Financial results press conference

EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT

PRESS BRIEFING BY

MR STEVEN KAEMPFER, VICE PRESIDENT, FINANCE

AND MR DAVID HEXTER, DEPUTY VICE PRESIDENT, BANKING

ON THE ANNUAL FINANCIAL RESULTS FOR

THE YEAR ENDED 31 DECEMBER 2002

WEDNESDAY 19 MARCH 2003

JEFF HIDAY, Head of Media Relations: This is a press conference on the 2002 results of the EBRD. Steven Kaempfer, Vice President Finance, and David Hexter, Deputy Vice President, will answer questions. First, Steven Kaempfer will make a few remarks.

MR KAEMPFER: Thank you for coming today for the discussion of the Bank's annual results, which you have in summarised form in the press statement that has been released to you. Obviously, in the normal way, the full results and full discussion will be in the Annual Report and Accounts of the Bank, which will be made available near the time of the Bank's Annual Meeting in May.

Perhaps before we come to questions I will make a few comments on the period behind us and lift out some of the key points to focus the discussion, but, obviously, you can ask questions about anything you like.

The first thing to say is that, in a year when the global economic and financial environment has been particularly challenging and volatile, the region of operations of the EBRD has shown remarkable economic and political stability and resilience. This has been a reflection partly of the above global average growth rate of the region. As you know, it grew 4.3 per cent in 2001. We estimate that it will have grown by about 3.7 per cent in 2002. This is perhaps not surprising for a region which is reforming and thus playing catch-up with the rest of the world and therefore growing faster. Nonetheless it has been a remarkable feature of 2002 that this has been the case. In addition, the region has continued to stick to the reform process that the countries embarked on after they were released from their central command structures in order to start the long path towards market economic and political reform.

It is the combination of those two factors that has enabled the region to maintain its resilience and that has in turn been a contributing factor to our Bank's development during the past year, as you may have been able to see already from the figures we handed out. You will see from the business achievement of the Bank last year that we had a very strong year for new business. We achieved a new business volume of €3.9 billion, the highest rate we have attained to date. That compares with just over €3.6 billion the year before. Also our rate of disbursement - because new business means that we sign projects but disbursement means that we actually put cash into the projects in the region - under our signed portfolio also stood up strongly. We achieved a gross disbursement rate of €2.4 billion for the year, which was more or less equal to the level of the year before, and both of those were record levels of disbursement for the Bank. That has been a gratifying feature of the year, as has the fact that the pipeline of new projects, the projects under development but not yet signed, to be prepared to come to maturity and signature in the period ahead, continued throughout the year and into 2003 to be strong, and that bodes well for the future. Those are some of the key features of the Bank's business in 2002.

If we look at the distribution of that business in the region, we can say that in rough terms - the specific numbers are in the handout - a third of new business is based in the advanced countries of central and eastern Europe, quite a number of which are, as you know, scheduled to join the European Union in 2004; about a third of the business is in Russia, which in itself represents strong growth from the year before; and about a third of the business is in other, early and intermediate transition economies of the 27 countries in which our Bank operates. The distribution is more or less along those lines, which in itself reflects the implementation of the Bank's medium-term strategy, which is to move gradually east whilst also maintaining a strong presence in the advanced transition economies.

In line with this, the quality of the banking portfolio has continued to be very stable and therefore the recovery trend that has been in evidence in the past few years since the 1998 crisis in Russia has continued. This in itself has helped the Bank to achieve a solid profit for the year. As you may have seen, the Bank reports a profit after provisions of €108.1 million, compared to a profit in the year before of €157.2 million. In part, this was assisted by the fact that provisions in our banking portfolio were helped by the fact that we were able to recover a number of assets which were previously impaired and were therefore able to release a few provisions that we had made when we thought that those assets would be permanently impaired.

