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Archive for July, 2002

Analysis: Black Sea Trade and Development Bank- II

By Christopher Deliso

The Black Sea Trade and Development Bank’s stated mandate — of promoting trade, job creation and, when possible, environmental improvements — is well attested in the 2001 Plovdiv project.Until recently, the biggest polluter in Plovdiv, Bulgaria, was the Kombinat za Czetni Metali S.A. zinc smelter. Everything near this state-owned monstrosity stank of heavy metals and stagnant wastewater. The resulting contamination contributed to both the discontinuation of agriculture and the psychological torpor of the locals.

“KCM was so smelly and dirty, people saw it as a symbol of everything that was wrong with Bulgaria,” quips Robert de Bruin, Communications Manager at the Black Sea Trade and Development Bank. “Now, after our $9.2-million loan, KCM is clean, privatized, and one of the biggest exporters in Bulgaria.”

Without the clean-up project, BSTDB claims, KCM would have been finished- and with it, the loss of 2,400 jobs, $60 million in annual exports, and $7 million in annual tax revenues. The KCM success story is exemplary of what the Thessaloniki-based bank wants to achieve.

Trade financing is a major strategy of the BSTDB. A pre-export financing scheme, to promote regional trade through working with financial intermediaries, now operates in Turkey, Bulgaria, Georgia, Romania, Russia and Azerbaijan. The bank has given in excess of $130 million for trade finance facilities since 1999.

The BSTDB is particularly proud of its Turkey operations. In August 2000, it offered Turk Eximbank an $18.4 million trade finance revolving credit line, to on-lend to Turkish export companies — especially, for inter-regional export to countries. In the past two years, the fund has significantly increased Turkish exports throughout the Black Sea region, as well as the Czech Republic, Germany, Hungary, Spain, Switzerland, the Unite States and Commonwealth of Independent States countries. For the bank, this is a big success: Turk Eximbank now facilitates more than $36.8 million of Turkish exports annually with the money lent.

The latest member in the scheme arrived May 28, when the BSTDB extended a revolving credit line of $1 million to Commercial Bank-Bulgaria Invest A.D. The CBBI is the third Bulgarian bank to participate in the trade finance program (after First Investment Bank and CB Union Bank). The BSTDB funds, used to advance sub-loans to Bulgarian exporters, are strategically focused on cultivating small and medium-size enterprises in Bulgaria. This emphasis aims at increasing trade and diversifying economies. In formerly state-controlled economies like Bulgaria, building SME’s is a vital part of privatization.

In countries with severely unbalanced economies, like oil-dependent Azerbaijan, diversification also helps to mitigate future economic risk. For the BSTDB, developing Azerbaijan’s private manufacturing sector is seen as crucial for protecting that country from fluctuating oil prices.

SME development in the Black Sea region is not without its challenges, however. For the European Union, an SME is defined as a company with a $15 million annual turnover, and up to 500 employees. Says Programs Officer and strategist Panayotis Gavras, “you’d be challenged to find many companies as large as this in Greece — let alone in Georgia or Albania!”

Another challenge is executing risk assessment in a diverse and complex region. The widely varying economies in the BSTDB’s purview preclude any uniform policy of risk assessment. Countries have vast economic differences, and so must be assessed individually. Sometimes, the statistics are misleading. Albania, for example, has posted the region’s highest growth rate (more than 7 percent annually) for the past four years, yet has little infrastructure, and is economically and politically chaotic. The high growth rate can be attributed instead to the remittances of Albanian йmigrйs, often obtained through organized crime or under-the-table migrant labor.

The continuing instability of certain economies also factors in. Last year, Turkey suffered a practical economic collapse, with real gross domestic product falling by 9.1 percent. “This was a much bigger challenge for us than the country’s recent political crisis,” states Gavras. “But we didn’t lose anything in our trade financing portfolio- probably because we lend to the largest and most stable Turkish banks.”

Overall, the bank has high expectations. Each member state (with the exception of Turkey) saw steady growth in 2001. A 6 percent increase in exports of goods and services, together with increased investment, saw Ukraine’s real GDP increase by 9.7 percent. Similarly high growth was recorded for Azerbaijan and Armenia (9.6 percent), while Moldova, Georgia, Greece, Russia, Bulgaria and Romania all posted growth between 4 and 6 percent.

Despite the challenges of navigating rough economic waters, the bank has experienced no real failures. The BSTDB has protected itself by keeping strictly to co-financing, and a financial limit ($20 million or 35 percent) per project. While some projects sunk due to the failures of partner commercial banks, the BSTDB has not gotten any bad loans, and even hopes to go solo by fully financing certain upcoming projects.

