2008 annual results press conference

2008 Financial results press conference: 25th February 2009

MANFRED SCHEPERS, VICE PRESIDENT FINANCE: Thank you all for joining us at this press briefing on EBRD’s 2008 results. The Bank, like many of us, has been in the midst of a crisis that unfolded in the course of 2008 and has finished the year very differently than it started. In response to the crisis EBRD has agreed to make a significant increase in its investments in 2009 so as to have a direct impact on the crisis, alongside our Medium Term Plan.

In 2008, for the first time since the Russian crisis in 1998, the Bank made a loss, a loss of €602 million, a very similar loss in relation to its investment size. Obviously, the cause and the effect are very different. This compares with a net profit for 2007 of €1.9 billion.

In many ways, it would have been surprising if the Bank had not been negatively affected by the impact of the crisis because of the very deep commitment the Bank has, both in its loan investments and also its equity investments. It is the equity investments that have caused the impact on the financial result, largely due to unrealised losses in the equities, as there were relatively few equity disposals in the market last year. The decline in equity values we have seen has been very much in line with the declines experienced in other markets worldwide, in both developed and emerging markets.

The unrealised losses and impairment charges on our equity portfolio were €1.2 billion, as you will see in the financial summaries that you have received. They are related to the decline in fair value of our equities. In contrast to our loan book, which obviously we carry at cost, and we make provisions through the life of the loans, our equities are accounted for at fair value, so the values of both the listed and unlisted stocks are taken straight through the balance sheet.

An interesting observation, as EBRD is a long-term investor in equities in the region, is that at the end of the year the value of our equity portfolio, which stood at €4.4 billion, is still 10 per cent above the cost of the equity investments. The equity investments have been built up over many years, starting in 2000, some even earlier, so the decline that we have seen in 2008 has effectively been a reduction in the unrealised gains that have been built up. However, obviously, this year is starting off on a rather negative note. If we exclude these unrealised losses and other unrealised amounts, the Bank in fact made a realised profit before impairments of €849 million for 2008.

The Bank remains exceptionally well capitalised. It has €26.3 billion of capital, of which €11.5 billion is paid in capital and reserves and €14.6 is callable, and that compares with the Bank’s banking assets, both loans and equity, of €15.1 billion, €10.7 billion being loans and €4.4 billion being equity. So the loss has in no way affected EBRD’s ability to implement its increased investment programme both as part of its Medium Term Strategy and as a response to the crisis, and there is no need for additional capital over the coming years.

As a result of the crisis, the Bank clearly has an increased role in comparison to our plans of a year ago. In response to the crisis the Bank is increasing its business volume in 2009 by 30 per cent from the €5.1 billion that we invested in 2008. The crisis is now affecting not just Russia, which was very much the focus of attention in August 2008, but countries across the region.

The most immediate needs are in the financial sector. In order to strengthen the institutions, which are all in a unique constellation, foreign-owned, actively utilising dollar and euro currencies, some countries being resource-based, others not, it is clearly important that we ensure that the financial institutions in the region are sound and that they are able to keep credit flowing to small and medium size enterprises.

We have already had programmes of both equity and debt support for Bank of Georgia, for Banca Transylvania in Romania, for Raiffeisen Bank Aval in Ukraine and several other smaller banks. In Russia we have made similar investments both in equity and in debt in some of the regional banks. Further, in the corporate sector there is a need for provision of ongoing working capital, completion of capex programmes, and we are about to sign a facility to do so. We plan to double our Trade Finance Facility.

Again, this is a global phenomenon; it has been well documented and highlighted by other financial institutions. At the heart of a lot of the reduction in credit is not only conventional bank lending but also the collapse in trade finance, particularly in the emerging markets, as that is where trade finance is obviously most needed.

This year we are looking to invest around €3 billion in the financial sector, €1.5 billion the corporate sector and €2.5 billion in the infrastructure and energy sectors.

