Support of the Russian Economy Growth by BRICS New Development Bank / Yana Grigoryeva
The BRICS countries cover more than a quarter of the world’s territory with more than one third of the world`s population. BRICS became a new center in the global economy. In 2016, the total economic output was approximately 22 per cent of global GDP, up from around 11 per cent in 2005. Despite the potential risks to the global economy posed by rising protectionism and increasing insularity in some developed economies, the BRICS countries continue to be a major driving force of the world economy, contributing around 45 per cent of global growth. That’s why the New Development Bank was launched in aim to help BRICS countries rising the economic growth.
Rising exports and strong consumer demand supported Russia’s economy in its return to a growth path in 2017. According to the country’s statistics service, public investment in infrastructure in 2017 was USD 33 billion (both federal and regional budgets), while private investment in fixed assets (excluding own sources of finance) amounted to $65 billion.
Total infrastructure investment accounts for 6 per cent of Russia’s GDP. The vast territory and sizable consumer base provide great opportunities for development, also in non-commodity sectors. Expanding into new industries and services will demand additional improvements in transportation, communications, power generation and logistics, especially in more remote areas. There are also opportunities in the development of infrastructure for connectivity through trade and transport corridors and logistic centers that would facilitate regional integration and trade development.
NDB is expected to play a significant role both in catalyzing private capital to infrastructure development and contributing international standard practices in planning and implementing infrastructure projects. Up to 2017, NDB had approved more than $629 million for projects in Russia, including in renewable energy generation and transportation.
The main drivers of Russian economy growth for the next five years will be cities and roads improvements. This sphere is becoming more and more significant direction of the BRICS New development Bank`s investments flows. The NDB is going to increase the loans portfolios to Russia by 15-20% till 2021. At the end of 2018 this rate was about $2.5 billion, and this year it will probably grow up to $16 billion.
There are few particular projects to achieve this amount of investments. One of them is about renewable energy. Russia submitted its first investment project to the Bank-the development of small energy in Karelia. This is hydrogeneration, which will provide energy to the cities, towns, industry. Also, another big project concerns the professional education system. In 2017, the Baikal Institute of BRICS was opened. The Institute has educational programs in the areas of environmental engineering and clean energy, digital technologies, innovative economy and international business. Classes are taught in English by successful Russian and foreign professors. More than 40 citizens of Russia, China, Nigeria, Egypt, Indonesia and Mongolia became students of the institute. As for the current projects, there are 6 of them in total, worth about $1.5 billion. Moreover, now BRICS NDB is discussing with the Russian Railways a large project of 500 million- construction of the high-speed highway "Moscow-Kazan". It will be an investment in one particular line. But Russian Railways has many attractive projects, and the BRICS Bank is ready to provide the necessary support in all areas. In the next two years, up to eight concessions in the railway industry can be concluded in the railway industry.
NDB has extended support to a road development project in Ufa, Russia, a city that is grappling with rising traffic volumes and inadequate road infrastructure. Improving infrastructure and connectivity with coordinated policy has proven to be an effective way of increasing productivity and the resilience of a country’s economy. Through a sovereign loan of $69 million to the Russian Federation to fund a portion of the $701 million project, NDB is providing financing to support the construction of 10 kilometers of road, a 1-kilometre road tunnel, and a 2.5-kilometre bridge across the Ufa River, as well as toll collection stations and other supporting infrastructure. A transport corridor will be constructed to the east of the city center, connecting it to the surrounding suburbs.
BRICS Bank also participates in the implementation of national projects in Russia. Bank develops its participation in all sectors, but infrastructure is a key focus. The Bank is ready to discuss with the Government of the Russian Federation any project in this area. In all countries of presence, the Bank builds roads and railways, participates in water purification projects (for example, the Volga Health Improvement program, which involves the reconstruction of wastewater treatment plants for the further development of the water supply and drainage system of the city of Dzerzhinsk), in the electric power industry, and in social sectors. The Bank already has several similar investments in other countries, for example, $300 million has been allocated for the project of ecological restoration of water resources in Chongzuo in China, $80 million - for the project of development of the renewable energy sector of the African company «Industrial Development Corporation».
NDB is contributing towards Russia’s development of a transparent and effective judicial system. NDB is providing a loan of $460 million to support Russia’s judicial development strategy. With a total cost of $601 million, the project’s main focus is institutional development and aims to improve the efficiency, effectiveness and transparency of the Russian judicial system. Funds will be directed towards upgrading physical infrastructure such as building new administrative buildings and integrating information and communication technology systems to implement a new electronic case management system.
In general, the impact of national projects on the economy of the Russian Federation can be assessed as positive. For example, "green" energy helps not to pollute the environment. Building roads and supplying villages with water make people`s life easier. In addition to economic benefits, investment can bring many other results.
BRICS Bank also interacts with other development institutions in the BRICS countries. Cooperation is carried out mainly on the presence of the Bank in various countries. Development institutions in Russia are not funded yet. But in the process of work, there is a very close interaction with Russian institutions and further cooperation is based more on the field of expertise.
Previously, the BRICS Bank was mainly focused on lending projects in foreign currency - mainly in dollars. However, due to dedollarization and increased risks of blocking accounts in US currency, borrowers from countries under sanctions decided to pay more attention to financing projects in national currencies. The purpose of the Bank is to popularize national currencies, because it is the least risky money in which a country can borrow. In Russia, the Bank sees great interest in issuing bonds in rubles. The BRICS NDB plans to issue bonds in rubles at the end of 2019. At the initial stage, the development institute wants to attract 15-20 billion rubles. This will be the first entry of the bank into the Russian market.
The bank will give the credits in rubles to two Russian clients who have such a need. Some customers in Russia are willing to borrow in euros and Swiss francs. Thus, at least three currencies in Russia can compete with the dollar.
In the first year of operation, the demand for loans from the BRICS Bank in the Russian Federation was quite low. There are some significant difficulties with Russian market entry. In particular, the BRICS NDB in Russia doesn`t yet have a credit history, so it is unlikely that the bank will be able to borrow there at favorable rates.
Another difficulty lies in the fact that now the Bank, as a rule, invests under the condition of state guarantee for the borrower. This cuts off many private projects from the bank’s money, often more efficient than government projects. In any case, financing the BRICS Bank for Russian projects is a positive factor. Especially against the backdrop of the other international institutions` withdrawal from Russian - for example, the European Bank for Reconstruction and Development.
In addition, the bank is not enough mature in the local market, it can`t assess the risks associated with specific characteristics of Russian business. Partially this problem can be solved by opening a branch in Russia. This step was announced in April 2019 at the general meeting of the BRICS Bank participants in Cape Town. This year the Bank plans to increase the share of the portfolio of Russian loans by 15-20%.
In 2018 Russia's economic growth was 1.3%. It is possible that this year the growth will be from 1 to 1.5%. One of the consequences of economic growth will be urbanization. It can give impetus to the growth of the Russian economy in the next five years. This will be a key drive - the development of cities, roads, construction of the subway. Another driver is railways. Therefore, the key growth zone of the Russian economy is infrastructure. Russia needs a well-developed infrastructure due to its size and population size. China, which is at the first stage of developing a powerful infrastructure, can serve as a good example. Infrastructure development will be followed by growth in production and services. Because now the leading businesses are spheres that didn`t exist five or ten years ago: food delivery, online shopping, and so on. The main growth is expected in the service sector.