Profitability was also well assisted by the good results on the equity portfolio in banking, where, through a combination of good judgement and good fortune, as one always needs in financial markets, we exited from a number of equity investments, having completed our transition role in them, at the beginning of the year before equity markets resumed their downward trend. As a result, as is visible in the figures, we were able to achieve a net profit on the sale of equity investments of €140 million, which was well up on the nearly €90 million achieved the year before. A combination of those two features enabled the banking portfolio as a whole to deliver a substantial profit from banking operations. It was in fact nearly €182 million, well up on the year before. That figure is on the second page of the handout, where all these details are given.

To some extent there was an offset here in that in the Treasury Department of the Bank we recorded a net loss of €74 million against significant profits in prior years. That reflects two facts, the main one of which is that we took provisions against a small number - mainly two - of assets originally rated AAA but which were downgraded in the second part of last year, following the sharp credit deterioration in global financial markets, by the rating agencies. As a result, we have taken provisions against those assets, which are in the asset-backed securities sector of the treasury portfolio.

It also reflects something more technical, which is an accounting charge under an International Accounting Standard which is generally referred to as IAS 39. IAS 39 has certain rules for hedge accounting, on which I can comment if you have questions. Broadly, under those rules you do not have to make a charge for hedges when they are made one on one, the hedge with the one asset that it hedges. If you hedge on a portfolio basis, which is what most banks in the financial system do with a good part of their asset/liability management, then you have to reflect a charge on the derivative side of the asset/liability hedge, depending on what happens in financial markets. In our case, last year we had to make a charge because interest rates fell and there was therefore a corresponding impact on the portfolio. Had interest rates risen, it would have been the opposite. The main point is that it is a technical feature because it does not reflect an underlying economic trend and it will be recouped as the asset and liability proceed to maturity. That was a second factor that had an impact. If you exclude that impact, the treasury loss was in fact €35.3 million for the year 2002, reflecting this provisioning charge in treasury, which was €83.6 million.

As a result of this process during the year 2002, especially the financial developments, the reserves at the year-end grew to €661.1 million from €488.7 million the year before. This reflects mainly the profit for the year. That profit was further assisted by the fact that once again the Bank's expenses were contained well within budget at €142 million, which was an increase of €3.5 million over the year before. Much of that - in fact more than that - is due to the fact that as of the beginning of last year, we have paid a higher rent on this building following a rent review which increased the cost by £4 million. On a like-for-like basis, the other expenses have in fact gone down slightly.

It is always a good part of a financial review to look at the overall provisions for banking operations after the year. They stood at €1.2 billion at the year-end, which was approximately the level they stood at the year before. At that level they are well over 13 per cent of the disbursed outstanding loan and equity assets of the Bank.

That is all I have to say, after what has been a solid year for the Bank and an especially solid and remarkably resilient year for the region in which our Bank operates.

We should be pleased to answer questions or listen to any comments you wish to make.

RICHARD JORY (International Financing Review): Can I ask about the hedge? Presumably the IAS 39 was in place. How did it come about that you had a portfolio approach to hedging when you knew that you would actually take on this cost as a result? Or was that overlooked at the time?

MR KAEMPFER: Neither nor. International Accounting Standard 39 was implemented for the first time not last year but the year before, in 2001. It basically deals with how you account for hedges. It is not what is the economic value plus or minus of a hedge but how you represent it in the financial reporting. It has, incidentally, been the subject of a lot of discussion. If you look in your own and other press, you will see that. In our case the impact is very small. All right, €38 million is a meaningful number, as it so happens, but if you look at many banks who work under IAS you can see that it will be hundreds of millions.

Why does this happen? Let me give you one example to explain the point. If you make a fixed-rate loan at a rate of X and you have an asset/liability management model, as we do, and as most banks have, that you do everything on a floating-rate basis, the normal thing is to do a swap against that fixed-rate loan with another bank under which you transform it into floating-rate asset. If you lend a fixed-rate loan to a customer at a rate of X, to convert that to floating rate you do a swap with a bank under which you pay him X, that same X that you receive from your customer, and you receive a floating rate of interest. That way you have transformed it into a floating-rate asset.

