Annual Meeting 2007 opening statement

Opening address by Jean Lemierre, President of the EBRD

Annual Meeting of the Board of Governors

Kazan, 21 May 2007

It is an honour to be with you in Russia, and I thank President Putin for inviting the EBRD to hold our Annual Meeting here.

This invitation marks a strong relationship between the EBRD and Russia, our biggest country of operations.

We are especially honoured to be in Kazan.

I have had the great pleasure of meeting some of Tatarstan’s bankers and entrepreneurs whom the EBRD has supported. I have talked with the bright young generation of future leaders at the University of Kazan.

I was joined by some members of the Board of Directors to present a donation from the EBRD to the City of Kazan to improve the energy efficiency of a hospital for abandoned children here.

Everywhere, the people here have been enthusiastic, generous and full of optimism.

I thank President Shaimiev and the Prime Minister of Tatarstan, Mr Minnikhanov, for welcoming us all here and for the efficiency in preparing for this Annual Meeting.

The EBRD invests in Russia

Coming to Tatarstan was an important decision for the EBRD.

It represents both the frontier and the heartland of Russia, and is a symbol of the mix of cultures and religions and of a thriving society driving a growing economy.

It represents the future of Russia and the future of the EBRD as we focus our investments more and more on the vast country outside Russia’s two biggest cities. 

In all the countries where we work, the EBRD is financing at the frontier.

We are focusing on the geographical areas that most need investment to accelerate their transition to market economies, and on new areas of activity to meet the new needs in all our countries of operations.

In Russia, that means investing in

• infrastructure in transportation and in power sector projects in which the Bank has already invested -- €1 billion to modernise and upgrade it
• financing banks to finance industries
• small businesses and mortgages for families, and equity in supermarkets
• a discount airline – a first in Russia
• Russian multinational high-tech company
• and helping cities across Russia to provide better municipal services such as trams and clean water and district heating to save energy.

The EBRD doubled the size and expanded the scope of its staff in Russia last year, with new offices in cities such as Yekaterinberg, Krasnoyarsk, Samara and Rostov. The EBRD plans a presence in all the federal regions of Russia.

Our business in Russia doubled to almost €2 billion, representing 38 per cent of the Bank’s 2006 business volume.

This is all part of the vision shared by the Russian authorities and the EBRD: a vision of working with the private sector to diversify and grow.

Oil and gas are producing enormous wealth, and the government is preserving that wealth wisely by investing it for future generations; but the Russian economy must strengthen its industrial force and diversify to build economic strength in every sector.

Investment in infrastructure will be crucial to support industries that will create jobs. With foreign or Russian investors; strong corporate governance will be a key to sustainable growth.

Russia has made huge economic strides by launching a transition to a democratic market economy.

Russia has opened to competition and further improvement of state institutions and fair transparent regulation will certainly accelerate economic success.

All of this flows from the choice Russia made 15 years ago to adopt the principles of a democratic market economy. And that choice has affected the way the Russian people think too.

Russians stake their future on business and industry

The EBRD is carrying out research to understand better how ordinary Russians right across the country see their lives and aspirations for the future.

One clear finding is that Russians do not want their country to be dependent on sale of raw natural resources.

They see their future as building on the best of their past -- through industries that depend on engineering and technical skills, trained manpower and ability to market and trade, as well as raw materials.

Russians believe their country has great economic potential through industry.

If they have a universal concern, it is the state of their own surroundings.

Government surveys show that 66 per cent of Russians want better housing, and our own focus group research found that in cities big and small, rich and poor, everyone wants better municipal services.

The economic progress of the country can be read in the finding that urban Russians certainly do not feel deprived of the basics of life. But they do want more access to better consumer products. This is a picture of an emerging middle class.

What people fear is that they won’t have access to healthcare and education.

What they would like is the ability to enjoy more culture and they want to travel to learn and experience other environments.

These trends will shape the development of business and the economy of Russia.

But we learn even more: Russians associate, ‘Soviet’ times with stability and a sure future where people could count on the State for basic needs of life.

But Russians associate life today, in a market system, with ‘opportunity’ and ‘possibilities’.

Unlike just a few years ago, today, business is widely accepted and entrepreneurship is increasingly respected.

People see smaller business not only as a way to thrive but equally as bringing personal freedom and independence.

Through donor funding, the EBRD has helped more than 400,000 Russians to start small or medium-sized businesses because -- like those entrepreneurs -- the Bank sees entrepreneurship as a stepping stone to both prosperity and an open society.