In terms of the severity of the crisis, the impact it has on Western banks and the urgency and the complexity of the problem, it is imperative that we work very closely with other international financial institutions, first and foremost the IMF, which has now made interventions in several of the countries in the region, and other institutions of a similar nature, such as the IFC, with the capability of doing both equity and debt, and the EIB in terms of being able to do larger-scale bank-based financings. It is critical that we coordinate our interventions and apply them where there is the greatest need.

Similarly, G20, which is meeting in London at the beginning of April, is focused on the scale and the methods used by the international financial institutions, the multilateral development banks across the world, to ensure that they can behave in a countercyclical manner in this crisis with the resources that the MDBs have through their strong shareholder support, their AAA ratings and their ability to continue to access the capital markets. This is something that I think is critical to ensure that the interventions being done globally are of similar input, with similar products and similar support from shareholders.

Looking back at 2008 institutionally, the Bank had a new President; Mr Lemierre left, having been President of the Bank for eight years, and in the summer Mr Mirow became the new President. Turkey became a new country of operations and we already, because of the current environment, have increased levels of projects in the pipeline.

EBRD investments in 2008 were lower than 2007, €5.1 billion compared to €5.6 billion the previous year. The decline was very much based on the latter quarter of the year, because the implementation of a lot of projects was delayed in terms of decision-making, FDI or local investments. These projects will in due course sign but obviously, in the current environment, the current crisis, the availability of co-investment and of majority shareholders is more difficult.

At the same time, co-investment, the syndicated loan market, has effectively closed down, although I am glad to report a little glimmer of light at the end of the tunnel is that last week we were able to close for the first time in many months quite a large syndication for Integra, a Russian company where we had a series of international banks participating as B lenders in our syndicated loan.

As I mentioned previously, underneath the crisis there are also the core priorities of the Bank in terms of its support to the region, such as the Western Balkans and the Early Transition Countries, central Asia and the Caucasus. In those areas we continue to see strong growth. In the Early Transition Countries our investments increased by 14 per cent, our investments in the Western Balkans increased by 16 per cent, and in key sectoral-related areas such as the Sustainable Energy Initiative investments closed above €1 billion, at 20 per cent of our total volume, and this obviously continues to be a key priority in the Bank underneath the crisis that we are all focused on.

Russia accounted for 36 per cent of total investments for the year, which was slightly lower than the year before, and that is basically because the early and intermediate transition countries was where we experienced most of our growth and central Europe remained relatively stable.

In total, since the Bank was created in 1991, we have invested nearly €42 billion and, together with third parties and co-financing, the Bank has now mobilised over €130 billion over the past 17 years. Liquidity became something of a focus in 2008. Formerly people did not talk about it; now it is key, and one of the key elements of the financial strength of the EBRD is its very high level of liquidity and its continued access to the capital markets. Our liquidity remains very high: we have cash, liquid assets, in the Bank which equal the next three years’ cash requirements and our access to the capital markets due to our shareholder support and our AAA rating, our high capitalisation, with €26.3 billion of capital, supporting a currently a portfolio of €15.1 billion but obviously, as part of the crisis intervention, that portfolio will grow. The Bank’s total capital is sufficient for us to continue to intervene aggressively in this crisis.

Our cost of funds for 2008 was still very attractive at Libor minus 38, partly due to our modest borrowing requirement, but in 2009 it continues to be relatively attractive as we have our traditional sources of funds in the capital markets. Nevertheless, the capital markets have become more difficult. The issuance of government-guaranteed debt and the increased level of issuance by the governments themselves is obviously putting strains on the relative cost of funds of all issuers, including the IFIs.

