Banking On Europe

Europe Business Review, Oct-Dec, 1999 by Majella Anning

Majella Anning [*]

The European Bank for Reconstruction and Development (EBRD) began amid scandal but is now a reformed character.

The bank was formed as part of the West's surprised response to the sudden collapse of the Soviet bloc in 1991. It is intended to help former Communists move towards capitalism.

The bank's first president, Jacques Attali, was quickly discredited by his extravagance and waste outfitting in marble the interior of the bank's headquarters in London.

Attali, a former close aide of President Francois Mitterand of France, moved on and today the bank, under the presidency of Horst Kohler of Germany, claims a leaner bureaucracy and likes to describe itself as one of the most efficient and cost-effective of international financial institution.

The EBRD is mandated to assist the countries of central and eastern Europe and the former Soviet Union to develop market economies. It has a subscribed capital of 20 billion euros (about US$20 billion).

So far the bank has approved 629 projects, involving 14.7 billion euros of its own funds. These loans were expected to mobilise an additional 35.3 billion euros from other sources.

Projects backed by the EBRD range from investment in telecoms, transport, energy and exploitation of natural resources, to agribusiness, tourism, manufacturing, and helping to develop financial sectors in the former Communist nations.

The bank is expected to help to rebuild areas of the war-torn countries of the Balkans. The US has announced a US$50 million plan to support the EBRD in the Balkans, mostly to finance small and medium-sized enterprises.

The US will also contribute US$200 million to a regional equity fund with the EBRD which operates throughout the region, except in Serbia, Montenegro and Kosovo.

The EBRD has no legal relationship with those three areas but it plans to provide investment funds for Kosovo, and possibly Montenegro, through banks and companies operating in neighbouring countries, such as Bosnia and Albania. The bank's target for new commitments for 1999 in the Balkan region is 450 million euros.

Financial relations with Russia, which account for around 20 percent of the EBRD's total loans, are risky and turbulent due to Russia's growing financial crisis.

The EBRD had a net loss last year as a result of the Russian financial collapse, which led the bank to stop providing long-term project finance to Moscow to loan short-term working capital instead.

However, the EBRD has bravely recently decided to double the annual ceiling on its lending to Russia to 1 billion euros over the medium term on condition that Moscow restructures its banking sector and acts to improve the dismal investment climate.

Corruption, money-laundering and diversion to political pockets of international loans are all reportedly rife in Moscow.

They are being investigated by the British, US and Swiss Treasuries, and the US Federal Reserve Bank and FBI because of the use of London, New York and Swiss banks to move illicit funds out of Moscow.

In the Ukraine, another EBRD loan area, the former Premier, Pavlo Lazarenko, is being accused by the Kiev government of embezzling State funds and laundering money obtained from natural gas contracts. The Ukrainian and Swiss governments are seeking his extradition from the US where he recently purchased a Californian mansion for US$6.7 million.

Australia is, curiously, among the 60 founding members of the EBRD (the 60 members include the European Community and the European Investment Bank).

Former Australian assistant Treasurer Jim Short has been the Australian director on the EBRD Board since 1997. He sits on the bank's financial operations policy committee looking at policy direction, including short and medium-term strategies, policy implementation and sectoral strategies. Australian newspapers report his annual salary, tax-free, is A$150,000.

"It is clear the bank is making a difference in the countries it assists," he says. "It did have a rocky start but has been transformed into an efficient operation. For example, the administration budget has had no real increase for six years, although the bank's investment flow has tripled in that time."

Short was an official at the Australian Treasury, concerned with Australia's foreign investment and exchange rate policies. He has also served as the Treasury's economic and financial representative to Britain and Europe.

After election to Parliament he was appointed assistant Treasurer in the first Howard government in 1996 before taking up his post at the EBRD in 1997.

He says "As well as contributing to the bank's policy making, I see my role as representing Australia's interests. I try to build greater understanding within the bank of what Australia, and Australian companies, have to contribute in terms of skills, expertise, and consultancies."

Short is disappointed that, with some exceptions, Australian business has not become more involved in new investment opportunities in the former Soviet bloc.

"There is a risk that Australian companies will miss out on opportunities. After all, ten of the 26 countries within the remit of the EBRD are applicants to join the European Union. Poland, for example, is a country of 40 million people with a skilled workforce and is in the seventh year of real growth. It is a similar story in Hungary and the Czech Republic."