Let us go through what happened last year, because that is the explanatory answer to your question. When interest rates fall, as they did quite sharply last year, the X that you have to pay to your swap counterparty is now well above the market level of interest rates, because interest rates have fallen.

Under IAS 39, that swap, as with all other derivatives on your balance sheet, has to be marked to market, which is sound. It is good that everything has to be marked to market. When interest rates fall, and you pay somebody else above the market, on the mark to market basis you are losing money, because you are paying more than you should, according to the current market. So on the mark to market basis that becomes a loss.

This is 100 per cent offset by the fact that you are also receiving from your fixed rate loan customer an interest rate the same as X, which is above the market, so you are making a mark to market gain. So normally it should be a wash and it is not reflected, and if all you have is one asset with one offsetting swap, it washes, it is fully recognised you can mark both sides to market under IAS 39, and there is zero impact on your financial results.

Now you have a group of fixed rate loans and a group of fixed/floating rate swaps, and they hedge each other as a group, and not necessarily precisely individually. When that happens, IAS 39 says you have to mark to market the derivative side, the swap side, but you are not allowed to mark to market the asset side, and that is exactly what happened last year. So when you have hedging on a group basis, and in this case in our fixed rate loan portfolio, in a portion of which this happens, if interest rates then fall, you suffer a mark to market charge on the liability side which you cannot offset with a mark to market gain on the asset side. That is why I said if interest rates had risen, the opposite would have happened and we would have shown an IAS 39 profit.

MR JORY: So have you altered your strategy as a result of that, or are you just waiting?

MR KAEMPFER: No, because this does not reflect the underlying economic impact, but it does mean that P&Ls of banks will be more volatile than they would be in the absence of this. If it were total current value accounting, which in itself is a good principle, then all these things would wash because they would all be marked to market in the same way, but so long as there is a discrepancy, you get these P&L volatilities. This is why many banks, particularly continental banks who are facing the prospect of having to account under International Accounting Standards from the year 2005 under the European Commission's Directive, and who are now gearing up and getting ready for it, are strongly discussing with the International Accounting Standards Board whether IAS 39 cannot be modified, and indeed, it appears that some modifications are being aired. We shall see. This is a developing impact.

It is a slightly long explanation because it requires a certain amount of understanding, but in simple terms: why was there a charge last year that was higher than the year before? Because interest rates fell last year, and they fell more than the year before.

MR HIDAY: Christian?

CHRISTIAN SCHUBERT (Frankfurter Allgemeine Zeitung): Did you also hedge more last year than the year before?

MR KAEMPFER: No, because we have a policy that we hedge all these risks in our asset liability management. We do not take market risk, so when we do a fixed rate loan with a client, we make an automatic hedge to make it a floating rate asset. All our liabilities are floating rate, so there is no material mismatch in the overall interest structure of the Bank. This is the normal way in which hedging works in financial institutions.

MR SCHUBERT: I thought maybe because of increased volatility on the financial markets that you thought there was a need to secure your assets more.

MR KAEMPFER: No. We always hedge. It is particularly worthwhile when markets are so volatile - you are right - but as a matter of financial policy, we hedge those risks so we are not exposed in any meaningful way to market risks, and the exposure is purely to the credit risk. So with the market risk of having a fixed rate loan which can go any way depending on where markets go, if you put it on a floating rate basis, you develop with the development of interest rates and you are exposed to credit rather than market risk, and that is what we do.

GAVIN SERKIN (Bloomberg): What were the two AAA rated asset backed securities that were downgraded?

MR KAEMPFER: As a matter of policy and normal market practice, we would not comment on individually impaired assets. I think you can understand why. When you have an impaired asset against which you make a provision, then obviously you wish to pursue a vigorous recovery and stabilisation process, and if other parties involved are aware of the amount of your provision or the fact that you have made a provision, that can influence the efficacy of your recovery process. Also, these are traded securities in the market place, so you are dependent on making and receiving prices from counterparties which are appropriate, and if they know exactly what your position is, it will influence the ability to get the best result.

