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. Last Updated: 07/27/2016

EBRD to Post $100M Loss

CAMBRIDGE, Massachusetts -- The EBRD will post a loss of more than $100 million later this year largely because of unsuccessful investments in Russia, a top official with the bank said.

"We made a loss in 1998, a fairly sizable loss, largely due to provisions we have taken on our Russian investments," said Charles Frank, first vice president of the European Bank for Reconstruction and Development, at an annual conference on investing in Russia hosted by Harvard University. "This is our first loss in six years."

In an interview after his speech, Frank said the international loss was still being calculated exactly but would be more than $100 million. An EBRD spokeswoman in London confirmed that a 1998 loss would eventually be reported, probably in March, but said exact figures were not yet available.

A good part of the losses in Russia hit the bank's $500 million financial sector portfolio, Frank said. That portfolio included shareholdings in failed Russian banks Tokobank and Inkombank and credit lines of about $100 million to Uneximbank and nearly as much to SBS-Agro, Neil Parison, head of the EBRD's Moscow mission, said in a telephone interview.

Parison said the EBRD was counting on getting back much of the credit lines to Uneximbank and SBS-Agro but was less optimistic about getting much out of Tokobank or Inkombank.

The EBRD was set up in 1990 by Western governments to help Eastern Europe and the republics of the former Soviet Union finance the transition from communism.

Frank and other EBRD officials interviewed said the loss would do nothing to deter the bank from continuing with that mission, noting that since the Aug. 17 treasury bill default and ruble devaluation, the EBRD has approved investments in the Radisson Nevsky Hotel in St. Petersburg, in a Vladivostok telecommunications company called NTC and in Permtex, an oil production facility in Perm.

"We will continue to invest in Russia," Frank said. "But quite frankly, our first priority will be to protect our existing investments and to work with our existing clients. We will be rather cautious and careful in taking on any new clients or investments."

Parison said the 1998 losses were "not good, but not a disaster. It's quite early days for [judging the success of the EBRD] portfolio."

About 70 percent of the EBRD's 3.5 billion euros (about $3.02 billion) of investment in Russia are long-term bets on real industry - from the Magnitogorsk Metal Works to the GAZ car factory in Nizhny Novgorod to the Vienna beer brewery in St. Petersburg. Parson said the EBRD plans to hold those investments for at least five years, and hopes that 1998 losses will be recouped over that time.

The EBRD says it will also resuscitate one of its most successful projects of recent years, its $350 million Russia Small Business Fund, which provides micro- and small loans to small and medium-sized businesses.

The EBRD farmed out the small business loans through about 20 Russian commercial banks, partly to cultivate bank enthusiasm and expertise in such lending. With the banking system's collapse, however, the smallbusiness fund has been limited to Sberbank and a handful of surviving regional banks.

To provide a healthier home for the program, Parison said the EBRD is planning to launch its own micro-lending bank. That would have the added advantage of providing jobs to laid-off commercial bankers whom the EBRD had invested in to teach them business lending.

"We're not just trying to protect financial capital, we're trying to protect human capital as well," Parison said.

Frank said the EBRD was particularly worried about the Russian banking sector, which remains largely in ruins. Most banks had set aside huge chunks of their reserves in government treasury bills that are now practically worthless.

The Primakov government has put forward a banking sector revival and restructuring program, but Frank said it was not energetic enough.

"Unfortunately, in far too many instances, chaos reigns," he said. "Shareholders and management strip assets from the bankrupt estate, leaving creditors and depositors to fight over a near empty shell."

The EBRD is working with other development agencies - including the International Monetary Fund and the World Bank - to coordinate aid programs for the banking sector's restructuring. Frank said the EBRD had proposed to Primakov the creation of a high-level task force on reviving the banking sector.

"The EBRD is an equity investor and lender in a number of banks that are either insolvent or undercapitalized," Frank said. "We're going to play a very active role in the restructuring of these institutions."

Tokobank remains a special case, however: as a condition of supporting active restructuring of that bankrupted institution, Frank said the EBRD would expect to be recognized not as a shareholder but as a creditor.

The EBRD, a minority shareholder, invested in Tokobank under a contract that guaranteed it the option to give its stock back to the bank at any point in return for a set amount of money. When the EBRD tried to exercise this so-called "put" in July, Tokobank refused to honor it - while Tokobank's already-jittery creditors reacted in surprised anger at the sight of the EBRD jockeying to change from being an owner of their debtor to one of their colleagues.

Frank conceded that many Tokobank creditors apparently did not know about the EBRD's put option when they loaned the bank money.

"Although the disclosure of information about any company is not the responsibility of its individual shareholders such as the EBRD, we do regret that there was not fuller disclosure of the EBRD's put in the financial statements of Tokobank," he said.