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. Last Updated: 07/27/2016

EBRD Sets New Standards For Loans

A lack of legal protections and of government and corporate transparency threaten to hobble Russia’s long-term economic prospects, says the EBRD in a grim and detailed new assessment of the bank’s undertakings here.

The 58-page report, "Strategy for the Russian Federation," was released on Tuesday, a week after it was approved by the board of the European Bank for Reconstruction and Development. Among other things, the report is critical of past EBRD investments in Russia, and it sets harsher new standards for future lending.

The EBRD was founded in 1991 by European governments that hoped to help the post-Soviet bloc find its way both to free markets and free democracies. It has for years been Russia’s No. 1 private investor, having since its founding sunk more than 2.4 billion euros ($2.1 billion) into investments here, from truck factories to lumber yards to banks.

This year, the bank again will be Russia’s leading private investor, with plans to invest 650 million to 750 million euros ($565 million to $651 million). That is up dramatically from the 217 million euros ($188 million) in new commitments the bank took on in post-ruble crash 1999.

On Monday the EBRD’s new president, Jean Lemierre, in his first official visit to Russia, signed off on three deals worth a total of 43.8 million euros ($38 million) — including a 17.3 million euro ($15 million) loan to the Chelyabinsk Electrolytic plant that represented the bank’s first dip back into industrial investment since the August 1998 crash.

Lemierre offered a carrot-and-stick mix of upbeat talk about Russia and dour admonitions to do better. "My first impression is that the investment climate is improving," he said. "The Russian authorities share the same challenges and same priorities."

But he urged them to follow through on their promises — something the report released Tuesday notes has not happened often enough in the past.

The EBRD’s review, available at www.ebrd.com, is of interest not just because of what it says about future EBRD activities. It will also be studied by other private investors pondering Russia.

The report looks back largely on an era run by Horst Köhler, the bank’s president until this summer — when he accepted a promotion to run the far larger International Monetary Fund.

At the IMF, Köhler has brought in a new wariness toward lending that contrasts with the Kremlin-friendly reign of his predecessor, Michel Camdessus. To judge from the draft federal budget for 2001 the Cabinet has submitted to parliament, the Russian government is not expecting any new IMF loans or lenience on old ones this year. In fact, that budget devotes a fourth of all revenues to paying off foreign debts.

Back at the EBRD, meanwhile, Köhler’s successor Lemierre has adopted an only slightly less wary line.

"We have to be honest," Lemierre said this week in Moscow. "Many people thought [laying the groundwork for economic prosperity in Russia] could be done easier and more quickly."

Lemierre reaffirmed his bank’s commitment to promote market reforms and praised the government’s efforts to put the national economic house in order. But the report offers a string of harsh statements about the state of affairs in this particular eighth of the globe.

"The Russian state bureaucracy is still at an early stage of its adjustment to the needs of a modern market-oriented economy," the report opines.

It argues that the agricultural sector has been untouched by reform, the banking sector remains a post-devaluation mess, and that good policy for economic development has been hamstrung by political lobbying.

As to the EBRD’s own losses in Russia, many of them in the wake of the 1998 meltdown, these resulted either because they represented investments that had been "exposed to the poor management of the macroeconomy" or victim of "questionable business standards."

"A culture of nontransparency in fact pervades" the nation’s biggest companies, the report says, and adds that in past the bank has "overestimated its ability to influence change for the better in companies with low standards."

Some of this unpleasantness was material for a discussion this week between Lemierre and Prime Minister Mikhail Kasyanov.

The EBRD is suing the politically connected Bank SBS-Agro in London. But a key witnesses in the EBRD case, former SBS-Agro executive Alexei Rasskazov, alleges that this summer he was beaten by five Moscow police officers, who planted a gun and drugs on him and told him not to underestimate the power of SBS-Agro founder Alexander Smolensky.

The EBRD has brokered Rasskazov’s flight from Russia into hiding, and Lemierre was to discuss the matter with Kasyanov. So far, there has been no word of the prime minister’s reaction.

But the report authors must have had Rasskazov in mind when they wrote, "The frequency of intimidation, extortion, even physical threats in business or legal disputes, with little reliable recourse to the judiciary and to law enforcement, adds a dimension to investment risk that is usual for most other countries."

Where the EBRD has had strong success has been in microlending to small and mid-sized business, which have received more than 500 million euros ($434 million) in recent years.

The EBRD is also close to agreeing to terms on loan facilities with Gazprom and LUKoil.

LUKoil is seeking a $150 million medium-term loan, while Gazprom is seeking a $150 million loan and help lining up an additional $100 million syndicated to banks.

http://www.ebrd.com/english/new/main.htm The EBRD's "Strategy for the Russian Federation" can be downloaded from its web site.