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Russia: EBRD Loan To LUKoil Attracts Criticism

Russia's giant oil company LUKoil doesn't seem to need financial assistance. And most major financial bodies have refrained from lending to Russia recently because of international criticism of Russia's policy in Chechnya. But the European Bank for Reconstruction and Development has just given LUKoil a $150 million loan. RFE/RL's Askold Krushelnycky asks why.

Prague, 19 May 2000 (RFE/RL) -- LUKoil does not sound like the sort of organization that is in need of a cash handout.

By its own reckoning, LUKoil --the huge Russian oil company which owns oil fields, production facilities, refineries and around 1,000 gas stations -- anticipates profits of up to $1.8 billion next year. The $150 million, three-year loan that the European Bank for Reconstruction and Development, or EBRD, has just announced seems a mere drop in an ocean of oil.

Still, the EBRD's decision to lend money to LUKoil has been criticized by Central and East European Bank Watch, a non-profit organization that monitors the way international financial institutions disburse money to former communist states.

The EBRD, funded by the European Union countries and other rich countries, was established in 1991 to help the countries of Central and Eastern Europe and the former Soviet Union move towards market-oriented economies and to promote private sector activity.

But since its inception, the EBRD has been criticized for mishandling funds in one form or another. Targets of criticism have been the amounts of money spent on the outfitting of its lavish London headquarters, the large proportion of its funds -- by some accounts 10 percent -- spent on salaries for its own staff, and the large losses of money in Russia's 1998 financial crash because of poor judgement.

Bank Watch member Peter Hlobil said that his organization intends to question the EBRD about the LUKoil loan. He says the loan was shrouded in secrecy before it was announced ahead of the EBRD's annual conference, which begins this weekend.

"We're trying to find out more about this at the moment and actually it was impossible [to find out anything] because, surprisingly, the EBRD did not disclose the information which they disclose for every other project. The EBRD normally puts out, a minimum of 30 days before any project, something called a project summary which contains all the necessary information about the project, how it's financed, also the environmental and social implications of the project. This was not done for this project."

After its considerable losses, the EBRD has been under pressure to put money into investments that will show a return. But Hlobil says that making a profit should not be the overriding consideration, and that the EBRD should more closely examine the political and environmental impacts of its decisions before making loans.

"We don't think it ( LUKoil) is a good candidate actually. We believe that the EBRD should go for long-term development of the region and we don't believe that investment in fossil fuel companies is the right way to develop the region."

The EBRD said that there had been no public consultation about the LUKoil loan before it was announced, because the bank is only bound to do that when a state-owned enterprise is involved. LUKoil, says EBRD spokeswoman Julia Zilberman, is a mainly privately owned company with only around 8 percent controlled by the Russian government, and the information was commercially sensitive.

The EBRD's director for natural resources, Kevin Bortz, says the bank has good reason to lend to LUKoil. Helping LUKoil with its privatization, Bortz says, will set a good example for the rest of Russia.

"We felt that it was very important for us to work with some of the major Russian oil companies, LUKoil is the largest. We felt that we could have some important transition impact on the Russian oil sector by giving loans directly to the parent companies, hopefully having a positive impact on corporate governance issues, on business plans and future strategies. That's why we've worked very closely with LUKoil to try to achieve some of those objectives. We felt given their importance in Russia, they were the best ones to start with."

But Bank Watch says the LUKoil loan has come at an inappropriate time, when the EU and other EBRD sponsor countries have been signaling their displeasure with Russia's conduct in Chechnya.

Hlobil alleges that EBRD loans in the past have actually encouraged Russian military action in Chechnya. He says that an EBRD loan for a Russian oil pipeline planned to traverse Chechnya, partly contributed to Russia's decision to reassert military control over the breakaway republic.

Hlobil says that Bank Watch and other concerned groups want the countries financing the EBRD to ensure that EBRD loans are made with what he calls more "sensitivity" to political consequences, so that they do not end up helping what he describes as "dictatorships and regimes which oppress human rights."

"We believe that this [ LUKoil loan] is a good case by which we can demonstrate that the current public information policy [of the EBRD] has to be changed in the way that these things can be completely controlled. It should not be possible for a company to claim that the project is confidential so no information can be released. There should be some public review, for example in the way of an ombudsman or an inspection panel, which can give feedback to the EBRD."

The EBRD's Bortz counters that the development of natural resources is one of the bank's tasks. He says the bank will continue making large investments in Russia and in Central Asian countries, which are rich in oil and gas.

Bortz adds that one of the EBRD's main aims is to instill in Russian companies greater all-round transparency. Critics of the EBRD say they wish to promote the same thing in the bank.