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The East: EBRD Takes Tougher Stance On Economic Reforms

London, 21 April 1999 (RFE/RL) -- This week's board meeting of the European Bank for Reconstruction and Development (EBRD) in London revealed an institution trying hard to adjust to monumental events in Eastern Europe: Russia's financial collapse and NATO air strikes against Yugoslavia.

For Yugoslavia's Balkan neighbors, the four-day meeting was a timely platform to announce early estimates on the economic fallout of the NATO strikes. But bankers say the story with the greatest impact on EBRD operations has been the Russian financial crisis of last August -- an event that led the bank to post losses of more than $225 million last year.

In response to the crisis and last year's loss, bank governors yesterday approved a new medium-term strategy aimed at coaxing Eastern governments into quicker action on market reforms.

The vote confirms that the EBRD will increasingly use its financing as leverage to encourage free market legislation and the creation of new regulatory institutions. Bank-sector reform in the EBRD's 26 countries of operations also is a high priority.

EBRD Vice President Charles Frank echoed the tougher new stance when he announced yesterday the EBRD will be more cautious about projects in Russia, the largest recipient of EBRD loans and investment since the launch of the bank in 1991.

Bank president Horst Koehler said the EBRD remains committed to operations in Russia. But he said further financing there depends on what he called "decisive and credible action" to speed reforms and improve the rule of law.

"The better the investment climate, the more we can do. This is particularly true of Russia. There can be no doubt that the EBRD remains committed to Russia. But our activities there depend on decisive and credible action by Russia to move reforms forward and, in particular, to improve the enforcement of the rule of law. And I was very much pleased that governors endorsed this position."

This tougher stance on reform better reflects one of the goals contained in the EBRD's founding charter -- to foster the market transition of former command economies in Eastern and Central Europe and the former Soviet republics.

Confronted with the bank's first year of losses in six years, Koehler says the Russian crisis has taught the EBRD that investments cannot be effective without a reasonable legal and regulatory framework for a functioning private sector. He also said Eastern governments must demonstrate more financial discipline to ensure macroeconomic stability.

Amid all the talk in London this week about lessons from the Russian crisis, Balkan officials focused their statements on the cost of supporting Kosovo refugees, as well as losses in trade and investment because of NATO air strikes.

Albania's Minister for Economic Cooperation and Trade, Ermelinda Meksi, said Tirana will need at least $800 million in budgetary and humanitarian aid this year.

Bosnia-Herzegovina is desperately seeking investment to rebuild damaged infrastructure and support refugees from its own devastating war. Neven Tomic, vice-chairman of the country's Council of Ministers, said the Kosovo conflict has put additional strain on Bosnia's stretched finances.

Bulgarian Deputy Prime Minister Alexander Bozhkov said the air strikes will prevent Sofia from reaching this year's goal of attracting $1 billion in direct foreign investment. He told RFE/RL that trade with Western Europe will continue to suffer long after the end of NATO's military campaign. That's because Bulgaria's most direct transport links to the European Union already have been cut by destruction of Serb bridges across the Danube river.

Macedonian officials say their exports also have been crippled because of severed transport links through Serbia. Romanian officials say Bucharest already has lost $175 million in export trade.

EBRD president Koehler said in his closing remarks yesterday that the Kosovo crisis has shown the need for the EBRD to intensify its work on new projects in the Balkans. But as a project-oriented institution, the EBRD can offer little that is new and concrete to lighten the financial impact of the Kosovo conflict.

Questioned by RFE/RL about specific new plans, EBRD director for the Balkans and Caucasus Olivier Descamps offered vague references to what he called "new "ideas," along with some projects initiated last year.

"We're not going to announce magic by creating projects out of nothing. The best support and intervention that the (EBRD) can offer is to take care of its existing projects and support them through what could be some hiccups. It also has a very substantial pipeline of projects which are not yet completed and which we have been working on for six to nine months. Trying to complete them as quickly as possible in the next few months would be one of the best signals to (ease the concerns) of strategic investors."

But there is one possible project that could have major impact on Balkan trade with the West -- a proposed Danube bridge linking northeastern Bulgaria to Romania near the Bulgarian town of Vidin.

Descamps told RFE/RL that new ideas have come up in London between Romania and Bulgaria on how the EBRD could finance the bridge. The bridge proposal is an old idea from the time of Bosnian war, when a United Nations embargo on rump Yugoslavia caused similar trade difficulties for the rest of the Balkans.

Descamps said the bridge never became reality because of disputes between former governments in both Romania and Bulgaria. But, he said, the EBRD hopes the new reform-minded leaders in both countries will be able resolve those disputes.