Development bank turns towards Russia

By Stewart Fleming

Date: 07/10/04

THE job of Jean Lemierre, the president of the London-based European Bank for Reconstruction and Development (EBRD), has been getting tougher over the past few months.

It is not just that eight countries which have been home to some of the bank's best clients have now joined the EU and are no longer the main focus of EBRD's strategy for future growth.

Worse, the country that has replaced them as the EBRD's top priority is Russia, and Russia is becoming a more difficult place in which to do business.

Only last week, it emerged that worries about the investment climate in Russia had led Société Générale, the French bank, and its Dutch rival ING, to withdraw at the last minute from a loan to oil company TNK-BP. HSBC bank also pulled out of a loan to Norilsk Nickel.

In Washington this week the Institute for International Finance, the global trade association for financial institutions, warned that foreign investors were losing confidence because of "the [Russian] government's heavy handed action in seizing [oil company] Yukos' assets for non-payment of taxes".

Lemierre, 54, a former head of the French treasury, is undaunted. "There are always going to be ups and downs," he says. "I think Russia is helped by the very high price of oil. This should be an incentive for them to move forward with reforms quickly and not to relax. Whether they do, this is the key question."

The EBRD's shareholders consist of more than 60 governments around the world.

Although they include the US, the bank's genes are European. The EBRD was established in 1991 to help finance the transition of the former communist countries to market-based democracies.

Since then it has lent €24 billion in projects costing €76bn, making it the biggest single lender in these states.

But now that eight of the former communist countries are EU members, the EBRD is refocusing its operations.

"We are shifting our business more from central Europe to Russia, the south-east of Europe - countries in the Balkans and Bulgaria and Romania which are potential EU members - but also to Ukraine, the Caucasus, and central Asian states like Turkmenistan and Tajikistan," says Lemierre.

The implications of this shift are much more than geographic. In the former accession states, the promise of EU membership helped to drive the transition process: no reform, no accession. This is not the case with most of the countries that are now at the top of the EBRD's list of priorities.

Where the carrot of EU membership is missing, says Lemierre, other ways must be found to encourage these nations on their journey to becoming peaceful capitalist democracies. "One of the challenges of the new [European] Commission is to build new relationships, new partnerships," he says.

The EU is starting to face up to the foreign policy challenges it must address. The EBRD, with a mandate that stretches deep into central Asia, is one of the players that will help to shape the Union's emerging foreign policy.

Its role is complicated, however, by a mundane requirement: it is expected to make money.

"There is no doubt that we are now facing a period in which we are going to have to take on higher risks if we are to fulfil our role of promoting transition in the former communist countries through supporting private enterprise," Lemierre says.

Where risk is concerned, Russia has a track record with the EBRD. It was largely as a result of the 1998 Russian debt crisis - and the simplistic transition strategy that the West encouraged which led up to it - that the EBRD plunged into losses of €262 million in that year.

But now, with the EBRD back with a profit of €378m in 2003 and Russia enjoying an economic recovery, new doubts are surfacing.

As European Voice reported last week, EU ambassadors have agreed to freeze closer ties with Russia amid doubts about Vladimir Putin's authoritarianism.

The government's pursuit of the Yukos oil company and its former boss Mikhail Khodorkovsky is perceived to be a symptom of this authoritarianism, which is damaging to a transition economy that has already had difficulty attracting the foreign investment outside the oil sector that it so badly needs.

The fallout from the terrorist attack on Beslan school in North Ossetia - and the threat of reprisals against Chechnya - is also likely to damage EU-Russia relations.

Speaking before the Beslan attack, Lemierre was anxious not to be drawn into discussing sensitive political issues. But he makes it clear that the EBRD is not rethinking its approach.

"It is our mission, this is why the bank was created, to do a difficult job," he says.

Lemierre says that in pursuit of its goals of promoting the market economy and democracy, the EBRD is trying to be as active as possible in the regions of Russia. "You don't develop Russia if you invest only in Moscow and St Petersburg," he says. It is also focusing more on domestic investors, rather than the foreign investors who were the priority in the first years of its operation.

"You see in the region the beginning of a new generation of entrepreneurs and they have to be supported, this is very important from a political point of view," he maintains.

It is critical too, he argues, to encourage the diversification of an economy which is far too commodity based. "When you look at our investments, which are mainly in general industry, in the automotive sector, agribusiness, white goods, cement, transport, this is what we do."

But, Lemierre stresses, Russia must take the opportunity presented by a "rather good macroeconomic situation and a budget in surplus" to press ahead with reforms.

"If Russia wants to double its gross domestic product by 2010, which is the target President Putin has set, it must undertake more reforms - of the judiciary system, for example, and of the banking sector."

• Stewart Fleming is a former US editor of the Financial Times and now a freelance journalist in Brussels.

After the 2004 enlargement of the EU, the London-based European Bank for Reconstruction and Development (EBRD), has refocused on Russia as its top priority.

EBRD: Countries & Sectors: The EBRD and Russia http://www.ebrd.com/pages/country/russia.shtml

Website: European Bank for Reconstruction and Development (EBRD) http://www.ebrd.com/

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