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Russia: EBRD Official Blames Financial Collapse On Lack Of New Institutions

London, 3 December 1998 (RFE/RL) -- A senior official of the European Bank for Reconstruction and Development (EBRD) says the Russian financial collapse shows that policy-makers underestimated the need to build new institutions in creating market economies.

Alain Pilloux, the EBRD's director for Central Europe and the Baltic states, says this mistake also was made by western investors and advisers, including his own bank. He told an investment seminar last week at the Royal Institute of International Affairs in London that Russia's economic crisis shows markets cannot function without a state and institutions that support them effectively.

"These (priorities) include a functioning market-oriented legal framework, and sound corporate governance. And, of course, corruption and its causes must be resolutely addressed. All this seems obvious but it has not been very obvious to many investors in the last few years."

Pilloux said the Russian crisis showed another lesson: the transitional countries that have pushed ahead most strongly with reform have proved the most resilient to outside shocks.

He said that moreover, the crisis shows successful reforms need the support of society. He said such support had obviously been undermined in Russia but also in Central Europe.

Pilloux said the Russian collapse will hit hardest those countries that depend on Russian trade and on financiers who have lent to Russia. He said it also will contribute to a global slowdown, particularly in Western Europe.

Pilloux said international commercial bank loans are no longer available in Russia. And a general loss of confidence in the region means lending to Croatia, Slovakia and Romania fell to only one-fifth of their 1997 levels between August and October this year.

However, he said international lending to the Czech Republic, Hungary and Slovenia have held up well. But he said international investors have largely deserted local securities markets, and foreign investment in privatization and other programs has fallen off sharply in Romania, Bulgaria, and Lithuania.

Pilloux noted that one key western agency, the Institute of International Finance, has reduced its forecasts for net capital flows in 1999 into the transitional countries from 55,000 million dollars to 33,000 million.

He said the capital flows into Central Europe are unlikely to experience such a steep decline, showing overall that the region is proving resilient. But he said there is a "great uncertainty" about future capital flows to Romania and, to some extent, Croatia and Slovakia.

Pilloux said governments must improve the investment climate in Romania, Slovakia, the Czech Republics, and Latvia.

He also said the 10 Central and East European countries seeking accession to the EU need to create what he called an "equity culture" -- in which shareholders have a stake in the societies in which they live.

He said one of the EBRD's worst fears is that the development of the 10 countries is too strongly founded on debts and borrowing. He suggested the collapse of East Asia's economies -- many of them with enormous debts -- is a cautionary lesson.

Another speaker, Angus Nicolson, Slovakia-based senior loan officer of the European Investment Bank, said Central and East European countries should concentrate on improving infrastructure.

The European Investment Bank, set up in 1958 by the Treaty of Rome and whose shareholders comprise EU member countries, expects to step up its lending to the Central and East European region, particularly for transport, telecommunications and energy. Nicolson said lending patterns to the region are similar to those that existed to other nations prior to their joining the European Community.

"The patterns of our lending we've seen in these different sectors in Eastern Europe are not unlike patterns we saw in the mid-1980s with Portugal, Greece and Spain just prior to their accession."