The EBRD has been very focused on local currencies, which is at the heart of many of the strains that we are now seeing in the region. The Bank’s focus on providing local currency lending has been, with foresight, a very important strategy. Nevertheless, we are currently seeing a setback as many of these markets are under deep strain and the efficiency of the markets across the region, from Russia through to central Europe, is now more difficult. This is something which will continue to be a big focus of the Bank, as we are going to see a significant shift into local currencies becoming a more actively used tool within local lending to help restore stability and confidence in those capital markets and that they become more vibrant. Currently, however, they are in deep strain, particularly because, of course, interest rates – and I think this has been alluded to in the press – are currently very high due to currency weaknesses. There is then, of course, the problem of greater credit growth in local currency vis-à-vis hard currency, where interest rates are at historical lows.

Looking forward to 2009, the region is obviously seeing significant slowdowns in the real economy. The banking sector is under pressure, not so much at this stage from actual loan losses but more the question of the refinancing of the predominantly international wholesale financing utilised for credit growth. This is something which we seek to address, which the other IFIs seek to address, and which I am sure the governments in their discussions will also seek to address, to ensure, particularly in central Europe and in the near European countries, that this lack of refinancing capacity is solved, and we are confident that it will be.

The issue for the region is about resilience: is the modest level of central government debt going to be a stabiliser? It is about international support for refinancing from the strong international banks that are active in the region. They are all relatively strong, although obviously nobody is unscathed by the current crisis. The banks in the region have not been involved in structured credit, leveraged finance. These were the mistakes that were made within the Western banking system, not in the region, and corporate leverage as such is relatively low.

EBRD has stayed very focused on our long-term priorities, as I mentioned previously, in terms of the early transition countries, the Western Balkans, the Sustainable Energy Initiatives, and others. The crisis response is key to ensure that we utilise the resources we have in such a way that they have most impact in terms of dealing with the crisis and to ensure that we leverage some of the scarce instruments that we have, particularly our ability to invest in equity, our ability to provide trade finance and counterparty guarantees across the banking system in the region, and with our core debt product.

The risks are, of course, significant. The equity markets continue to be volatile. We have clearly seen a big move in equities last year, and this year, although we appear to be at the bottom, it is still an area of great vulnerability. Our impairments in the loan book last year were marginal at just over €100 million, and most of them were general provisions. The specific provisions in our loan book were very low. It goes without saying that this year, as the real economy continues to deteriorate, we could expect an increase in our specific loan provisions.

As I said before, EBRD is exceptionally well capitalised and well placed to withstand losses in the loan book and potential further losses in the equity book. We remain very liquid, with very strong capital market access, and on the back of that are able to support the higher level of investments that we intend to make in 2009.

I hope that provides an overview and an outlook and I am very happy to take any questions you may have.

CAROLYN COHN (Reuters): You have mentioned that there is a lot of government funding going on. I just wondered whether the EBRD was likely to be either reducing or expanding its own borrowing programme, and also whether you might be considering the possibility of guaranteeing debt perhaps from some of the countries that you serve.

MR SCHEPERS: In terms of our borrowing programme itself, we have to see how the year evolves. As I said, we are highly liquid and therefore have an ability to support a significant investment programme. We do access the shorter term debt market. This year we have a borrowing programme which is planned to be in the region of €2.5 to €4 billion, which is relatively modest in comparison with other issuers. In the year to date we have completed just under €2 billion of that. It really depends on the implementation of the crisis response and it also depends on the disbursement of the crisis response in some sectors, in particular the infrastructure and energy sectors, where we could support a project but the actual disbursement of the project will take longer, whilst obviously support for the financial institutions sector, the banking sector, is more likely to see more rapid disbursement. It will depend on that.

CAROLYN COHN: Is that this year?

MR SCHEPERS: That is this year.

CAROLYN COHN: You have done €2 billion already?

MR SCHEPERS: We have done €2 billion already.

In terms of the guaranteeing of debt, this is something which is not envisaged as such. Obviously, we provide the guarantee programme under our Trade Finance Facility, which is a way of providing support to trade finance in taking the counterparty exposure, but that is an instrument we have not deployed in the capital market. As far as the capital market is concerned, we would be seeking more to assist in the re-establishment of capital market financing in the local currencies in which the Bank operates in many of our countries. We think it is critical for countries such as Russia, but even in central Europe, to support the development of both government and non-government bond markets so that the credit growth, the corporate finance, that is required in these countries can be sourced long-term from the country in which they reside. That is an area where we would see ourselves providing support.