MR SERKIN: Can you say which country they are in?

MR KAEMPFER: No, because they are international assets from the international capital market.

MR SERKIN: You were saying how well the region's economy has been doing. Overall, have your provisions for losses, if those two were stripped out, come down?

MR KAEMPFER: No. I would say they have been stable, because we do continue with provisioning prudently, and of course, the provisions you asked me about were in the Treasury portfolio and the latter part of your question is really on the Banking portfolio. The Banking portfolio provisions have remained stable at about €1.2 billion, but of course, the portfolio itself has grown slightly, so at the end of the year provisions as a percentage of the outstanding operating assets was 13.3 per cent - I mentioned this before. That in itself was slightly down from 13.9 per cent at the end of 2001. That stability reflects some new provisions made, as well as some recoveries on previously provided assets which released some provisions.

MR SCHUBERT: I understand you usually only buy AAA securities in your Treasury department and now they are not AAA any more, so what do you do about it? You probably would not sell them now; you would realise a loss, would you not?

MR KAEMPFER: We do not only maintain AAA exposures. We have a policy. This is all about our exposure management. That can be through the assets we own or through swap exposure to other banks. We have a Treasury approach that limits our exposure to very high-quality credit exposures, but it is not only AAA, although it is not far away from that. If you look at the overall Treasury portfolio, the average exposure level stands at about a AA+ level. We are allowed to own assets which are less than AAA, but they still need to be of very high creditworthiness. So when things are downgraded, we either sell or we make a decision to manage the exposure afterwards, depending on what has the best result.

MR SCHUBERT: In these cases you decided to manage.

MR KAEMPFER: Yes, we decided to manage.

MR JORY: Can I ask you for some comments for last year on domestic bond market issuance? I did talk to you briefly at the EBRD conference, and there had been talk at the beginning of last year that you would issue in Russian roubles. I just wondered if you could comment on any progress on issuing in roubles and any progress on issuing in European domestic currencies.

MR KAEMPFER: Yes. Trying to enhance the Bank's issuing presence in domestic capital markets is a useful objective, because it permits us to fund lending to entities in the region who themselves do not have a foreign currency income stream, and that is particularly relevant, for instance, in the infrastructure sector of our business, where often longer term borrowings in the local currency are preferred. We hope to, and are planning to, when conditions permit, to enter and access the longer term Russian rouble bond market.

We have not done that so far because so far it has not been possible because there had to be legislative change, but the progress that was made was that towards the end of last year the Russian Duma did pass a new securities law, which is necessary, although not by itself sufficient, to permit us to issue bonds in the Russian market. It is not sufficient because other rules and regulations guiding the procedure of issuance have still to be worked out, and are being discussed with the Federal Securities Commission of Russia. We hope some time this year that it will be possible, but it depends on the progress, and we have to see. But we are encouraged by the fact that progress has been made on the legislative front.

MR JORY: Which was the law that was passed?

MR KAEMPFER: The new federal securities law. If you want the exact detail, we can give it to you afterwards. It was passed by the Duma in the latter part of last year, and became effective at the year end.

MR JORY: It was not very well-known or widely broadcast. I tried to find out about it.

MR KAEMPFER: That may be because it only became effective during the Christmas period, and that might have caused slightly less attention to be drawn to it. But in our case it requires some follow-up steps to be implemented.

MR JORY: Do you have any rough timetable at all, or any idea of when you might be able to issue at all?

MR KAEMPFER: I would like to be cautious, because it depends when all these discussions are finished, but I think it would be very good if some time in the latter part of this year a transaction could be done. Meanwhile, what we have been doing is some short-term issuance in roubles in the Russian money market as promissory notes, which we have rolled over.

MR SERKIN: Can I broaden that question to other bond sales in general this year that you plan? How much do you plan to raise in different currencies, and how does that compare to last year?

