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. Last Updated: 07/27/2016

EBRD's Big Profits Overshadow Work

KAZAN -- Record profits at the European Bank for Reconstruction and Development sparked a major internal debate at its annual meeting on Sunday over what the development bank for the former Soviet bloc should do with the excess cash.

Held in Kazan, the venue for the two-day meeting that started Sunday is meant to highlight the EBRD's expansion into Russia's regions.

But its biggest shareholder, the United States, used its time at the opening session of the board of governors meeting to criticize the bank for exceeding the approved lending volume and renewed its call for the payment of a dividend.

The EBRD is owned by 61 member states and two intergovernmental institutions. It was set up in 1991 to help former communist countries move from socialism to market economies.

At issue is whether a portion of the 3.7 billion euros ($5 billion) in unrestricted reserves accumulated in 2006 should be distributed to bank owners or put to work in the growing economies of the former communist bloc.

The EBRD's charter states that it cannot pay out profits unless general reserves amount to 10 percent of authorized capital stock, or 2 billion euros. This occurred for the first time in 2006, when unrestricted reserves grew 51 percent. "We have called in the past for consideration of a dividend," said Kenneth Peel, the U.S. representative at the meeting. The United States owns 10 percent of the bank.

"While a private sector financial institution would be congratulated for such results, we are concerned about the EBRD's apparent willingness to finance sponsors with ready access to financial markets," said Peel.

Russia also said it was concerned that the bank has not been ready to put forward to shareholders a reasoned proposal on the use of its profits.

"We support the bank's conservative approach to risk management and the protection of shareholders' capital but we cannot support the proposal for the regular allocation of all profits to reserves," said Economic Development and Trade Minister German Gref.

The development bank's net profits, after provisions, rose by 60 percent to 2.4 billion euros in 2006 from the prior record of 1.5 billion euros in 2005.

EBRD president Jean Lemierre said they rose so fast due to the bank's exiting of equity investments in central Europe, where many of the countries are on their way to leaving its sphere of operations by 2010.

The dividend debate has overshadowed the EBRD's push to expand operations south and east and its push into the regions in Russia, its main area of operations.

"This poses a new question for shareholders, of what to do with surplus profits," Lemierre said in his speech.

He asked his board to consider how much should be plowed back into the region and whether shareholder countries should reap part of the benefit.

The extra cash could pay a dividend to shareholders, be pushed back into the regions or earmarked for special projects in the regions such as sustainable energy, nuclear safety or technical cooperation, Lemierre said.