months later in November 2006. "We really hit the ground running," says Krasilnikov, outlining the bank's successful raising of this and two subsequent syndicated loans, with a total value of $850m. At that time, he says, the syndicated loan market was very vibrant, allowing the bank to carry out three successful, high-profile deals. With its track record established, the bank started preparing its Eurobond programme.

Plans to issue the EDB's debut Eurobond in 2008 fell through due to the turmoil on international financial markets following the collapse of Lehman

However, when the time comes to raise funds, all the necessary machinery is in place. The EDB registered its $3.5bn euro medium term note (EMTN) programme in December 2007, and Krasilnikov and his team remain in constant dialogue with its current mandated arrangers – investment banks JP Morgan, Citi and VTB Capital. In July, the EDB also registered a $3.5bn eurocommercial paper (ECP) programme. "Coupled with longer-dated Eurobonds, the ECP registration gives us a lot of

"It's obvious there is a market need for our issues" Brothers. However, by 2009 the situation had improved, and the EDB carried out its inaugural bond issue, raising KZT20bn (€104m) on the Kazakh market. "That was a clear ice-breaker for Kazakhstan, because virtually no deals were coming to the market from any non-sovereign borrower in this country. It was a well-timed and useful issue both for us as a borrower and for the Kazakh market," says Krasilnikov. Later that year, the EDB followed up with its first global Eurobond issue,

flexibility in terms of quick execution and flexibility in terms of size and tenor, at very moderate cost," explains Krasilnikov. Despite the continuing volatility on the international capital markets, Krasilnikov believes the fund-raising climate for an EDB issue would be "quite supportive" and he's confident in the bank's ability to raise funds. "The fundamental picture is mixed. The past few months proved to be volatile, prompting issuers to take opportunistic approach to their

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issuing tactics However, looking specifically at our situation, we are quite confident in our ability to repeat our earlier successes – both on the grounds of our improving fundamentals, as well as technical market factors related to supply of high-quality paper from the CIS," he says. While Russia carried out a Eurobond issue earlier this year, it's not planning any more dollar issues in 2010. Meanwhile, the Kazakh government remains divided over whether to use the country's National Welfare Fund or to raise finance on the international markets. The appetite for Kazakh risk has also been reduced by the country's banking sector crisis and restructuring. A positive side effect of the lack of good quality names from Russia and especially Kazakhstan is that appetite for an issuer such as the EDB is likely to be high. "The market appetite is highly segmented in terms of the quality of issuers, so the lower-rated issuers, especially from the financial industry, have to pay sizeable premiums to come to the market," says Krasilnikov. "It's obvious there is a market need for our issues, and for us the question depends on whether we need money, rather than whether we are able to raise them. When and if we need money from investors, we will get as much as we need." Branching out As the EDB grows and develops, the Bank is also working to launch new financial products for its core clients. Although some of these clients are already being served by investment banks, in general the areas where the bank operates – which include hardto-access sectors such as the nuclear industry – are heavily under-banked.

"We have excellent access to clients and industries, and a good understanding of their business," points out Krasilnikov. "Our clients are comfortable working with us because we are a supranational, inter-governmental organization, with the Russian and Kazakh governments as our biggest shareholders." For example, the bank plans to become more inventive in terms of working with its assets. "Many of our loans will soon be maturing to the stage where they will become re-financeable by ordinary commercial banks or by investors," says Krasilnikov. "As soon as this happens, we will be looking to cash out and replace that risk from our balance sheet to commercially-oriented investors." The EDB can also use its preferred creditor status to help its lower-rated member countries raise funds on international markets. As an international development bank, it can work in jurisdictions that are not broadly bankable because of the problems in evaluating sovereign risk. Although Russia and Kazakhstan have historically been active on international financial markets, other member states of the EDB are rated at much lower levels and have not been active in the international capital markets. "It's a common approach for international development banks that has been used in Africa, Latin America and even Western Europe after World War II. There is virtually no history of defaults to international development banks, which is probably why the banks are as a rule much higher rated than their individual shareholders," says Krasilnikov. "This gives us a potential area to expand our business together with other banks and

"For us the question depends on whether we need money this year, rather than whether we will be able to raise funds"

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private investors into those less-established jurisdictions." At present, the EDB is in the process of growing its commission-based operation. "Our operations are focused on this part of the world, where we can take some long-dated and large-scale risks in the real sector. We have sufficient capital for that, credit ratings and attractiveness to investors, as well as the capacity to evaluate risks involved. All that allows us to offer financing in cases where few others can. Very often that financing can and will be complemented by commission-based assignments by the EDB," says Krasilnikov. This could, for example, involve acting as arranger for a corporate bond issue, which would also be covered by the bank's guarantee. The EDB might also provide bridge financing or financing for various types of M&A transactions of its clients. "Our aim is to grow our origination effort in terms of some special situations where we can fit better into our clients’ needs without reinventing the bicycle. Normally, this would involve partnering with other banks – either Russian or western. Our aim is not to compete head to head with the behemoths in the market, but to spot and get into situations whereby we will have some competitive advantage in front of our clients," says Krasilnikov. "We view the high added-value, commission-based business as a means to better serve our clients and to create profits that we can then use to improve our lending terms to the projects in the real sector which cannot pay high interest rates. The commission-based effort will therefore help our mainstream business," he adds.


