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. Last Updated: 07/27/2016

EBRD Shifts Focus to the Public Sector

After pouring more than $3.9 billion into Russia over the last decade, the country's largest foreign investor is shifting the focus of its lending policy from the private to the public sector.

Under a new two-year plan unveiled by the European Bank for Reconstruction and Development at its annual meeting in Bucharest, Romania, last week, the bank intends to increase its funding of infrastructure projects and ruble-based financing.

"In addition to what we always did in Russia, which is to support the private sector and [small and medium-sized businesses], we think we should be doing more to support reforms in general and make this economy more stable," Dragica Pilipovic-Chaffey, the EBRD's country director for Russia, said in an interview before leaving for Bucharest.

"We would also like to finance sectors that can diversify Russia's GDP and exports away from dependence on natural resources," she added.

The EBRD was set up in 1991 to assist former Soviet-bloc countries in their transition to a market economy.

Russia now accounts for 20 percent of the EBRD's total loan portfolio. Of this money, 19 percent went to general industries, 15 percent to natural resource companies and 12 percent to agribusiness. The rest is split between the banking sector, power and energy sectors, small business, transport, telecoms, municipal infrastructure and others.

The EBRD's annual average lending volume to Russia since 1995 has been 500 million euros ($460 million), with a record low of 164 million euros in 1999 in the wake of the 1998 financial crisis, and a high of 822 million euros in 2001.

The bank has a target this year of 1 billion euros, 40 percent of which is earmarked for projects covered by sovereign guarantees. The remaining 60 percent will go to the private


Already this year, the bank has approved investments worth a total of $150 million for everything from tires to candy.

"We have increased financing of the public sector and there are a number of new projects, which we are working on now," Pilipovic-Chaffey said.

"But it is in addition to what we do in the private sector and is not taking money from it. ... Good development of the private sector depends on infrastructure very much," she said.

In October, the bank approved a 50 million euro loan to national electricity monopoly Unified Energy Systems for industry restructuring. It is also negotiating a $215 million loan to the Railways Ministry to finance structural reform projects and a $319 million loan to the State Highway Agency to build roads in St. Petersburg and the Far East.

"We first ask what the government sees as federal priorities and than we agree between ourselves which of them we could try to finance," Pilipovic-Chaffey said. "It would not work if we had ideas that did not fit the government's priorities."

The increased focus on public sector borrowing is expected to push the number of loans to Russia in the bank's total portfolio to 30 percent in the coming years, with 1 billion euros ($930 million) in new loans approved annually.

The EBRD said ruble financing is the key to its continued support of both the private sector and municipalities.

"We can't increase financing of SMEs [small and medium-sized businesses] and municipalities until we have an opportunity to issue ruble bonds," said Pilipovic-Chaffey. "In addition to a $16 million project signed with the St. Petersburg administration in November 2001, we hope to sign two new loans, which will bring the total number of ruble-financed projects in Russia to three, but we can't do more."

During the last six months, the EBRD has issued two tranches of promissory notes for about 700 million rubles ($22.4 million). But as Pilipovic-Chaffey pointed out, they have several disadvantages compared to bonds.

"They are more expensive and we have to refinance them every three months, while our loans are provided for several years. Also, the market is not developed enough," she said.

The draft amendments to the securities law that will allow the EBRD, as a foreign-based institution, to issue ruble-nominated bonds, is now going through the State Duma and the EBRD hopes it will be approved in June.

"In other countries, like Poland and Hungary, where the capital markets are more developed, we do [currency] swaps," Pilipovic-Chaffey said.

"I hope that one day we will be able to do the same in Russia."