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Afreximbank --Africa's bridge to Russia

Afreximbank's Annual Meetings were held in Moscow this time around, the second time the organisation has staged its summit outside Africa. The bank, which won the Bank of the Year at this year's African Banker Awards, increasingly sees itself as a major facilitator of trade and investment on the continent, rather than simply providing liquidity around traditional trade finance services.

Afreximbank's annual summit in Moscow, Russia in June was one of its most successful meetings to date. Russia, through the state-owned Russia Export Centre, which became a shareholder of the bank in December 2017, had invited it to host its summit there.

The Russians, who have increased their overtures to the continent recently, used the occasion to make a statement of intent. With an official Russia-Africa Summit due in October, the bank now seems to be a partner of choice through which to drive private sector business deals.

Afreximbank has been mandated to organise the Business Forum that will take place on the sidelines of the summit, and according to some of the bank's senior personnel, over $5bn of deals are likely to be announced then.

Trade between Russia and Africa still lags behind that with other BRIC countries India and China, as well as trade with historical partners such as the EU and USA. Nevertheless, both imports and exports to sub-Saharan Africa between 2008-2018 increased by over 140%. In 2018, Russia's exports to Africa rose 84% to $17.4bn. To put it into context, China's trade was $10bn at the turn of the century and today is over ten times that of Russia. Sergey Lavrov, Minister of Foreign Affairs, stated that Russia's investments in Africa had increased to reach $20bn in 2018. It is involved across a number of sectors, including energy, oil and gas and mining.

One of Russia's closest trading partners is Egypt, where Rosatom, the biggest exporter of nuclear power in the world, is helping the government to develop its nuclear infrastructure, building reactors and supplying nuclear fuel. The state-owned nuclear company is said to be working in Zambia and Rwanda.

It had agreed to build a power plant in South Africa, during the administration of former President Jacob Zuma, but the contract was cancelled as the costs of building it were considered too prohibitive, with Eskom undergoing severe financial constraints and needing government bail-outs.

In the oil and gas sector, both Rosneft and Lukoil are developing oil and gas fields and other projects across the continent. Russian companies are also actively involved in numerous mining projects including in bauxite, platinum and nickel. They are helping build a logistics hub in Eritrea and developing export processing zones in Egypt.

The Russians seem to be adopting a G2G model whilst promoting their expertise in a number of sectors through some of their bigger companies in strategic industries.

Russia's GDP at around $1.6tn, and a per capita income of $11,000, makes it an upper middle-income country but it faces several challenges that are similar to those of Africa -- for example, being over-reliant on the extractive sector (oil, gas and mining). The emphasis today is on diversifying its economy, and there is a determination to strengthen South-South ties.

The meetings were notable for the high level of participation from both Russia and Africa. Aside from Lavrov, Russia's Prime Minister, Dmitry Medvedev attended.

A number of private sector leaders such as Ylias Akbaraly of Sipromad, Agostinho Kapaia of the Opaia group from Angola and Samuel Dossou-Aworet from Benin, founder of Petrolin, were there. On the Russian side, some heavy hitters including Dmitry Mazepin, chairman of Uralchem, Kirill Komarov from Rusaltom, and Igor Shuvalov, a close adviser to President Putin and now chairman of the VEB, the national development bank, under which the Export Centre operates, were present.

Turning point for bank

The bank has substantially grown its portfolio and widened its mandate over the past few years. A turning point came during the financial crisis of 2008/9 when, alongside the AfDB, it effectively became a lender of last resort, plugging the gap left by commercial banks and the lack of liquidity in the market.

Over the past three years, as well as providing finance solutions across its different activities, the bank has increasing seen its role as an institution that needs to deal with the inherent constraints holding back trade: information asymmetry and the capacity to transact between African countries.

It is with this in mind that it launched the Intra- African Trade Fair last year (IATF) and a new platform called Mansa, which is a repository of certified data to help connect buyers and sellers, whilst providing a one- stop-shop for fulfilling client due diligence.

The bank is also launching a clearing platform -- the Pan-African Payment Settlement System (PAPSS) -- that will help companies from different African countries transact and settle in local currencies, rather than having to make recourse to the euro or dollars.

The president of the bank, Professor Benedict Oramah, estimated that the platform could save the continent more than $5bn in payment transaction costs per annum and formalise a significant proportion of the $50bn of informal intra-African trade. Last year the bank also launched a Project Preparation Facility, intended to fund the earlier stages of infrastructure development, often considered the riskier but essential stage of a project to bring it to bankability. It also launched the Fund for Export Development in Africa (FEDA), a PE/VC-like vehicle to provide equity capital in high-growth businesses on the continent across strategic sectors.

And two weeks after the Moscow meetings, in Niameyon the sidelines of the AU Extraordinary Summit, the bank announced a $1bn facility to enable countries to adjust to sudden and significant tariff revenue losses that may occur as a result of the implementation of the African Continental Free Trade Agreement (AfCFTA).

These announcements were all made against the background of a solid financial performance for the institution in 2018. Announcing its results, the bank said it had grown its revenues by 24% to $806m and net income grew 26% to $276m. Its shareholder funds had also increased, by 23% to $2.6bn. The board announced a dividend pay-out of $69m to its shareholders.

