Mr. Alimardanov has a vast experience in the investment market. He started his career with the IFC in 1997 and worked on financial projects in various spheres of economy in the Balkans, in Southern Europe, Mexico, Russia, and Turkey; he was also on the board of directors of the CFA association in Russia. At present, Mr. Alimardanov is a key figure supporting the Ukrainian government in reforming state companies: he is a member of the Nomination Committee (affiliated to the Ukrainian Cabinet of Ministers) selecting top managers and members of directors’ boards for major state-owned companies in Ukraine; he participates actively in working groups on privatization and reforming the state and financial sector; he is on the boards of directors in several direct investment funds operating in Russia and other CIS countries.
How did you start your career at the IFC?
In Azerbaijan, back in my student years, I started working in the construction. Between 1989 and 1994, I worked at the Azerbaijani Bank for Housing and Communal Services, at the State Bank, and at the National Bank of Azerbaijan. At the same time, I continued my studies, including a year-long program at the Banking School of Turkey. After completion of the MBA program in the USA I started my career at the IFC.
At first, at the IFC Washington headquarters, I was involved in the projects for the Balkans, Turkey, and Central Europe. Then I moved to the IFC Global Department for industry and services where I had to deal with projects in different parts of the world, from Mexico to Turkey.
In 2003-2004, I began studying the iron industry market in Russia. I was really interested in what was going on in the eastern European region: it was booming. I volunteered to work there and my request was satisfied. Having moved from Washington to Moscow, I built my team and we started developing business in the sphere of industry and services in the Eastern European countries. We covered metallurgy, machine building, trade, pharmaceutics, realty, hotel business and some other branches. Later we were also entrusted with oil-and-gas industry, petrochemical sector, mining industry, as well as agriculture. Those were exciting years: the IFC invested over $2 billion in our projects. And in 2011 I was appointed the IFC regional representative for Ukraine and Belarus.
In spite of long years of work in other countries, I have always been interested in the situation in Azerbaijan. Here live my friends and relatives whom I regularly visit.
Azerbaijan is now switching over to the post-oil development model. What can you say about other countries’ experience of economic diversification?
Diversification is indeed a must. But we know from the global experience that diversification is hard to achieve in the countries whose export is focused on a single group of goods. Export is impeded by the pressure on currency, even with sovereign funds and sterilization of currency earnings. Here not only civil servants or the government machine relax but also the society as a whole - getting accustomed to accessible import and the rise in living standards.
On the other hand, there are countries who have increased their per capita income tenfold over the last 140 years, and their experience shows the following. The USA and Great Britain diversified their economies, including export. At the same time, Australia and Canada have been growing during this period as rapidly but their export remained focused on a certain group of goods.
If the task is to increase the GDP, diversification will not necessarily bring about results as fast as the society expects. But the effect of a successful diversification is more extensive as it results in a balanced economy, higher tolerance to shocks in the markets, and ‘hot’ capitals that come under favorable conditions and leave when the conditions change. A comprehensive approach is needed for setting the task and building the development strategy, and discipline is required for its implementation.
A lot of studies have been done in this area, including the ones by the World Bank. The availability of exported natural resources in the country and the ability of the society to market them enables these countries to build a sustainable economy. However, a country will be able to use this chance and transform its mineral resources into an efficient infrastructure, to make its population more educated and healthy under the following conditions: if the value of the recurrent capital (roads, ports, schools, hospitals, etc.) created in the country exceeds the value of the extracted and exported natural resources; if intangible assets and management institutions are adequately structured.
To my mind, Azerbaijan was already moving in this direction. The economic growth in the country resulted from infrastructure projects, from creating jobs in related industries and investing into capital assets. Everything was proceeding as if according to a plan: at first the focus was on the oil sector and, in particular, on getting currency receipts; then Azerbaijan started developing infrastructural projects, roads, ports, railroads; transit traffic capacity using the geographic location of the country was enhanced. Such expenditures are justified.
The country started upgrading education and healthcare systems when export earnings went down unexpectedly. Today, when we look back, one can easily say that something could have been done in a different way, but we can clearly see the planned moves. Perhaps, we profited from the management predictability, unlike economies of some other countries where management teams and approaches often changed. Now time has come to tighten the belt and revise some of the projects. At the same time, it is vital to complete the started reforms avoiding the temptation to put them off till high oil prices return.
What problems are the Ukrainian and Byelorussian banking systems facing against the backdrop of the ongoing global economic recession? How is the situation in these countries different from that in Azerbaijan?
