Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

EBRD Questions Its Role as Oil Cash Floods Russia

LONDON -- Russia's economy, flush with petrodollars, is challenging the European Bank for Reconstruction and Development to find ways to remain relevant in its biggest target market, says the EBRD's new chief economist.

Erik Berglof, who has been at his post at the bank for roughly a month, also said that being a major player in Russia was the key to wielding influence in the wider former Eastern bloc.

Berglof sits on the bank's executive committee and serves as special counselor to the president, Jean Lemierre.

"The liquidity that is in Russia right now means we have to make sure we can add 'additionality,' that is, be a benefit to a deal in more ways than money, otherwise we become irrelevant," Berglof said in a recent interview.

As part of its normal review process, the bank will start a six-month examination of its Russian operations in March, and Berglof said there would be very substantial changes in personnel.

Some changes, which include three senior people leaving the Russian office, have been announced to staff.

The bank was set up in 1991 to invest in the economies of Central and Eastern Europe and the states of the former Soviet Union.

It is the largest private non-oil investor in Russia, committing, as of Aug. 31, 2005, roughly 6.53 billion euros ($7.74 billion) since its inception.

One measure of the strength of the Russian economy is the record gold and foreign exchange reserves, a sharp contrast to when Russia defaulted on part of its debt in the 1998 financial crisis. Russia had accumulated $194.2 billion up to the week ending Feb. 10.

There is a growing debate over what role, and -- more importantly -- where, the EBRD can be most effective.

Recently, the EBRD's largest shareholder, the United States, said the bank needed to reconsider its future operations in new European Union member states, given their well-established market economies.

Berglof, who joined as the rhetoric over the bank's future role was increasing, reiterated that the EBRD still had a role to play in the new EU member states of Central Europe, but said he realized there was going to be a shift in focus away from that area and toward Russia, the Balkans, the Caucasus and Central Asia.

The bank has said it wants to focus its attention on small and medium-sized enterprises and not on big projects.

"We are trying to codify what has been said about switching strategy. This implies an environment where countries in our sphere don't have an anchor provided by potential European Union membership. This forces us to engage much more in policy dialogue and technical assistance," Berglof said.

"Russia is a very challenging environment. It is changing and becoming more difficult to gauge, and this requires us to respond."

The moral significance of an EBRD investment in a project is often more important than the size of the investment itself.

Berglof believes the bank has an opportunity to offer more policy prescriptives and broaden its focus from simply investing in projects.