MR KAEMPFER: Last year we had a borrowing programme that raised a total of approximately €2.2 billion in a range of currencies and in a range of markets, as always. We swap those into a small pool of mainly dollar/euro currencies on a floating rate basis. For the current year, 2003, we expect a programme that is broadly comparable to what we did in 2002.

MR JORY: What kind of style will that come in? Will that come in a couple of big issues?

MR KAEMPFER: We have a borrowing programme that is meaningful but is nonetheless of a size that permits one not to have to go to a large public issue, unless there is a really interesting financing cost attached to it. In 2002 we have mainly done structured transactions, mainly through private placements, and they have been very cost-effective. In the year 2003, we shall see, but there is no preconceived notion; it depends on where the best opportunities lie for the Bank and for the shareholders of the Bank to achieve funding for the Bank.

MR JORY: Do you have a more natural bias this year towards euros rather than dollars? Do you have any kind of instinct for the year in terms of which currencies you will raise?

MR KAEMPFER: Not necessarily, no. It depends really. What we do every day is look for the best opportunities. We have a constant dialogue with the counterparties, as do most of our brethren in this business.

MR JORY: They tend to go for at least one or two big issues. Not the ADB, but the IDB tends to like to have at least one or two almost jumbo issues.

MR KAEMPFER: Yes, but you have to relate that to the size of their programmes, and the ones you have referred to have a somewhat larger programme than we do. In our case, we also do this from time to time, but we did not do it in 2002. We did one in 2001, as you may recall, when we did the $1 billion transaction in a global issue. So we shall see. It depends upon what opportunities are afforded by the marketplace.

MR SERKIN: I wonder if you could go into a bit more detail on your final comment in the press release, which is your concern for 2003 that the economic climate may cause problems for the region and for your pipeline. What specific problems do you envisage? Which countries are most at risk?

MR KAEMPFER: That comment is not really specific; it is more a general comment of slight caution in the context of the overall situation. As I said earlier, the region has been remarkably resilient, and at the present time we are optimistic that resilience will continue in the year 2003, but times are uncertain. There is a lot of uncertainty in markets. Much will depend on what the investor behaviour will be. For instance, if you look at the trend over the last 12 months, foreign direct investment into the region has maintained reasonable strength, but if there were to be adverse economic developments during the current year, or greater risk aversion, this would affect the flows of foreign direct investment in the region.

At the same time, there are private commercial sector banks who have been good co-financing partners of the Bank in 2002, and in fact increased their contribution to the overall mobilisation of funds that, as a catalyst, the Bank was able to mobilise to the region. If continued uncertainty means that they shall become more risk-averse, then this could also influence flows of new projects into the region. That is more what I was referring to than a specific warning about a danger of an individual situation or an individual area or country.

The fact is also that highly volatile financial markets tend to make a contribution to people taking a wait-and-see attitude or being more risk-averse. I am speaking more about those factors. Nonetheless, we do anticipate that the relative strength of the region will continue, barring very unforeseen circumstances, into the current year.

MR SCHUBERT: I have read that there has been a rally in emerging market bonds going on for about five months or so. To what extent are the bonds from your countries affected by that? Do you know if they benefit from that?

MR KAEMPFER: These have been a particular contributor to the phenomenon that you mention, and that has been especially true for those countries which are heading for the accession process because clearly, from an investor point of view, investors see the convergence over time of these countries in terms of costs of borrowing and the financial conditions they can obtain in the market. They can see convergence and they anticipate between that and what applies to Member States of the EU. You will see that the bond spreads being paid by the advanced countries in which we work, those which are going to accede to the Union, assuming that all the political ratification processes are completed on schedule, have been reducing. That has been a big contributor to the rally to which you are referring.

Some other rallies have taken place outside our region but those are really not a subject for us. You will have seen, for instance, that the spreads and yields on Brazilian paper after the election of President Lula have improved substantially, having previously been knocked down over the fear of the outcome of the election, but that is not really our subject.