The banking sector reflects the situation in the economy as a whole. There is also inverse dependence: some problems in the banking sector can slow down the real sector, especially if the capital market is not properly developed. Presently, the banking systems of many countries in Eastern and Central Europe and the CIS are having a hard time. One of their main problems is a high percentage of non-performing loans, and it is essential if their regulators are efficient and if banks’ shareholders are able and ready to make additional capital inflows.
In Ukraine, for instance, banks can be classified into four groups: banks with western capital (mainly European), banks with Russian capital (that prior to 2013 had been strengthening their position in Ukraine), banks with Ukrainian capital, and state banks. At present, all the banks suffer from payment failures, and western banks are no exception here though they have, as a rule, more advanced technologies and more reliable risk management systems. At the same time, western banks had more chances to increase their capital; state banks also boosted up their capital. However, 80 local-capital banks were closed or assigned for temporary management – this accounts for half or one third of the announced assets. According to some experts, the percentage of problem loans for the banks who remained in the market is 40% or even higher. This is a serious problem because the banking system of the country has not recovered since 2008 and is experiencing the crisis again.
In the Byelorussian market, we can see the domination of state banks with 70% of assets, followed by the banks connected with Russian capital (20%), and these are mostly affiliations of the Russian state banks. The Byelorussian banking system has gone through several crises since 2008. The reportable percentage of problem loans exceeds 12% though some experts give higher estimates noting that 40% of such loans are covered with reserve funds.
In Azerbaijan, whose economy has not been as dependent on banks and has not experienced such grave disturbances, it is easier to solve problems. True, Azerbaijani banks are mainly banks with local capital and limited opportunities to increase their capital. Besides, most of the banks in Azerbaijan are those with the state participation. We remember the issues with the International Bank of Azerbaijan (IBA), though they were not limited to non-performing loans. In my opinion, the problem was also that the IBA, being an influential institution, was forcing up the interest rates.
In order to avoid overheating of the economy, the banking regulator was trying to slow down this process using the reference rate; on the other hand, with the same purpose in view, sterilization of the currency earnings was performed through the State Oil Fund of Azerbaijan (SOFAZ). But the situation was aggravated by the fact that the IBA kept its deposit interest rates as high as 20% (both for manat and foreign currency deposits), which led to unhealthy competition in the market and tightened pressure on the overall rate size. The availability of currency receipts from exporting energy products does not mean that the funds should be thrown into the market and used to finance all the projects without exception. Basing on the savings of business entities and market risks, it is the market which defines the cost of capital, and this value was set too high because of the IBA’s unbalanced activity which involved funding non-marketed projects.
Now we understand all these things, but during the period of high rates, both individual customers and financial institutions that worked with high-risk investments yielded to the temptation to use them.
As you know, Azerbaijan has two state-participation banks. According to the government’s plans, the International Bank will be privatized next year. Is it really worthwhile to privatize it in the current complicated economic situation? What is the usual strategy of regulators in such cases in the countries where you are working now?
Theoretically, a bank should be transferred to private ownership because a private investor would be more efficient. But I think that the state should take a broader approach: the state as a bank owner should set goals for its bank, which can include encouragement of export operations, temporary support to some of the infrastructure projects, servicing people living in far-off regions before commercial banks come there, etc.
Privatization of state banks is being discussed in many countries, but privatization takes a long time. Today it is much more difficult to attract investors than it was in the early 2000s when they expanded, often unreasonably, into eastern markets. If we take Ukraine and Belarus, they were of particular interest to western and Russian banks. Now a bank should be prepared properly to gain a good bargain; its corporate management should be reformed to arouse the interest of potential ‘buyers’. They take action to this end in Ukraine, and international financial agencies, including the IFA, participate in this work, consulting and facilitating it wherever it is possible. In Belarus where the overwhelming majority of assets in the banking market belong to state banks, unlike Azerbaijan and Ukraine, these processes are already under way.
Does it mean that the IFC is ready to participate in privatization of state banks?
Even if we participate in the equities of a state-owned or a private bank we are always a minority stockholder. In other words, we are never the final investor who will eventually privatize the bank. Banks should be privatized by a banking institution having resources and an adequate managerial system. What can we do, for our part? We can accelerate the process by means of rendering consulting services, adjusting the work of internal systems, including corporate management; performing other programs – this is what we are doing today in Ukraine and Belarus. If we think that it would be expedient for us to acquire a share in the capital, too, we do it together with the strategic investor. Or, we can be the first to acquire a share and hold it but only before such an investor appears. By acquiring a share in the capital we add confidence both to the state (which is a shareholder at the moment) and to the investor. All the above does not mean that we are going to take part in each privatization process but we are ready to consider investments of this kind. We start with studying the bank, we provide consulting and sometimes we help with trade financing. The next stage will be opening lines of credit and, after that, acquiring a share (if we take such a decision).