Entrepreneurs are able to use their position in the economy to support better regulation, fight corruption and back the political directions that give them and their families better lives.

That is what most Russians say they want.

It is clear that Russia has changed.

This country, with virtually no tradition of a market economy, has fundamentally adapted to a way of life that values choice and the freedom to pursue one’s own destiny.

The ability to choose has become part of the definition of a middle class, thriving through a fair regulated market and anchored in democracy.

As so many countries have learned, the period of adaptation can be difficult, but the combination of open societies with open markets will clearly bring sustainable prosperity.

In today’s connected world, open societies and open markets are an inevitable combination.

Integration of Russia with the world economy

The EBRD shares another great vision with the policymakers of Russia: Russia needs to be firmly integrated into the world economy in order to attract investment and build its own economy.

It will require partnerships with foreign firms to build the infrastructure and industries Russia needs to develop. 

Membership in the World Trade Organisation will be a crucial step for Russia linking into the global economy.

The launch of the process to join the Organisation for Economic Cooperation and Development offers a crucial dimension of economic and social policy development that will tighten international ties and underpin understanding.

It is a shared duty for us all to support Russia’s efforts to lock in to global standards and practices through the international community and through investment.

Russia, rightly, sees foreign investment as a two-way process.

Russia is seeking the foreign financing and know-how that will accelerate its own development. At the same time, Russian firms are becoming real multinational enterprises and it is legitimate for them to turn to investment abroad.

This is a progression that is at the heart of all the international financial institutions -- that trade and investment bind countries into mutual cooperation, understanding and stability… permanently and pragmatically.

That is the story of the EBRD region.

EBRD countries’ progress

Some of the EBRD’s 29 countries of operations have made such progress that they will no longer need the kind of financing that the EBRD provides.

Ten EBRD countries made such political and economic progress that they became members of the European Union.

The EBRD and its Board have taken the view that eight of those new EU countries will have completed their transition to a full market economy by 2010.

After each country ‘graduates’ out of EBRD operations, beginning with the Czech Republic this year, the EBRD will no longer do new business, but will turn to working with investors from those countries to invest in EBRD countries further east.

That will allow the EBRD to devote more financing and attention to the countries where transition is still in progress.

The Governors have given clear direction on how the EBRD should re-allocate those resources.

Focus for the Future

The EBRD will do more work in Russia and in south-eastern Europe, Ukraine, Kazakhstan and the least advanced countries of the Caucasus and Central Asia.

Across these countries, the economy grew by a robust 6.8 per cent last year, driven by strong domestic demand stimulated by real increases in credit and wages.

Expansion is forecast to continue, at 6.3 per cent for the region and almost 7 per cent for the CIS countries, in 2007.

This healthy economic environment has helped to draw record amounts of foreign direct investment to the region, with a sharp increase to $65 billion.

This is the backdrop for the Bank’s record business volume last year, and for our careful strategic planning for where to direct the EBRD’s resources.

Over the past three years, the Bank has increased four-fold its financing to the poorest countries of the Early Transition Countries Initiative, including in Mongolia, which became a country of operations in 2006.

There was a parallel push to expand operations in south-eastern Europe through the donor-funded Western Balkans Initiative.

In these countries, the Bank takes on more risk and devotes more resources to project preparation with the help of donor countries.

The Bank financed 80 new ETC projects last year totalling € 290 million, and the biggest share of all Bank commitments last year was in the early and intermediate countries. 

Across the region, there is a tremendous opportunity for adding to energy supply by avoiding waste of energy.

The EBRD took an early lead in helping countries realize that opportunity by setting ambitious goals to promote sustainable energy, especially through energy efficiency improvements as part of our financing to industries.

And the Bank is working with municipalities to save energy, in transportation, district heating and efficient housing. Here, at the Annual Meeting in Kazan, we have enriched that discussion with regional governors from Russia and mayors from the EBRD region who are here.

In energy-rich countries and energy-importers alike, the economics, environment and energy supply agendas coincide, making promotion of sustainable energy a top priority for the EBRD.

As the Bank moves into more challenging investment environments, 20 pe rcent of volume is now in the form of equity, which is a vehicle for setting high standards of business practice and corporate governance through participation on the boards of companies.

Financial institutions drive the real economy and the EBRD has developed forms of financing to match the evolving needs, from more mortgage and consumer finance lending for the growing middle class to lending in local currencies for municipalities trying to avoid exchange rate risk.