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of a common power market in EurAsEC. Mutual trade and investments will be stimulated," says Yasinsky.

EDB pushes energy cooperation in CIS Clare Nuttal in Almaty

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ell known for its abundance of fossil fuels, the Commonwealth of Independent States (CIS) also has immense hydroelectric power resources. But to fully develop its energy potential, the region's various states need to cooperate more and so new infrastructure to support this integration is now being built. According to Vladimir Yasinksky, director of the strategy and research department at the Eurasian Development Bank (EDB), which already counts Russia, Kazakhstan and Tajikistan among its members, "energy is a pivotal factor for economic integration," and consequently, an important strategic area for the bank. "The bank's member states possess ample natural energy resources – enough to last for decades," Yasinsky says. "The problem is not physical deficiency, but the absence of conditions for efficient use of this potential. By this I mean investment in expanding the energy resource base, building and modernising transport infrastructure, energy-saving technology, renewable and alternative energy sources, and nuclear power." The EDB has already made a number of investments in the energy sector. One of

its major commitments is the construction of the third generating unit at the Ekibastuz GRES 2 power plant in Kazakhstan, which has an installed capacity of 500 megawatts (MW). This is being funded by a $770m multi-cur-

The scale of projects in the energy infrastructure sector mean that international development banks – including since its launch the EDB – have an important role to play in their funding. The need, in some cases, to balance the needs of several different countries has also meant that an international approach is important. This is of particular urgency in Central Asia, where a lack of funding and disagreements between the five post-Soviet republics there caused the disintegration of the once-functional Central Asian common electricity system. "We understand that the rehabilitation of the common power system in Central Asia in a new format will require first of all a common energy market infrastructure and we are developing our plans accordingly," says Yasinsky. The EDB co-financed the construction of the North-Kazakhstan-Aktubinsk Oblast 500 kilowatt power transmission line that has a total length of about 500 kilometres, and it's considering some other opportunities in this area.

"In the late 1960s, there was a Central Asian common electricity grid. Since then, the regional network had been under-invested in and the sector is in disrepair" rency loan from the EDB and Russia's Vneshekonombank. The EDB has also funded a programme for rehabilitation of the plant, at a cost of $93.5m. The Ekibastuz GRES-2 project has an integration dimension, since the power plant is co-owned by Russian and Kazakh shareholders. Located in north Kazakhstan, the plant supplies most of its electricity to the unified Russian grid system, and equipment for the new unit will be provided by Russian companies. "This sizeable project will help reunite the Russian and Kazakh grids, and contribute to integration and development

The EurAsEC Anti-Crisis fund may also commit funds. "In the late 1960s, there was a Central Asian common electricity grid. Since then, the regional network had been under-invested in and the sector is in disrepair, which affects the quality of the electricity supply. This is a major factor in economic growth, in fact there is a linear relationship between stability of electricity supply and growth," says Sergei Shatalov, the fund's managing director. "Kazakhstan wants a second loop to help Kyrgyzstan and Tajikistan, which have power generation capacity in abundance, to export electricity to them. Kazakhstan will have

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major power shortages when economic growth returns to pre-crisis levels." The new grid will also help stabilise the power supply situation in the region after last year's accident at the Sayano-Shushenskaya hydroelectric power plant in south Siberia, one of the world’s largest power plants, which left 75 people dead and much of the plant’s equipment destroyed. Water fall However, when considering ways to increase hydropower generation in Central Asia, the need for water and energy resources has to be carefully balanced between the interests of different countries. Investment in unleashing its hydropower potential must take into account the needs of the whole region, and look at the benefits – and the possible drawbacks – for all parties. Lacking the large hydrocarbon deposits of their neighbours, Kyrgyzstan and Tajikistan are looking to the hydropower sector for their future energy security and economic prosperity. "Once the available hydropower potential is realised, Kyrgyzstan and Tajikistan will be in a position to export power to their northern [Kazakhstan, Russia, Uzbekistan] and southern [Afghanistan, Pakistan, India] neighbours," points out Yasinsky. However, he stresses that, especially for major new facilities such as the Roghun

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plant on the Vakhsh in Tajikistan, the needs of all countries involved must be taken into account. "The development of hydropower potential in upstream areas should in no way be detrimental to downstream water use systems, bearing in mind that irrigated farming is of critical socio-economic importance to this region," Yasinsky says. "The countries involved must cooperate closely in preventing the potential negative downstream impact of hydraulic facilities." This is rendered more complex by the impact of climate change on the Central Asian region. According to a study financed by the EDB, by 2050 the runoff of the region's two great rivers, the Amudarya and Syrdarya, will shrink by 10-15% and 6-10% respectively. In 1960-2005, the Pamir-Altai mountains lost more than 1,000 glaciers and the Zhailaysky Alatau mountains about 100 glaciers. "The hydropower and agriculture sectors are highly sensitive to climate change, as any changes in river run-off affect them directly... investment proposals must take climate change into account." says Yasinsky. As the high costs of such projects may require support from a consortium of international development banks – or private financial institutions – it is all the more important for a broad international consensus between the interests of upstream and downstream countries to be reached.

"Once the hydropower potential is realised, Kyrgyzstan and Tajikistan will be able to export power to their northern and southern neighbours"


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