Considering the practicability of privatization in Azerbaijan, the state, being the owner of the bank, should have a clear vision of the bank’s tasks. There is no easy formula suitable for everyone but one thing is clear: the model of a completely universal state bank that would dominate and work in all market segments can be seen more and more seldom in the world practice.
Today the Azerbaijani banking sector is going through tough times. Taking into account your experience in helping banks with problem loans, what could you recommend to our banks? Which schemes are more efficient in solving problems of late payments?
At present, various instruments are being created to this end in Ukraine. One of them is extrajudicial debt restructuring for enterprises. In June 2016, the appropriate law was adopted and the IFC had participated in drafting this law. The law is aimed at preserving viable enterprises and jobs and the early recovery of the financial and real sectors of the economy.
The issue of ‘bad loans’ in Ukraine is not new. We have witnessed several attempts to solve it but the solution requires the appropriate legislature and favorable environment. The IFC has cooperated closely with both the government and the regulator to improve the environment. Nevertheless, the current percentage of such loans is so high that it is hardly possible to solve the problem only by means of the local capital. There have been cases in the world practice when the state cooperated with foreign investors. Specialized institutions are being founded in Belarus, too.
As for Azerbaijan, it is more flexible – because of the size of its economy and more stable public finance: the state has already helped to solve the issue of problem loans, in particular, with the IBA and Bank Standard. Azerbaijan will probably need the help of foreign experts who have experience of working with ‘bad’ loans. Ireland and the USA have succeeded in dealing with this issue.
When such loans are transferred to specialized structures for handling, banks release their resources, which enables them to return to credit activities. Among other problems hindering credit activities I can mention predictability of the currency rate and the regulatory environment from the point of view of working with pledges. All these parameters should be adjusted to enhance the efficiency of credit provision.
As far as I know, all the above has been discussed in Azerbaijan and I hope that the country will find a way to work with ‘bad’ loans.
When you mentioned the state’s role in solving this problem did you mean its participation in founding a specialized structure?
A specialized structure created for managing assets offers a lot of advantages. First, it allows to concentrate limited resources and expertise in a single agency. Second, it uses consistent and standard methods of handling assets. Third, it gives a chance to restructure economy in a more orderly way, if needed. There also are some other benefits. However, everything has to be paid for: the banks that benefitted from such operations should have very stiff terms. They should be under tight control and follow strict requirements like it was done in the USA after the mortgage crisis.
To what extent - in the world practice - can the cost of the redeemed problem loans differ from their real value?
It depends on the case, on how advanced the problem is, on the market environment that is a function of numerous factors. Again, if we speak about Ukraine, its problems originated back in 2008 but now the asset evaluation is influenced by totally different reasons. So far it is hard to predict how the developing markets will behave from the point of view of capital movements; there is a risk that in the medium term the cost of capital for developing markets will grow. This may also influence the assessment of assets. The most important thing today is to face up to reality though it can be unpleasant for bank owners. But if we try to avoid solving this problem it will only get worse.
In Azerbaijan they hope subconsciously for the increase of oil prices but one should not rely on it. Today Azerbaijani oil and gas industry accounts for 90% of the country’s export. In some countries, economy is dependent on several groups of goods but in Azerbaijan it is just one group. Azerbaijan lived through the time when the oil price exceeded $100 per barrel. However, before 1970, oil cost - measured in the current prices – was around $20 per barrel. True, in the 80ies prices leaped up to $100, then they fell back to $30-15. But the average price level was around $20. That is why the price of $130-140 per barrel is considered abnormal and we should not count on it. I admit that the oil price can somewhat rise and settle at a higher level but it is unlikely to reach the old records.
What is the IFC policy regarding the transition to financing in local currency? This could give access to long-term funding for more companies.
As a rule, borrowers suddenly remember about the local currency during crises. Before the crisis, in Azerbaijan, unlike some other countries, credit terms were actually the same for loans in local and foreign currencies. In Belarus and Ukraine credit facilities in foreign currencies were less expensive than in their respective local currencies. Companies took advantage of this, making loans and investing in long-term projects. It does work if a project depends on export receipts, like in the case of Ukrainian agro-industry; but if enterprises operate in the domestic market or, like Byelorussian companies, sell their products to Russia for rubles but are funded in US dollars or in euros, they are certainly exposed to risks. Everybody remembers about risks when he gets his fingers burnt.