In our region, there has been a good contribution to this process on the basis I have just described.

MR SCHUBERT: It has to run out in the not too distant future because 2004 is the accession date. Will it be over by then?

MR KAEMPFER: You would expect that process to continue but then stabilise at a certain time. I cannot tell you when that will be because it depends on the perception by the markets of events. The conversion process in the eye of the investor has clearly been in evidence in the borrowing conditions that a number of our countries of operations have been able to obtain.

MR JORY: May I ask you two more questions? One is a specific country question about disbursements for this year. Could you tell us what kinds of plans you have for disbursements to Ukraine this year, if you have specific information?

I also wanted to gain an idea, in terms of equity investments for this year, which countries you are looking to invest in effectively with real equity.

MR KAEMPFER: May I deal with the second question first on equity investments? Much as we are contributing to the market economy, we are not commanding exactly where an equity investment can take place because that depends on the project flow in any of the transition economies in the pipeline at any given point in time. We are open for equity investment business in all of our countries of operations where the investment climate permits those equity investments to be made by our strategic co investors who wish to make investments and whom we join on a risk-sharing basis.

If you look at the nature of investments throughout the region, then it is interesting to see that, as transition progresses, there is an evolution where investments generally are made. For instance, if you look at the EBRD, in the advanced transition economies, many of which are now in the waiting room to join the EU, originally when we first made investments at the beginning of the existence of our Bank, these were strongly focused on the banks in those regions. Because they were state-owned, they then became subject to privatisation and the Bank took equity participations in quite a number or in most of them. Over time, these were exited as our transition contribution was completed. We exited to free up our risk capital to make another transition investment. These were typically acquired by strategic investors, many of which had come from outside the region. In some of the countries, many of the banks are now in foreign hands or partly in foreign hands.

Our own focus on making such equity investments then shifts. In those countries, for instance, making equity investments has shifted in part to focus on the non-bank financial sector. There perhaps it is more in the form of loans than equity investments, but also in the form of equity investments in the insurance sector, in leasing companies and in helping pension instruments and institutional investors in local markets to develop. Of course, there are also big companies that have attracted equity investment, including from EBRD.

The challenge for the next phase of the transition of these countries and to make it sustainable long term in the convergence process that they will go through after joining the EU, which is a real challenge, will be to attract equity and risk capital for the medium-sized company sector. In Germany that is typically called the mittelstand. It is really the long-term sector that is, of course, needed for any market economy, which is in its early stages of development, but also needed is the small and medium sized enterprise sector, where again we have a strong focus, mainly through loans but to some extent through equity investments.

MR JORY: What are the points at the core of that? I was interested and followed what you said before about your investments in the banking sector. Obviously that is quite key and it is almost part of your definition as an institution. Is that going to translate into large equity investments in the Russian banking system? That seems to be the biggest system that has the furthest to go. In terms of the development of Russia, I suppose, alluding back to my previous question, those banks obviously need to be strong enough to carry on. Is that going to be part of your focus?

MR KAEMPFER: Russian reform under President Putin has now begun to focus on the financial sector. Of course, there were earlier reforms in other areas because they were a priority, including budget reform and reform of the energy sector, particularly given the strength of the price of oil and the effect on Russia. The focus has now begun to move towards the financial sector where reform is needed, and which was significantly involved in the events of 1998, as you will recall.

We are certainly open to considering such investments. We have been in discussions on potential ones. We have made no decisions because it is obviously necessary that the reform process is articulated and implemented in the financial sector. Several investments could be made, depending on how that process unfolds. There has been speculation in the press from time to time on some of them, as you are aware. You might have written one of those reports.

We have made no specific decisions either on any of the names mentioned or any others. It could be that we incorporate in our review some of the larger banks, depending on how things unfold. There could be some small and medium sized investments in smaller banks or in emerging regional banks. We will judge this in the context of the implementation of the reform process of the financial sector.