One test of the bank’s staying power will be in Georgia, an impoverished country decimated by civil war. Since breaking from the Soviet Union in 1992, Georgia has been plagued by separatists in the provinces of Abkhazia and Ossetia, as well as spillover destabilization from Chechnya. There have been several kidnappings of foreign businessmen in the past few years and corruption is rampant. The dizzying political climate is exemplified by the fact that over 1,000 candidates vied for Tbilisi’s recent city elections.

Nevertheless, the BSTDB is forging ahead with a feasibility study on Georgian manufacturing, exports and banking. The study, contracted out to Athens-based Kantor Consulting, should be finished by September. If a solid project does come out of this, it will be seen as a test- both of the bank and the capabilities of its smaller countries.

“Diversifying and expanding the export base is a huge challenge for them,” says Gavras. “For Georgia, big exports are wine, scrap metal, and timber, agriculture. What we want is sustainable industry, a stronger emphasis on manufacturing, and to improve the weak and not very liquid banking system.”

The BSTDB already has a modest presence in Georgia, in trade financing, banking, and agriculture. According to Gavras, “we would also be inclined to work in the tourism sector — it has a lot of promise.”

Cautious optimism is necessary in regard to Georgia, however. The government controls only two-thirds of the country, and the convivial Georgian lifestyle is antithetical to the ethos of Western business. In a country where businessmen can spend more time eating than having meetings, implementing change takes time. Yet if the Georgian experiment bears fruit, similar feasibility studies may be held for countries like Moldova and Albania, and Armenia has expressed a similar interest.

In addition to potentially increasing the bank’s capital base, and developing independent financing, there are other factors for the bank’s future potential. “I would like to see us diversify beyond lending, and possibly make greater use of equity — which is currently a very small portion of our portfolio — as well as guarantees and leasing,” states Gavras. “Equity is riskier, the payback period is ill-defined, and diligence is required for monitoring, but I’d like us to do more of it.”

The BSTDB expects a favorable regional balance of trade with Europe within the next few years. “It is a huge challenge,” says Gavras, “and not without its risks. But our relations with the European Union … this is the big-ticket issue in the coming years.”

This article was originally published on 30 July 2002 by UPI.

Analysis: Black Sea Trade and Development Bank- I

By Christopher Deliso

Its headquarters are in Greece, while its president is Turkish and its current vice-presidents are Russian, Romanian and Ukrainian. As an exercise in political parity, the Black Sea Trade and Development Bank is unsurpassed. As a multi-national banking institution, the Black Sea Trade and Development bank isn’t doing so bad, either.

Since 1999, Thessaloniki’s fledgling financial institution has doubled its operations annually, in a diverse region of some 11 countries and 350 million people. So far, the bank has pledged over $371 million to 44 development and trade finance projects in the energy, telecommunications, transportation, manufacturing and tourism sectors. In 2001, it approved 11 new project finance operations, at $87 million, and seven trade finance operations, at $47.9 million. As of the most recent board meeting in June, $404 million of board-approved projects and $199 million of signings were underway, according to strategist and Programs Manager Panayotis Gavras.

Of course, future speculation is premature. In the 2001 annual report, President Ersoy Volkan admitted that ” … even with its favorable growth prospects our region still continues to be somewhat overlooked by foreign direct investment and international lenders.” Moreover, a slumping global economy has made would-be investors skittish.

Yet there are reasons for optimism. Most importantly, the bank’s statutory foundations are solid. Its managerial composition, the proportional nature of its stock subscriptions and its legislative safeguards, have helped the BSTDB to chart a course through potentially turbulent political seas.

The bank’s 11-strong Board of Governors, and the 12-person Board of Directors it oversees, are composed of experts, ministers and advisors nominated by each member state. The BSTDB also acknowledges economic realities in its graduated approach to capital composition. Of 1998’s stated $1 billion capital base, leaders Russia, Greece and Turkey each contribute 16.5 percent, in the form of SDR, or special drawing rights, shares. Three mid-level countries, Ukraine, Bulgaria and Romania, fund 13.5 percent each. The rest — Albania, Moldova, Azerbaijan, Armenia and Georgia — each hold 2 percent of the bank’s stock. This scheme reflects the member states’ economic disparities — and also prevents any 50-50 voting split.

For all this sagacious provisioning, there are inevitably some holes. Statute 5.3 states that the bank’s authorized capital stock should be reviewed — and potentially, increased — at five-year intervals. If an increase is voted, shareholders can increase their stock, although they are not obliged to do so, beginning with the smallest shareholder countries.

