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East: EBRD Shifting Lending Focus Further East

The European Bank for Reconstruction and Development plans to increase its focus in Russia, Southeast Europe, and some former Soviet republics. Activities in Central Europe will remain at the same level for the next few years. From the EBRD's annual board meeting in London, RFE/RL's Ron Synovitz takes a closer look at the new strategy.

London, 24 April 2001 (RFE/RL) -- The European Bank for Reconstruction and Development plans to expand its lending and investments in Russia, Southeast Europe, the Caucasus, and some Central Asian republics. At the same time, the Bank's activities in the countries closest to European Union membership are to remain at current levels during the next five years.

The plan was formally submitted at the Bank's board meeting in London this week by EBRD President Jean Lemierre.

Lemierre says the new strategy does not mean the EBRD will halt its operations in Central Europe. Rather, the level of fresh funding is to decrease gradually after EU membership is attained by countries like Poland, Hungary, Slovenia, and the Czech Republic.

"First of all, I think they still need us [even in the countries closest to EU membership.] For the next five years, we are going to maintain the level of investment that we have now in Central Europe -- which is over 1 billion euros ($900 million) a year. When I meet with people in charge in these countries, they make it very clear that they still need us. But we are indeed going to move part of our activity further east to Russia, Ukraine, [parts of] Central Asia, and of course, in Southeastern Europe -- especially in the Balkans. Yugoslavia has recently become a member of the bank. And of course, [we also plan to focus more on] the Caucasus. Obviously the bank is going to take its share of the burden in the transition process."

Russia is expected to receive a large share of the EBRD's new business lending, which is to be increased overall from about 2.7 billion euro ($2.4 billion) to 3.4 billion euro each year.

Lemierre says confidence in Russia is recovering from the economic crisis of August 1998 when the ruble lost about 60 percent of its value against the U.S. dollar

Nevertheless, EBRD officials say loans will not be made in Russia unless the recipient firms meet the bank's standards of transparency. A proposal for a $250 million loan to Gazprom is a case in point.

David Hexter, the EBRD's deputy vice president for Russia and Central Asia, says the funds will not be offered in the near future because of concerns about Gazprom's relationship with the private energy firm Itera -- a company that has been attempting to buy up energy distribution firms across Eastern Europe and in former Soviet republics.

"What everyone is asking for, and the minority shareholders of Gazprom are asking for, is an audit of the relationship between Itera and Gazprom itself to ascertain assets did not pass out of Gazprom, for whatever reason, into Itera on unfavorable terms for the Gazprom shareholders. This is really an issue of corporate governance for the shareholders of Gazprom, including the Russian government -- which owns 38 percent of Gazprom."

Itera issued a statement last week saying that neither Gazprom nor its top managers are its beneficiary shareholders. But the question of exactly who owns Itera was not cleared up by the publication on Friday of a list of Itera's shareholders. That list shows about 87 percent of Itera's stock is held in trust -- meaning that the owners of those shares do not legally have to be declared.

Yugoslavia, which was allowed to join the EBRD only after the ouster of former President Slobodan Milosevic, also is being targeted for large amounts of investments under the new plan.

Olivier Descamps, the EBRD's director for the Balkans and the Caucasus, told our correspondent there is potential for projects totaling 200 million euro to be approved for Yugoslavia during the next year.

Descamps says companies that might receive EBRD funds are being investigated carefully to ensure they are not tied to Milosevic's former regime. He says the government in Belgrade is working quickly to shape economic reform policies. He said projects will be approved soon if the government continues to move forward with reforms.

Descamps also said that EBRD loans and investments in Yugoslavia would not be affected if Montenegro decides to seek independence through a public referendum. Hexter told RFE/RL that an increased focus in Central Asia depends on the progress those countries bank on economic and democratic reform.

"We cover all the countries of Central Asia but in terms of critical mass the two big ones are, or course, Kazakhstan and Uzbekistan. I think Kazakhstan is on the right track and I expect we'll do about 250 million euro this year of projects there. But what I want to do is to get to about 500 [million euros per year for all of Central Asia] with another couple hundred [million euros] going into Uzbekistan. We won't get there this year. And therefore our ability to achieve that plan in the medium term will be very dependent upon Uzbek reforms."

Bank officials say they are particularly concerned about the lack of reforms in Belarus, Uzbekistan, and Turkmenistan. Belarus could risk losing its membership in the Bank because of continued reform delays.

EBRD chief economist Willem Buiter says a key issue in both Uzbekistan and Turkmenistan is an exchange rate mechanism that makes it difficult for foreign investors to change their profits into dollars or euros.

"Belarus, Turkmenistan, and Uzbekistan regressed or failed to make any progress on the road to reform. Turkmenistan and Uzbekistan still managed multiple exchange rate regimes for current account transactions -- something one would not expect to find in the 21st century, but we still do."

Romania also is expected to see an increase in EBRD lending and investment in the next five years -- provided its new government meets its promises to speed up market reforms. Romanian President Ion Iliescu led a high-level delegation to this year's EBRD meeting in London in an effort to attract investment and convince international institutions like the IMF that Bucharest is serious about reforms.

Iliescu outlined Romania's priority investments for business delegates and government officials at the meeting. He emphasized that infrastructure projects in Romania would also help other countries in the Balkans like Bulgaria and Yugoslavia.

"First of all, we need investments in transport infrastructure. Combating pollution has become a priority for Romania as well as other countries in our region. We must allocate more funds to this idea."

Romanian officials are hoping to win investor confidence when Bucharest hosts the EBRD board meeting next year. Business delegates at this year's meeting listened to Iliescu's speech in London with quiet reserve. Some said privately they want to see action on improving the business climate in the country rather than promises.