MR HEXTER: Shall I pick up on the Ukraine question? If you look at page 1 of the handout, you will see that Ukraine is relatively underweight in the Bank's portfolio of commitments. It is the second largest country of operation in terms of population but only number five or six in terms of commitments outstanding, at €1.29 billion, only 6 per cent of our portfolio. Last year in fact it was only 4.4 per cent of our new commitments. We expect that to increase significantly this year as a consequence of a couple of things: a better investment climate, by no means perfect but there have been improvements in the investment climate; and quite a big increase in our pipeline of opportunities particularly coming from foreign investors, notably in the agricultural and agribusiness sectors.

We will certainly do a lot more than that €170 million this year. I am not going to give you an exact number but my sense is that we could well double that figure, based upon our current pipeline of opportunities. As the Bank's strategy is to move more and more eastwards, Ukraine is the type of country in which we would expect to see a fairly significant increase in our portfolio of commitments over the medium term.

MR SCHUBERT: What about Uzbekistan? You have one project there. I thought your activity there was somehow on hold because of the lack of political progress. Is that true? How are things going in Uzbekistan?

MR KAEMPFER: Our activities in many ways are not on hold because we are quite actively engaged in matters to do with Uzbekistan. To start with, as you are aware, we are planning to hold our Annual Meeting in Uzbekistan at the beginning of May. Secondly, last week we announced a new Country Strategy for Uzbekistan. That points to a number of issues that we believe Uzbekistan needs to address, both in the political and in the economic spheres, to enable us as a bank to be in a position where, if there are suitable projects, we could enhance our presence. On the other hand, if that is not the case, then it will be very difficult for us to do so.

We have set out seven benchmarks for judging the government's progress on reform in the political sphere. That is easily accessible on our website or through other press statements we have made. Briefly, in the political sphere we have stated that the government should: ensure greater political openness and freedom of the media; open up the political process to a variety of interests; and improve its human rights record. On the economic side, we have said that the government should liberalise its foreign exchange regime; eliminate barriers to foreign trade; reform the banking sector; and also raise tariffs in the energy sector so that it covers costs.

MR JORY: It does not seem that you have been doing a lot of business on the Uzbekistan scene, to be honest, because you also included the UN's statement.

MR KAEMPFER: David Hexter will comment in a moment on the operational side. It is important to know that there is a strategic framework under which we approach the way we do business there that will in itself be determined by the response to these points. We have said we will review progress on these seven parameters in a year's time. That will be a key determinant of what we can do but that depends, in addition, on what project flow there is.

MR HEXTER: I covered Uzbekistan for a number of years and made many trips to Tashkent. We have been successful with the mittelstand in fact in Uzbekistan. We have had a number of SME programmes and micro programmes running for the last several years, which have been quite successful.

We have also been moderately active in infrastructure projects, but those projects only work where we can agree the necessary conditionalities with the Uzbek authorities, such as raising tariffs and the regulatory framework. Progress in many of those sectors has been slow. Where we have not done well, and this is reflective of the points Steven made, is in attracting foreign direct investment into Uzbekistan. For the reasons given - exchange rates, regulation, bureaucracy and so forth - Uzbekistan has not been at the top of the list of priorities for the foreign investor.

We have regular dialogue with the Uzbek authorities to try to get some of those barriers fixed. I think it is right to say that until those barriers are fixed we do not expect a flood of investment opportunities coming our way. We should love to do more, but the nature of the economic deterrence makes that rather difficult at this point in time.

MR SCHUBERT: Is the one project you have mentioned here an SME?

MR HEXTER: I believe it is the micro-enterprise programme that we put in place last year.

MR SCHUBERT: It is still ongoing?

MR HEXTER: It is ongoing. It is making lots of small loans, $5,000 each, in big numbers, through Uzbek banks and thus far it is quite successful.

MR SERKIN: Can you talk about your biggest individual projects this year? Which countries within your region will have the biggest increase in investment, in proportionate terms?

