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. Last Updated: 07/27/2016

Duma Gives Nod to Russo-Kazakh Bank

The State Duma on Friday ratified an agreement to form a Eurasian Bank for Development to finance projects in Russia and Kazakhstan.

Russia will provide $1 billion in capital, with Kazakhstan chipping in another $500 million. Under an agreement drawn up in January in Kazakhstan, the bank will finance large projects in such sectors as energy, transport and manufacturing.

Al Breach, a Russia strategist at UBS, said it was the "logical next step" for Russia and Kazakhstan to work together to improve their infrastructure. "They have amazing balance sheets, and now they want to be bankers," Breach said. "It's a sign of the times."

"There is a need for project finance, particularly in Russia and Kazakhstan, because commercial banks are too small," said Richard Hainsworth, CEO of RusRating. "The only other way to finance such projects would be through the big global commercial banks, which has implications for national pride and goals."

As long as such development banks use their capital to fund financially sound projects, they tend to succeed, experts say. The problem comes when powerful politicians divert the funds for "pork-barrel" projects that don't end up making money.

"Development banks in the world are not particularly successful; their track record has been quite poor," Hainsworth said, adding that the European Bank for Reconstruction and Development was an exception to this rule.

The Duma's approval of the Eurasian bank came on the eve of a meeting Sunday and Monday of the European Bank for Reconstruction and Development, which recently said it would concentrate less on Eastern Europe and more on Russia and the CIS.

The EBRD has said the bank would increase its financing of Russian projects from 26 percent of its total in 2005 to an estimated 41 percent of the bank's total financing in 2010. Recent EBRD projects include a billboard-advertising company in Russia and a plastic container-top factory in Almaty, Kazakhstan. The EBRD had no immediate comment on the competing Eurasian bank.

The creation of the Eurasian Bank for Development is the most significant step taken by the Eurasian Economic Community, which includes Belarus, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and Uzbekistan. Those countries will also have the option of becoming shareholders of the Eurasian bank.

 In separate news Friday, Moody's said it was considering upgrading the credit rating of the Development Bank of Kazakhstan. Currently, the bank has a rating of Baa3.