The EBRD has taken a prominent role in helping to deepen and strengthen capital markets to open competition through transparency and fair regulation.

Underpinned by a new Energy Policy, the Bank has put sound sustainable practice at the centre of its operations.

The Bank’s Environmental Policy is being reviewed this year, providing an opportunity for dialogue with many interested experts and non governmental organisations on how the EBRD can contribute to sustainability that is based on environmental protection and high social standards such as gender balance and respect for the rights of workers and ethnic communities.

This is the policy that underpins the EBRD priority of supporting and engaging with an active and dynamic civil society.

In total, the Bank committed €4.9 billion last year to 301 projects in many sectors, using many approaches to accelerate transition to a market economy.

Due to the expertise and skill of the staff, and to propitious market conditions, profits rose to €2.4 billion in 2006.

Profit allocation

The high level of net income was largely a result of exits from equity in central Europe where the investments in much riskier times have paid handsome dividends in flourishing markets today.

The model works.

In effect, the approaching graduation of the most advanced countries is producing profits that can help to finance the countries that are still in the earlier stages of transition.

You, Governors, have given the guidance for future directions in the third Capital Resources Review strategic plan, which you approved a year ago.

The Bank needs protection through careful building of the reserves to protect against higher risks of the future in the riskier environments we will operate in. This is how the Board proposed to allocate the revenue of 2006.

Moving south and southeast, the Bank may continue to realise further gains. This poses a new question for the shareholders, of what to do with the surplus profits. 

How much of the surplus should be ploughed back into the region that produced the profits and that is the object of the Bank’s Mission? Should shareholder countries reap part of the benefit? 

We must address these questions in the context of the mandate of the EBRD, which is a transition bank and not a commercial bank. Our mission is to take risks, and those risks will only continue to increase as we continue to evolve our activities.

The surplus profits could be kept for further building of reserves or they could, of course, be used to pay dividends to the shareholders.

Or the surplus profits could go back into the region through an Account, earmarked for special projects that would support transition in the region… projects such as promoting sustainable energy or nuclear safety or other technical cooperation.

One of the most pleasant duties of a President is to put this question to his Board of Directors: what to do if a development bank earns more profits than it needs for its business plan?

Testing our own relevance

But there are many more questions that we must ask ourselves.

Even in a healthy financial situation, the Bank must constantly explore new ways of operating, collaborating with other organisations, and testing itself.

This year the EBRD signed a Memorandum of Understanding with the European Commission and the European Investment Bank to join together in identifying, financing and managing any of the infrastructure projects that the EIB undertakes in Russia, Ukraine, Moldova, the Caucasus and Central Asia.

And the EBRD again demonstrated its commitment to international efforts to fight corruption by implementing the first cross-debarment of a company identified by the World Bank for corrupt practices.

Beyond commitment to working with other institutions, the Bank opens to scrutiny by checking its priorities against the needs of the region.

After 15 years, the EBRD set out last year to probe whether the people in the region see transition as a success.

The EBRD teamed up with the World Bank to survey both the material well-being of people in the region and to get peoples’ assessment of quality of life in the Life in Transition Survey.

A qualitative focus group study probing views of the people in the Russian regions echoed and enriched those results, as did a separate in-depth research relating Russian lifestyle indicators to attitudes.

All of this will guide the future of the EBRD. We do need to ask the questions that will help us to define our future to match the needs and aspirations of the countries of operations.

In a longer-term perspective, we have undertaken a major year-long exercise to consider scenarios for the future.

Many of you were involved in the initial session a year ago where we asked for your perspectives on what the EBRD region and the world would look like in 15 or 20 years.

From that, and from research carried out this year, we have explored how four major forces could affect the future of the region, and by extension the EBRD: environmental change, technology, the power of China and demographic change and migration in our countries of operations.

Your input into that process will contribute to the Bank’s own constant efforts to test whether it is addressing the most relevant concerns in the region.

All of this will affect the future of the Bank.

As the EBRD completes its first year of the five-year strategy, it is clear that the financial success of the Bank raises questions about the best ways to conduct our future operations.

Questions about managing success will no doubt stimulate healthy debate. We rely on our Governors to guide and to help to draw conclusions. 

I know that I join with the staff of the Bank in encouraging conclusions that will reinforce the EBRD’s strong tradition of focusing firmly on the needs of the countries of operations.

Over the coming year, the Bank and its Board will certainly find creative approaches which build on the success of transition to promote progress in countries where it is still incomplete.

Thank you.