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Russia: EBRD Set To Invest More

In the aftermath of Russia's 1998 financial crisis, the European Bank for Reconstruction and Development's investments in Russia dropped to an all-time low of $217 million last year. Senior bank officials say commitments are likely to double this year -- and could reach $900 million by 2003. But they warn that the EBRD's future activities in Russia depend on the reform course charted by President Vladimir Putin. RFE/RL's Ron Synovitz reports from the bank's annual meeting in Riga.

Riga, 22 May 2000 (RFE/RL) -- The EBRD annual board meeting in Riga this weekend was characterized by almost continuous praise for the prospects of Russia's economy -- tempered with a few caveats.

EBRD economists say Russia is well on the road to recovery from the economic crisis of August 1998 -- a financial meltdown that cost the bank all of its profits from that year plus an additional $250 million.

Not surprisingly, private foreign investors have not been rushing back into Russia with their money. The European Union has taken a wait and see approach on President Vladimir Putin and his administration before disbursing fresh aid money. The International Monetary Fund has been more interested in learning about the individuals in newly appointed Prime Minister Mikhail Kasyanov's cabinet than rushing into talks on any new loans.

That has left the EBRD as both a leader and a cheerleader as far as investments in Russia are concerned. Established in 1991, the EBRD is a development bank that aims to foster free market economies in former communist countries.

Ricardo Lago, a deputy chief economist at the EBRD, was full of praise for the Russian economy.

"One year ago, there was lots of uncertainty as to the future government of Russia. There were many possible scenarios of follow-up after the Yeltsin regime. The whole scenario has changed. The policy announcements that we have had so far, and the appointments that there have been so far, have shown very positive indications as to where things are going. Of course, there are many challenges. Of course there's the issue of implementation and so on. But the outlook has changed. I don't think that we have seen a moment in which the prospects for the Russian economy were better than what they are now."

Last year, in the wake of the 1998 crisis, the EBRD made only 10 percent of its commitments in Russia -- about $217 million. But EBRD acting President Charles Frank told RFE/RL this weekend that the bank could commit as much as $900 million a year to Russian projects as soon as 2003.

"Our investments in Russia will rebound. They already have. We've already signed more this year, I believe, than we signed all of last year. So I wouldn't be surprised to see us committing in the range of $400 to $500 million in Russia this year. Possibly even more. Our overall medium term goal over the next three to four years would be to achieve roughly a 30 percent balance in Russia, a 30 percent balance in the advanced transition countries, and the 40 percent in the early and intermediate transition countries."

The advanced transition countries include most EU candidates, while the final group includes Bulgaria, Romania, and Caucasian and Central Asian countries.

Earlier this month, the EBRD announced a $150 million loan to Russia's LUKoil. The three-year loan has conditions attached: LUKoil must adopt international accounting standards and LUKoil managers must disclose their interests in the recent privatization tender for 9 percent of the company's shares.

But critics are questioning whether the loan violated the EBRD's lending principles. Ron Freeman, a former acting president of the EBRD who now works in the private sector, says financing for LUKoil could have come from private sources. He suggests the loan may have violated a requirement that the EBRD can only provide funds if no other lenders are offering reasonable rates. Many private sector financial analysts say that LUKoil does not have problems borrowing on both the Russian and the international markets.

But Frank took issue with those remarks. Frank told RFE/RL that foreign and Russian lenders have not been willing to lend money to LUKoil at reasonable rates since the 1998 crisis -- even though international oil prices have tripled since then.

"We really believe that our job is to be there when others are not. And in the case of the Russian oil company, it is very clear that working capital availability has been drastically reduced because the private sector financial institutions have pulled back."

Meanwhile, even the glowing predictions of EBRD economists were hedged with warnings that investors should closely watch how the economic policies of Putin and Kasyanov unfold. EBRD officials in Riga this weekend were privately complaining about a new banking policy Moscow is said to be considering.

According to EBRD experts, Putin wants to establish three or four dominant state-owned banks in Russia. The EBRD experts say privately that such plans would be a disturbing indicator of Putin's future economic pollicies. They say the move would severely hamper the development of private Russian banks, and also would hurt foreign banks attempting to facilitate direct foreign investment.

Russian Central Bank chief Viktor Gerashchenko said in Riga that Russia's banking system is weak and that, under the circumstances, private banks cannot be allowed to take over the business of large state banks.

But David Hexter, deputy vice president of the EBRD's Banking Department, says that privately owned banks with transparent shareholding structures are the most effective way to promote investment. Hexter says that the domination of banking by the state is bad in all cases. He said Russia needs to encourage foreign ownership in its banking system.

The EBRD experts say privately that consolidating bank ownership would be a disturbing indicator of Putin's future economic policies.