MR KAEMPFER: It is not easy to give you an answer to that question. These projects are very long term in nature, as you know. This is not short-term lending, it is not corporate lending. These projects have long gestation periods, in the main, and it is not clear when they will come to fruition. There are a number of major energy projects which are being explored and are under discussion in Russia. We would hope that one or more can come to fruition, but they are complex, they take time, they are dependent on many parties involved and sometimes many other countries, too, as they may be connected with, for instance, pipelines going through other countries; or they are in the infrastructure sphere, for instance roads and other forms of infrastructure, which take time to develop. I would not mention one individual large project.

Last year we did more than a hundred projects. That is typically what the Bank does in a year. It is never one individual large project that is decisive. Probably our largest project in 2002 was the St Petersburg flood barrier, which we were instrumental in getting financed. There could be one or other infrastructure project again this year. There are quite a number that we are looking at. I am sure we shall not do them all, but I am hopeful that we shall do some. Whether we shall do them in 2003 or 2004 I do not know. I could not give you meaningful guidance by telling you it was going to be there or it was going to be there. We intend to carry on with implementing the strategy of the Bank and to be active in all our countries of operation, to work strongly on continuing to improve the investment climate, to support reforms. What we do will depend on how they go. We are not driven just - or in fact at all - by the word "volume". What we are driven by is the quality of the projects, the transition impact they can make, the conditionality we can attach to a particular transaction and thus make our impact and the projects that are actually capable of being done and are viable. These types of questions are always difficult for us to answer ex ante. Yes, I would think there could be some larger projects in the infrastructure and energy spheres that will come to fruition at some stage this year.

MR SERKIN: Which countries do you think will have the biggest increase? You mentioned Ukraine as one country that you are fairly confident will have an increase in volume. Are there any other countries that you think will get similar boosts?

MR KAEMPFER: I am not sure I would single out one. I am hopeful that we shall continue to progress the business in Russia, as we did in 2002, but much will depend on the factors that I have just cited and the continued reform process. We are very hopeful that this will continue. We also believe that in countries like Bulgaria and Romania too, which are, as it were, in the accession waiting room and are strongly energised by the requirements and the implementation of the acquis communautaire, there will continue to be some strong opportunities for new projects. We are certainly working on quite a number of them. We also believe, notwithstanding the recent sad event of the assassination of Mr Djindjic, that in Serbia and elsewhere in the Balkans, as the adherence to reform continues and remains in evidence, that the investment flows will continue. Certainly from what we see so far that is very much the case and we are hopeful to be able to do more there. David Hexter has already made a comment on Ukraine. We also expect to have continued strength in many of the other countries, depending on how individual projects work out in terms of their timetable.

MR JORY: Are there any planned announcements for the Annual Meeting in Tashkent? Is there anything you are hoping to sign that you would announce at that meeting? Have you any expectations?

MR KAEMPFER: I would say that normally a number of projects are signed. At the moment I am not aware of one.

MR HEXTER: There are two or three Uzbek projects that we are working on at this point in time but we are not driving the timetable for signing by the fact that the Annual Meeting happens to be taking place in Tashkent. Those projects will be signed as and when they are ready. To my knowledge, there is no specific project planned to be signed at the time of the Annual Meeting.

MR HIDAY: There might be some non-Uzbek signings there.

MR KAEMPFER: That would be simply taking advantage of the fact that people are there. That would normally happen. I guess that there will be one or other signature, but I am myself not aware at the moment of any individual one that is likely to happen.

MR SCHUBERT: How is the attendance for the Annual Meeting developing? I guess you measure that somehow.

MR KAEMPFER: It is still very early to say. Many of the registrations tend to take place a little later. I am quite sure that, in the current context of global uncertainty, people have not rushed to finalise their plans, either to go there or to go anywhere else. It is early days to be able to tell. We have had a solid number of early registrants. We shall see how it develops in light of the events that lie ahead.

MR HIDAY: If there are no more questions, please feel free to stay to have tea or coffee and ask questions informally, if you like. Thank you for coming.