However, the bank has not been able to decide exactly when the first capital review should occur. Some count from 1997, when the bank was formed. Others argue for 1998, and the president’s appointment. Still others claim 1999, when the bank commenced operations. Capital review could therefore occur in 2002, 2003, or 2004. This surprising oversight is dismissed by bank officials as merely a problem for “the legal guys to sort out.” It does however factor in to any analysis of the BSTDB’s potential.

Although the bank’s subscribed capital share base is one billion SDR at $1.32 billion, this is composed of both callable and payable shares. As of Dec. 31, $250 million — less than 25 percent — had been paid up. Under the bank’s charter, only 10 percent of subscribers’ shares are payable, whereas 70 percent remain callable and 20 percent are paid with promissory notes. All member states presently have outstanding payable share obligations. Bank reserves, as of Dec. 31, stand at only $4.6 million. In their defense, bank representatives cite the BSTDB’s strong constituent currencies — including the U.S. dollar, the euro and the Japanese yen — and the bank’s good quality assets. Nevertheless, the BSTDB remains sensitive to both global economic fluctuations and the complexities of administering and uniting 11 countries of varying economic volatility.

Youth also incurs limitations. The BSTDB suffers from a lack of name recognition, offers only non-concessional lending, and has not yet acquired a credit rating. Its funding is strictly limited, in terms of both cash (up to $20 million) and percentage (up to 35 percent) for individual projects. Compared with other development banks, the BSTDB’s operations are modest.

Bank officials are quick to respond to these criticisms. Public relations chief Valery Aksenov points to a plethora of business publications that have featured the BSTDB, as well as many efforts to promote the bank at business conferences and meetings of the European Union, the European Bank for Reconstruction and Development and others. “The upcoming IMF (International Monetary Fund) summit in Washington is being especially targeted for bank promotion,” says Aksenov.

Acquiring a credit rating is “also something that is very much on our minds,” according to Panayotis Gavras: “We will get one, but what matters most is to get it at the appropriate point in time, and to achieve an investment grade rating — otherwise we would have to raise our cost of funding and pass this higher cost through to our clients. But to get a rating, you really need to show results and shareholder commitment. Unless you have a track record, it’s difficult.” The BSTDB is still working on building one.

Yet perhaps such criticism is unfair. The BSTDB is unique among development banks, in regards to its size, reach, and operations. And so it should be judged.

First, it is regionally focused. As such, the bank is most like the Andean Development Corporation, known as CAF. But the CAF orchestrates mostly Spanish-speaking countries, whereas the BSTDB oversees diverse linguistic and ethnic groups. The CAF also lists “developing and consolidating democracy” in its mandate, whereas the BSTDB stays away from politics. Unlike many financiers, the BSTDB does not discriminate in terms of public or private sector investment. It also does not undertake the World Bank’s enormous projects.

Admits Gavras, “there is concessional and cheap money sloshing around. The World Bank and the EIB (European Investment Bank) do huge infrastructure projects at prices we are not willing to match. Our more conservative approach allows us to concentrate on smaller investments.”

Unlike the IMF and others, the BSTDB does not attach policy conditions by which debtor states can be controlled. After NATO’s Kosovo bombardment, the European Agency for Reconstruction offered aid to Serbia — municipality by municipality — conditional on compliance with the EAR’s reform requirements. This year, Serbia’s IMF economic aid package has been continually harassed by powerful enemies in the U.S. Senate.

Macedonia, another example, has been in compliance with most of the conditions set by the IMF and World Bank, but nevertheless failed to get a standby arrangement with the fund. By linking economic aid with politics, big international creditors frequently trespass out of their rightful domain. For the BSTDB, such meddling would be tantamount to a “death warrant.”

Rather than bully, the BSTDB pushes inter-regional cooperation. Traditional antagonists like Turkey and Greece work together, and Armenia and Azerbaijan “don’t vote down each others’ projects,” assures Gavras, who cites the benefits of the bank’s leadership: “the theory with development banks is that political risks scare off investors. We can focus on financial risk, because our board members are, in many cases, high officials or ministers — and oftentimes we can draw upon them as a resource should non-commercial issues bog down an investment. This helps enormously in mitigating risk.”

This article was originally published on 29 July 2002 by UPI.

Analysis: Serbian Banking Reform

By Christopher Deliso
Just as the rest of Europe is embracing the new common currency, Serbia is leaving the eurozone.
As of July 1, customers must make transactions exclusively with the [...]