PAUL HANNON (Dow Jones): Earlier today the foreign debt of Ukraine was downgraded by Standard & Poor’s. I understood from S&P, or at least, from analysts’ reaction to that, that the implication is that there would be recovery of between 25-30 per cent should Ukraine default. What would that sort of recovery ratio do to you? What is your level of investment in Ukraine? Presumably, you would expect to be treated a little bit better than any old bond investor. Just for argument’s sake, what would 25-30 per cent recovery add up to?

MR SCHEPERS: First of all, the Bank is committed to an investment programme in Ukraine. The credit rating of Ukraine has clearly been lowered because of its economic, financial and political difficulties. In terms of the treatment of debt, obviously, this is the sovereign rating; it does not necessarily have a direct application to private sector credits in the country. Should there be any default, it is very difficult to make a judgment, first of all, on the relative recovery that one has on a private sector exposure as opposed to a government exposure.

PAUL HANNON: Roughly how much do you have at risk in Ukraine?

MR SCHEPERS: Of our banking assets, €1.5 billion is in Ukraine, of which 81 per cent is in the private sector, ergo 19 per cent is in the government sector. So if there were a government event, with the current rating the probability is greater but it does not imply that it would affect the government portion of that.

GREG ROUMELIOTIS (Reuters Project Finance International): Just on the point of syndications, you mentioned Integra, which was one successful syndication that closed recently, but throughout the year, particularly towards the end of the year, certainly in energy and infrastructure, there have been syndications like the Turceni power project in Romania, for example, that were not successful. In those cases banks, certainly your clients, tend to come to EBRD and ask what the Bank can do that commercial banks will not do. We have already touched on the issue of guaranteeing debt. I just want to get a sense of how prepared you are to think outside the box in terms of financing structures, to do things that commercial banks will not do, because at the end of the day, that is the expectation of a lot of players in the region.

MR SCHEPERS: It is funny how the world changes in 12 months. Twelve months ago we were talking about crowding out, and now we have a new concept, which is crowding in. How do we get the private sector to engage in the sector in long-term credit provision, which is obviously something which has been severely curtailed? I think, in terms of instruments, over past years there has been far greater growth in the pure private direct lending, syndicated lending, than in the EBRD’s lending or the EBRD’s syndicated lending, which is fantastic. That is exactly what the objective of the EBRD is, to stimulate private sector investment in our region. That has now had a severe setback.

The EBRD A/B loan structure is there when risks are perceived to be high, and when risks are perceived to be low, it no longer offers banks a lot of value. We think the value of that has gone up dramatically, particularly now, as I said in answer to Paul’s earlier question. What is the risk in a transaction? Is it the country risk or the project risk? Ukraine is clearly such an example, where there might be very viable projects but the government itself might not have an ability to honour its debt.

For that reason, we will continue to stimulate the A/B loan structure. It still requires the Bank to take risks, and it is an area we are looking at, which I mentioned previously. At the beginning of 2008 the concept of lack of liquidity was a non-concept, and now the concept of liquidity is to some extent a bigger hurdle than the taking of the credit risk in a project. So we are looking at structures whereby we separate the liquidity provision from the credit provision, the use of unfunded risk participations, and obviously one needs to ensure it does not apply to all projects and it does not apply to all lenders. But it is an instrument that we think will be used more because EBRD, as I said before, has good capital market access and liquidity. We are constrained, as is everybody, in credit provision. Whilst the private sector might not have the capacity to actually provide liquidity, it may have the capacity to support projects that are sound or with clients they have had for some time.

