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bne June 2017 Special report I 25
the bank. This was the first time Rus-
sia had appealed to the board of governors that make up the EBRD share- holders. The Kremlin made sure its appeal was high profile by sending not only Oreshkin to head the delegation, but also the CEO of state-owned Sber- bank, German Gref, who attended the meeting to sit on a panel about promot- ing competitiveness.
Oreshkin gave a long speech to the governors, according to those in atten- dance, which sought to make two main points: the EBRD had broken its own rules by refusing to put up new proj- ects to the board for approval; and that without the Russian business the bank’s profits will be badly hurt and this will undermine its financial stability.
The first point turns on a technicality and Oreshkin brought a legal opin-
ion written by an emeritus professor from Sorbonne university that con- cluded the EBRD had broken its own rules. But he said the board of governors “evaded” the discussion in the meeting.
Chakrabarti reiterated that the board had studied the issue and voted that it had done no wrong. Under the EBRD’s charter all new investments must be approved by the board, which is at lib- erty to refuse any project.
Part of what has incensed Russia is the blanket nature of the ban, which largely affects companies in the private sec-
tor that have not been included in the international sanctions regime. In the early negotiations in 2014 the Russian side was pushing for the private sector investments at least to continue, even
if those with state participation were blackballed.
More than half of the EBRD’s Rus-
sia portfolio is made up of debt, with
the remainder comprising public and private equity investments. About 83% is invested in the private sector, with just 17% in state-controlled entities, few of them on the sanctions list.
“During the meeting we highlighted the way the bank broke its own rules,” relat- ed Oreshkin. “In our opinion the freeze
is unfair. It is preventing lending to the whole economy and not just selected sectors as the EU and US sanctions do.”
The points on the EBRD’s financial health were far more contentious. The Russian delegation kicked off
by saying: “It is not Russia that
needs the EBRD, but the EBRD that needs Russia,” going on to highlight the economic recovery that has taken hold since the start of the year.
“On the bank side, the situation is dif- ferent,” said Oreshkin. “When the freeze was imposed, Russia was providing half of all the bank’s revenues at that time. As the revenue flow from Russia will decline, the bank will inevitably rapidly decline in profitability.”
The EBRD denied Oreshkin's claims, which it says are inaccurate projections. Oreshkin claimed that the bank's cost/ income ratio has worsened, though it
is running at a pretty healthy 42%. He continued that Russia doesn't believe the EBRD deserves its ‘AAA’ rating and would present all its evidence to the international rating agencies recom- mending a downgrade.
The EBRD is slowly winding up its Rus- sian portfolio, as its share in the bank’s profitability falls. Russia now makes up 10% of the bank’s portfolio and will continue to lose ground as the EBRD
Chakrabarti stressed that the EBRD is maintaining contacts with the Russian government and is continuing its work including a small and medium-sized enterprise (SME) advisory programme that has received some funding from the Russian government since the freeze on EBRD activity was imposed. At the same time the EBRD has been facilitating some Russian private sector investment in the bank’s other coun- tries of operation in partnership with the bank.
“I for one look to continuing to engage with the Russian authorities. And as you know we have a track record of 25 years of that,” said Chakrabarti.
One of the ironies here is the EBRD itself is not comfortable with the freeze on the Russian business, although it is far too diplomatic to say so in public. Chakrabarti has made it plain that this is the decision of the governors and not the bank’s policy. In the meantime the bank continues to work diligently on maintaining its existing investments and ensuring they deliver on their mandated goal: making a transitional impact. And in private comments to bne IntelliNews, the local staff are openly angry at the decision as, irrespective
of the geopolitical showdown, building a healthy Russian economy based on transparent and liberal market principles is in everyone’s interests, they argue.
“It is not Russia that needs the EBRD, but the EBRD that needs Russia”
ups investment in its other countries of operation, including Ukraine, which has become a major recipient of new EBRD money in the last two years.
However, the EBRD’s Russia portfolio remains the second largest after Turkey, even after shrinking by 30% to €5.35bn a year ago, according to data available on the lender’s website. The bank is still involved in 788 projects but the run-off in the portfolio is clearly accelerating, as assets had been worth €6.3bn in mid-2015.
The EBRD has provided much needed money and expertise to projects in Rus- sia and has been the biggest single foreign investor for much of the last decade. And its money is needed more than ever now. Foreign direct invest- ment (FDI) has collapsed in recent years from a peak of $74.7bn in 2008 to $4.8bn in 2015. In 2016 FDI recov- ered somewhat to $25bn, according
to Rosstat, but the bulk of this was profit reinvested by foreign-owned busi- nesses already operating in Russia.
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