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. Last Updated: 07/27/2016

Flush EBRD Faces Challenge in Russia

LONDON -- The European Bank for Reconstruction and Development can congratulate itself at its annual meeting in Sofia this weekend for having slashed its cost base and chiselled more cash out of its shareholders.


"There has been a great transformation of the bank in the last two or three years. It is now a highly cost-effective, focused organization," said Robert Graham-Harrison Britain's independent director at the bank.


The fifth annual meeting, which lasts four days, will see the usually tight-fisted governments among the EBRD's 59 shareholders rubber-stamp an agreement to double the bank's capital to 20 billion ecu ($25 billion), while other development banks like the World Bank are mired in the political machinations of the U.S. budget row.


The EBRD has agreed that the ratio of paid-in capital to authorized share capital will be cut to 22.5 percent from 30 percent, a key concession to the United States, which means that governments will pay in less cash over a longer period.


The bank, which reported its first profit in 1995, needs the extra cash to keep on investing and without agreement would have run out of money within two years because of the time it takes for investments to mature.


By 1995, the London-based development bank had committed 7.85 billion ecu to some 368 ventures in the 25 countries which form its bailiwick and had been transformed by its president Jacques de Laroisiere into a market-oriented organization.


Alongside the success of the EBRD, some countries in Central and Eastern Europe are showing signs of recovering from the shock of the bitter medicine administered after the communist bloc disintegrated in 1990.


Poland's economy is growing at 6 percent a year and the Czech economy at 4 percent, reducing the need for project financing, leaving the much more severe problems of the former Soviet Union as the main issue for the bank.


"The question of graduation is one that is now emerging in discussions," said Austrian director Heiner Luschin. "To what extent do countries like the Czech Republic, who have joined the Organization for Economic Cooperation and Development and may join the European Union, deserve further assistance from the EBRD?"


He sees the main problem as what to do with the bank's additional resources and says that as the bank expands its operations in the former Soviet republics it must be flexible on its rule that at least 60 percent of the bank's activities must be in the private sector.


"There is a shift to the east, but the EBRD should not lose sight of the more developed transition economies. We do not want to be forgotten totally," said Peter Bod, who is director for Hungary, the Czech Republic, Slovakia and Croatia.


The next key policy areas for the 25 countries of Eastern Europe, just as in the developed world, are the difficult choices over spending on health care and social services.


The EBRD's chief economist Nicholas Stern urges countries to "reduce budgetary outlays on social security and health, which absorb a large share of total expenditure," yet at the same time health care standards are sliding, with Russians forecast to have an average lifespan of 58.1 years by the end of the decade compared with 70 in pre-reform 1986.