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6 bne IntelliNews Daily
Eastern Europe and the Caucasus
May 14, 2015
aged in the interests of some private own- ers, not the state. We need to change that.” The ministry has already changed the way the heads of state-owned enterprises are appointed, namely that they must now be approved by a committee of ten people: “five ministers all with investment banking backgrounds like myself; and five inde- pendents including the heads of the World Bank, the EBRD, IFC in Ukraine, [the newly appointed] Business Ombudsman and the
and in the Cabinet of Ministers we removed the 15% discount and a organised a new auction," Abromavicius said. The oligarch blocked the new auction for two months, but then "in March we sold the oil without a discount for the first time in the history of Ukraine. The tycoons were earning be- tween $150mn-200mn a year from this scheme," Abromavicius claims.
Corruption is widespread and not lim- ited to the oligarchs, so Abromavicius has
“This is the beginning of the process of de-oligarchisation”
INTERVIEW: Ukraine economy minister tightens grip
on state companies
Ben Aris in Moscow
Ukraine has just embarked on what is arguably its first concerted attempt to reform its economy and run it on a market basis. The new Minister of Economy Aivaras Abromavicius talks to bne IntelliNews about the challenges that lie ahead.
rector of the Kyiv School of Economics.” The top-50 companies will also now be forced for the first time to carry out audits with one of the big recognised auditors to produce transparent accounts.
The abuse of state-owned assets was highlighted by the recent showdown between the government and Ukraine's pre-eminent oligarch, Ihor Kolomoisky, who owned 43% of oil and gas producer Ukrnafta with the state holding another 51%. Previously, the compa- ny's charter required 60% of shareholders to be present at shareholder meetings, leverage that Kolomoisky used to his personal advan- tage. “After years of attempts, finally [in April] the parliament reduced the requirement for quorum from 60% to 40%," Abromavicius says. “As the president said: state assets need to be managed by the state and private assets by private companies. This is the be- ginning of the process of de-oligarchisation. It was bold move and a very necessary move.”
For years Ukrnafta sold its oil through auction at a 15% discount at which only Kolomoisky could participate. "So when I became minister I appointed myself as chairman of the commission that sold oil
in July to exclude IIB from the sanctions regime, recognising the bank as a true IFI operating independently from the Russian government. "IIB is one of the world’s older development banks and is a normal IFI enjoying the privileges that come with international inter-government agreements. We are not subject to a national regime or answerable to any central bank, and we are accredited with the UN as an international organisation," says Kosov.
The bank is medium-sized by interna- tional standards, with authorised capital of €1.3bn and paid-in capital of €272.6mn, of which Russia has contributed a 55% stake. When Hungary is fully signed up Russia's share will fall further to 51.2% and even- tually the plan is to reduce Russia's share to the 40% it held when the bank was first set up.
Following the collapse of the Soviet Union, the bank was directionless and floundered for almost two decades; when Kosov took over two years ago 80% of the loan portfolio had gone bad. "2012 marked a new beginning and the bank adopted a new strategy in June of that year. Internally, the team was significantly renewed with more than 60% of staff having joined us since then," says Kosov. "We have also put in place a new risk management system that
launched an initiative to properly compen- sate state employees and bureaucrats to incentivise them to work for the benefit of the state, which will be presented to par- liament in the coming months.
The next priority will be to sell off these assets after they have been cleaned up. "This year we have UAH17bn (€743mn) in the budget as proceeds from the privatiza- tion process, so we are definitely going to attempt to sell something," says Abromavi- cius. "I believe a state with weak institutions, like Ukraine, is a bad owner of the assets. We can only make our economy more suc- cessful and dynamic by selling the assets to, preferably Western, investors, who will make them more dynamic and transparent."
The reform of Ukraine's industrial base is not going to be easy because, says Abro- mavicius, "resistance is still massive wher- ever you look.” However, he remains opti- mistic that the worst is over. "Finally we have a critical mass of people that want to change the country in the government, in the parliament, in the presidential ad- ministration and on the streets, to ensure Ukraine finds the right path.”
has been accepted by the rating agencies as corresponding to the best international practices.”
IIB’s member countries are an odd mix, but Kosov claims this works to the bank’s advantage. The bank doesn't have the same level of resources of some of its peers, so has focused on providing small and medium-sized enterprise (SME) support to financial institutions in its member countries, which now makes up 65% of the bank’s loan portfolio. "It has been a very popular programme," says Kosov. The bank has lent some €7bn since its establishment, the vast majority before 1990, but it now has aggressive expansion plans. Over the last two years the bank signed loans totalling around €320mn and aims to achieve €1bn in assets by 2017. Its current assets represent €611.5mn.
IIB has carved out a nice regional niche for itself, and now it has become more active its profile is rising. However, given its legacy there are some obvious lacunae in its membership list – a problem that the bank hopes to rectify. Other countries like Ukraine, Poland and Belarus are obvious candidates for membership, and Kosov says that talks with these countries have begun, but admits they will go slowly given the political tensions in the region.
Amongst the first things the Lithuani- an-born fund manager and investment banker Aivaras Abromavicius did follow- ing his appointment at the end of 2014 as Ukraine’s new economy minister was to order a stock take of all the state-owned enterprises under his control.
“We have 3,000 state-owned enterprises, of which only 1,833 are operational, but
there is a high concentration of assets: the top 100 control 92% of the revenues, but a little over half are losing money,” Abroma- vicius tells bne IntelliNews in an exclusive interview on the eve of the EBRD annual meeting. “These companies have a dividend yield of about 0.1%. They are not sharing cash flows with their main shareholders – the state. For years they have been man-
IIB stays relevant Ben Aris in Moscow
"We are back in the game and growing rapidly after we appointed a new management team two and a half years ago," says the ebullient chairman of International Investment Bank (IIB), Nikolay Kosov.
IIB is a little piece of Soviet history that’s alive and well in modern Europe. Set up in the 1970s, the bank was supposed to be the development bank of the Comecon countries. Its goal was to encourage and finance cross-border investment that would bind the economies of the Communist world together more tightly.
This legacy is apparent in today’s shareholder structure: there are five Emerging European states that are now EU members (Bulgaria, Czech Republic, Romania, Slovakia and Hungary, whose request to rejoin IIB was approved by the IIB Council in November); Russia, which is the largest single shareholder; and there are two Asian countries (Vietnam
and Mongolia); as well as Cuba, the only international financial institution (IFI) that the Caribbean state is a member of.
Headquartered in Moscow in one of the three towering bank blocks on Masha Poryvaevoy Street, the former home of the Soviet-era Gosbank, it's tempting to think of IIB as a Russian bank. However, the voting system in the Council, IIB’s highest governing body, is “one country one vote” (irrespective of the numbers of shares a country holds), with the five EU members holding the majority of votes. All decisions require at least a three-quarters majority of votes, while some require a unanimous vote. That means Russia is in the minority, despite being the largest contributor to the paid-up capital.
But the bank's multinational make- up means after the EU and US imposed financial sanctions on Russia last year there was an explicit decision in Europe