The other aspect is maturity. Previously in the Bank’s projects we had the capacity to take long-term risks – the point I made on our equity investments. The same applies to our loan investments. We could see situations whereby we have to facilitate the private sector participants with durations that in the current risk climate are more appropriate for them, and for us to balance it with a longer term. The A/B structure in the past was maybe closer in terms of maturity and now we may have to move them apart slightly. We will see these sorts of innovations, because it is critical that we see the private sector return to participating in the good infrastructure projects and corporate projects that are undoubtedly still there in the region.

GREG ROUMELIOTIS: Can I just very quickly follow up that point? Specifically in the case of the A/B loan structure, if you tweak the structure sufficiently and put in a liquidity premium and address tenor issues and the B loan still does not sell, are you prepared to step in nevertheless to support your client?

MR SCHEPERS: Obviously, we have constraints. We cannot be a majority provider of the capital structure but, on the assumption that the A/B loan structure is not that, in its entirety anyway, obviously the Bank has already been taking higher shares of certain loans, and in certain loans, particularly in local currency loans, it is currently virtually impossible for the international banks in particular to refinance themselves in roubles. Through our standing in the domestic market in Russia we have access to roubles, so in the rouble markets we will be doing most of the projects on a bilateral basis until such time as the international banks have access to roubles again.

AGNES LOVASZ (Bloomberg News): Could you please elaborate on the cooperation with the IMF and the other IFIs in the region. I wonder what the EBRD’s response is to calls for help by Western banks that are affected or that have huge exposure to foreign currency loans. Also, could you elaborate on what you said, that probably the focus would be local currency lending from now. What does that mean for the EBRD?

MR SCHEPERS: In terms of closer coordination with the other international financial institutions, at the beginning of 2008 the IMF was in the process of closing down its office in Ukraine and the region was not in need. Now we are clearly seeing IMF interventions across the region. Latvia and Ukraine are the two obvious ones, as well as Hungary. What is critical in our work with the banking sector and with the central banks is that we follow the priorities and the conditionality of the IMF programmes in those countries. There are requirements for bank restructurings, which are clearly happening in Latvia and in Ukraine. In Hungary there is a clear need for foreign currency interventions, so close coordination with the priorities of the IMF is imperative. In the same way, from a resource standpoint, the resources that can be provided from the international financial institutions, i.e. ourselves, the EIB and IFC, are very different from those of the IMF. The IMF provides funds to the government or to the central bank, not to the banks themselves. It is important in working in these countries to coordinate with the other IFIs to ensure that the interventions, as I said before, are done in a way that is coordinated and best suited for the priorities that that country has, in particular in the banking sector.

The instruments obviously also differ. We have the ability to invest in equities, subordinated debt, senior debt, and trade finance. The EIB is obviously more focused on the European Union with the stronger banks. The IFC is very similar to ourselves. The IFC has its priorities in our region but also in Latin America, Asia and Africa. It is important in this current environment where resources are clearly scarce. It is international financial institutions that currently have the ability to provide support, so it is critical that we coordinate that closely to ensure that we are making those interventions in the appropriate way.

In terms of the question of the international groups, as I said, we have made certain interventions already. We are in close contact with the international groups to determine where their priorities lie within their networks in the region. Clearly, the debate at the political level that is now going on is to ensure, particularly in the European Union countries, that the parent banks are providing ongoing support both in terms of equity and of parent company loans to the subsidiaries, and that there is not a degree of protectionism through the government support that is being received within the western European countries to the detriment of the subsidiaries. There is no evidence of that. Obviously, there is a fear of that but there is no evidence of it as such.

We are working closely with those banks and we have historical relationships with all of them across the region, whether in European Union accession states or in Ukraine or in Russia. We work with all of them where appropriate to support them in the various countries.

In terms of local currency, this is going to be a real challenge and one that is actually very important. It is being identified now – maybe a bit late – as something that needs to be resolved because, on the one hand, there is talk of some of the central European countries going for accelerated euro entry but at the same time there are certain countries where that is more distant and certain countries where it will probably never happen. What is critical is that the financial system in all these countries needs to be able to develop so you do not have the mismatches that have become so evident in this current crisis.