Prof. Chang calls for smart protectionism

Prof. Chang, who teaches at Cambridge University, is originally from South Korea. He attributes the growth of the strong industrial sector (shipping, heavy industry, manufacturing and telecoms) in his native country partly to smart protectionism.

While he is a proponent of multilateralism and free trade, he counters the WTO principle that free trade is best for all countries under all circumstances.

He argues that free trade, in the long run, amongst countries at different levels of development is detrimental for the lesser developed countries because it prevents the emergence of high productivity and high technology industries.

Using Hyundai as an example, he explained that tariffs were used in South Korea to try and level the playing field and protect infant industries. By 1969, Hyundai, which had been founded in 1967, was producing 2,000 cars a year, compared to General Motors' 4.4m in the US.

Had the Korean government fully liberalised and opened up the economy to car imports, he argues, Hyundai would have been wiped out -- it was "a glorified garage" as he put it, competing against an advanced behemoth.

High tariffs, subsidies, R&D support, and strict quotas helped make Hyundai what it is today, the 5th-biggest global car manufacturer. This was the model Korea used for its petrochemicals, shipbuilding, electronics, steel, semi-conductors and other industries.

In an impassioned and entertaining address, he argued that all developed countries have used, at some point, some form of protectionism to nurture their young industries.

Japan, he says, had the most restrictive FDI regime in the world until the 1980s and this is the case with many of the developed countries, which had ownership ceilings, requirements on technology transfer and local content.

The UK, during the industrial revolution of the 19th century, had industrial tariffs averaging 50%. The US had some of the most stringent bans and quotas throughout the 19th and early 20th centuries.

All developed countries have at some point in their history adopted tariffs to protect industries, and at a much higher rate than the average rate adopted today by developing countries, which is around 10%. Infant industry protection, as a matter of fact, was a term invented by Alexander Hamilton, the Treasury Secretary and one of the founding fathers of the United States.

No such thing as a level playing field

Prof. Chang's thesis centres on the argument that the concept of a 'level playing field' in free trade is inaccurate and a fallacy. It simply cannot be true because countries are at a different level of development and as such, require different treatments adapted totheirneeds."Notaspecialtreatment,"hewasquicktoadd, but a different one, a form of asymmetric protectionism to allow countries to catch up.

It should be said that many in academia have been critical of Prof. Chang for oversimplifying the economic arguments for the growth of Western countries and for ignoring other key factors that undoubtedly contributed to their economic dominance.

Irwin Douglas, Professor of Economics at Dartmouth College, reviewing Prof. Chang's seminal book Kicking Away the Ladder argues that correlation does not equal causation, and that America's economic success was driven by a multitude of factors, many of them much more important than protectionism. These included stable government; widely distributed land ownership; functioning political institutions; a large internal market with free trade of goods and free movement of labour. And it is these favourable conditions that advanced global competitiveness.

While in the case of Korea, a well-defined industrial policy that assisted local companies undoubtedly did help, so did an educated and skilled workforce and a highly competitive environment that forced these local companies to become fantastically efficient.

Smart protectionism is a valuable tool, but one that must be used in conjunction with a well-structured and functioning ecosystem.

Between the mid-1990s and today, South- South trade has risen from 42% to 57% of world trade. Excluding China, it has risen from 35% to 42% of world trade in the last two decades.

Russia faces several challenges similar to those of Africa -- for example, being over-reliant on the extractive sector (oil, gas and mining). The emphasis today is on diversifying its economy, and there is a determination to develop South-South ties.

Leveraging DFIs and ECAs for economic transformation

In a session with the heads of development finance institutions (DFIs) and export credit agencies (ECAs) it was agreed that there needed to be more effective collaboration between the different development banks, ECAs and similar institutions, especially to be able to attract more international capital to projects across the continent. There was a general consensus that to really make a dent in the infrastructure and other funding gaps, the capital lies not with governments but with the private sector. If anything, as Jean-Louis Ekra, former President of Afreximbank, pointed out, one of the biggest challenge that DFIs will have to grapple with is a looming debt crisis, driven by unsustainable debt burdens.

To mobilise international capital - and the pool of capital is very deep, in the trillion of dollars, much of it attracting low yields - the solution is to re-risk the continent and increase the pipeline of bankable projects. Pierre Guislain, the AfDB's Vice-President for the Private Sector, Infrastructure and Industrialisation, called for the different development institutions to be more creative to originate de-risking instruments, especially as African risk is the highest and the needs are the highest. Hani Sonbol, CEO of the International Islamic Trade Finance Corporation, an arm of the Islamic Development Bank, argued that his institution has been doing business on the continent for many years, and it's not a question of the continent being more risky but rather, understanding how to manage risk across the different countries.

Nikita Gusakov, CEO of EXIAR, the Russian Agency for Export Credit and Investment, stated that the role of an ECA, more than financing, is to create flow. And once you create that 'trade and deal flow', built on creating demand from the African side and awareness from the Russian side, you then create the confidence needed for companies to invest. And given that many countries are today over- leveraged, what is really needed is for the private sector to come in with equity investment.

But again, there is the need to expand the pie of bankable projects. Guislain noted one success story of collaboration, whereby the AfDB and Exim Bank of India had set up a development company dedicated to developing and strengthening the pipeline of bankable projects.

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Publication:African Banker
Geographic Code:60SUB
Date:Aug 5, 2019
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