Today a lot of companies are not willing to be financed in a foreign currency in spite of a lower interest rate because they have learned a good lesson. To my mind, in Azerbaijan the scope of dollar funding was not as high as in Ukraine and Belarus, but Azerbaijan had other problems: lending to individuals was allowed in a foreign currency and banks themselves depended on hard currency deposits. Having lost trust in the local currency that had been stable for years but suddenly fell in price, customers started converting their savings to dollars, and now they account for 80% of all savings. This endangers banks since their assets depend on borrowers’ income in the local currency.
That is why funding in the local currency is a priority for the countries where the IFC works. We support this as much as we can but we should also take into account the reality. To be able to provide financing in the local currency we have to raise funds in this currency. If we want to issue bonds into local markets, we have to be sure that the markets are ready for this: there should be investors willing to purchase these financial tools. Today we do not have access to local currency funding either in Ukraine or in Belarus or in Azerbaijan. But I think that before the latest crisis, Azerbaijan was ready to start local-currency financing including bond offering. So, when things straighten out, funding in local currency could become one of the priorities and this market will require developing.
Does the fall of the national currencies affect in any way the IFC operations in its partner countries and the amount of your investments in these countries?
In the countries where we provide foreign currency financing (except the cases where we acquire equities) we study the forecast for the currency rate changing. If we see that the rate is unstable and may continue falling we have to make sure there is no big discrepancy between revenues and expenses, as well as between assets and liabilities of the companies with regard to currency risks. Ukrainian agricultural and IT companies are operating actively in export markets. As for the credit users who work mainly in the local market but are financed in a foreign currency, we must study carefully the forecasts for the currency rate leaps and check the sustainability of these enterprises. These factors influence our choice of the industries and companies we work with.
You participate in boards of directors of several direct investment foundations operating in Russia and the CIS countries. In the current economic situation, how much are these funds interested in direct investments from the point of view of recoupment? Which spheres are the most attractive for investments?
All the funds where I am involved are regional, though the bulk of their investments are made in Russia. I will tell you about the direct investment funds operating in the region. Today investments are in great demand in Ukraine. The IFC participates in such funds as a limited partner. We have already invested in private equity funds and we are ready for new proposals. As a rule, such funds are involved with information technologies. In Ukraine and Belarus, as well as in Russia, the IFC successfully invested directly or via investment funds into such famous companies as Yandex or EPAM. During the rapid development of the consumer goods sector, the funds were actively investing in it. Now the list of the most investment-attractive industries is changing. Information technologies remain a promising sector; in Ukraine they also consider energy efficiency a good investment field as the Ukrainian economy has been energy-intensive for many years. The renewable energy industry also seems lucrative for several reasons including the attractive pricing policy.
Both in Azerbaijan and in Ukraine the agriculture is on the rise. Hopefully, we will soon see direct investment funds ready to participate in the agricultural industry of these countries.
The world economy is in crisis, and the fall of oil prices affects oil countries including Azerbaijan. How do you think it is possible to come out of the recession with minimum losses? Which measures would be more efficient? Is it worthwhile to expand foreign borrowings? Is it expedient to obtain credits for structural reforms?
Unlike Belarus and Ukraine where the amount of external foreign loans is very high (in Ukraine, even after the foreign loan restructuring, it is still quite substantial), Azerbaijan has an advantage of a certain backlog. I think the market will be interested in financing Azerbaijan should it turn out to be necessary.
True, when the external debt has been growing for several years, it is vital to use the borrowed funds both to cover the current needs and to invest into fixed assets. Otherwise the loans will be spent and even if the living standards rise after that, sources for loan repayment will not emerge. In some countries, according to the law, borrowed funds can only be used for investment projects and recession-fighting but never for the current needs. Actually, building up the country’s external debt means shifting the current problems onto the future government or even future generations. But if the loan is used efficiently the coming generations will also benefit from it.
In this case it would be even wiser to invite direct external investments which are, as a rule, long-term and bring new know-hows and new technologies with them. I would prefer this approach. If there is a need for external resources it would be good to have a program for attracting external investors. But you should realize that you compete for external capital with your neighbors in the region where there are countries with receptive economy and big market, like Russia or Turkey. That is why one should create his niche and set the goal, then it will become possible to attract foreign investments, which Azerbaijan successfully does in its petroleum industry.
You have shared your vision of the situation in the banking sectors and in the economies of the countries where you work, as well as your opinion on the current situation in Azerbaijan. And how do you spend your spare time?
Like many Azerbaijanis, I love playing soccer but now I more often play ball with my children than practice ‘big soccer’ like I did before. I have done swimming all my life, including swimming in outdoor pools, and I still enjoy it. And now, together with my son, I am learning to play the guitar.
Thank you for your interesting interview.
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