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East/West: EBRD Takes Tough New Stance On Investments, Loans

London, 19 April 1999 (RFE/RL) -- The European Bank for Reconstruction and Development (EBRD) is taking a new tougher approach to lending and investing in Eastern Europe and the former Soviet republics.

The approach, a reaction to Russia's financial collapse in August, became apparent at the EBRD's board meeting in London even before the launch of plenary sessions today.

The EBRD was set up in 1991 to aid the market transition of the former Communist states of Eastern Europe and the Soviet Union. It has already adopted a conservative lending strategy and bank funds are being used as leverage to influence government policies.

But EBRD governors meeting in London today are sharpening the strategy. They say they hope to instill financial discipline, better corporate governance and long-overdue banking reforms in the 25 countries the EBRD operates in.

Leading the new strategy is EBRD president Horst Koehler, a former private-sector banker and state secretary in the German finance ministry.

Koehler took the top post at the EBRD in September -- just weeks after Russia devalued its currency, defaulted on domestic government debt and declared a moratorium on debt servicing to foreigners.

The Russian crisis caused the EBRD last year to declare its first loss in six years -- more than 225 million dollars. More importantly, Koehler says, it taught the EBRD that its investments cannot be effective without macroeconomic stability together with a reasonable legal and regulatory environment.

On a country-to-country basis, that means governments must move their reform programs forward or forget about receiving money from the EBRD -- one of the last remaining institutions willing to invest across the crisis-plagued region.

Ukraine is a case in point. Koehler met with President Leonid Kuchma and other senior officials in Kyiv late last year to present the Bank's complaints about slow reforms there.

At stake are four EBRD projects, worth nearly 200 million dollars, that have been stalled in the Ukrainian parliament for more than a year. The EBRD also says it will N-O-T approve Ukrainian railroad and water management investments worth another 70 million dollars until the bureaucratic barriers are cleared on the earlier projects.

Lars Larsson, the director of the EBRD-administered Nuclear Safety Account, also is taking a tougher stance on aid recipients. Larsson says disbursements will only go to projects that speed the closure of hazardous reactors in Russia, Ukraine, Bulgaria and Lithuania.

Lithuanian Finance Minister Algirdas Semeta admitted there is increased pressure from the EBRD on the closure of the Ignalina nuclear plant. But Semeta, who opposes a shutdown without massive Western financial support, attributes Larsson's harder line to what he called "political pressure" from the European Union.

"I don't think the EBRD, as such, is the decision-making authority concerning the Ignalina power station. Actually, the owners of the (Nuclear Safety) Account itself, and other European Union countries, are the major political forces which dictate policies concerning Ignalina."

In the telecommunications sector, the EBRD is trying to coax several governments to create the proper regulatory framework for privatized firms to operate.

Legal assistance was provided last year to Belarus, Bosnia-Herzegovina, Lithuania and Poland. A contract for regulatory assistance has been finalized with Albania, and similar assistance is moving forward in Armenia, Kazakhstan, Ukraine and Georgia.

EBRD projects that develop capital markets and improve corporate governance have been approved for the Czech and Slovak republics.

Plans also have been finalized to work with the Russian Federal Commission for the Securities Market. That project will focus on developing capital market regulations and company laws. The aim is to increase the transparency of markets and improve corporate governance.

Meanwhile, the EBRD is still trying to resolve a dispute over the privatization of the Slovnaft oil and gas monopoly in Slovakia. That dispute arose in 1995 when Slovnaft's state managers bought shares of the firm at a fraction of the price paid by the EBRD and other investors.

EBRD officials cite Slovnaft as a classic example of how insider deals and the lack of transparency can damage the confidence of global investors in an emerging market economy.