Our interventions in these countries are to help small and medium size enterprises. If the risk for those countries due to rapid euro adoption is very limited or negligible, then obviously the lending should be done in euros where possible, but there are many other countries where that is not the case, and that is where we need to see more institutional change to develop instruments of local currency lending for the banks in these countries, particularly with the complexity we have had in the region where a lot of the banks were international banks. For subsidiaries, it was natural to receive the currency of the parent bank than the local currency, and therefore we have seen this strong growth in both dollar lending in countries such as Russia, Ukraine and Kazakhstan, and euro lending in all the EU accession states and the Western Balkans.

We need to see shifts here, and it is a complex area because interest rates, as I said before, are now very high due to currency weakness. Unlike in the euro zone or in the UK or in the US, where monetary policy has virtually run out of its capacity, in the countries of operation on the whole, due to currency weaknesses, we have seen interest rates at very high levels. So at a point in time when inflation is coming down rapidly, economic growth is coming down rapidly, credit is scarce to begin with, the cost of credit in the local currency is very high. We are seeing migration into local currency credit being very complex at this current time but this will pass and our strategy is to ensure that when interest rates normalise, we then migrate towards a structure where local currency lending for the SME sector and other domestic sectors, not so much the export sector – the consumer, the mortgage – develops and we do not get the currency exposure that is evident across the region.

CARL MORTISHED (Times): I was just wondering whether you were surprised at the speed of the deterioration in the banking sector in the transition economies. I was wondering, in retrospect, do you think that some international institutions encouraged perhaps a too rapid expectation of conversion with the euro zone in some of these economies?

Secondly, in relation to what the EBRD has been doing over the past two years, the Bank has been talking with growing confidence about a number of transition economies having transited and maturing, graduation. Is it the case that some of these economies will now be put back a class and made to repeat the sixth form or whatever the right analogy is?

MR SCHEPERS: Coming to your earlier question, I think if the de-leveraging and the inability of the parent banks to raise equity and debt had not occurred, then the system could well have sustained itself. What we are currently seeing – and this is something which I think we should not get too negative about because it is still work in progress and clearly different paths can emerge – is that the ability of the parent banks to support the subsidiary banks on the whole is there. People talk even in Western Europe about government support for banks, but on the back of that you must grow credit. People still want credit. We are also going through an environment of reduction in economic activity in the region currently and it is very difficult to see growth in credit in a period of reduction in economic activity.

I think it is fair to say that EU accession has probably caused a period of acceptance of too great a currency mismatch in hindsight vis-à-vis the speed of euro adoption, but again, I think the impact on the banking system and the impact on eastern Europe itself, had we not had the crisis in the banking system in the Western economies, probably would have sustained that process and we would have gone down that path. A lot of imbalances have now been exposed and clearly this is an exposure that in hindsight that has probably been too great and also, in many ways unnecessary, which gives us comfort that we can remedy this.

For many years in countries in central Europe in particular – Poland, the Czech republic – until very recently interest rates, in zloty, in Czech koruna, in Hungarian forint, in Romanian lei, were in no way high in comparison with interest rates in the euro or in the dollar, so the relative cost of the local currency was not so much higher. What was more difficult was accessibility, i.e. the availability of the local currency was not as great because the international market had this whole basket full of euros and dollars readily available. It was not the cost of credit that was so different; it was more the availability of funding, which was more available in dollars and euros.

That is the lesson we learned, and it comes back to my earlier point, that we need to focus on credit provision in the local currency, and now, of course, is the most unfortunate time because interest rates are so high, unlike even two years ago, when interest rates in these currencies were virtually at a par, and in some countries, such as Poland and Czech Republic, were even lower than interest rates in euros. I think this is a lesson learned but it is not something that has in itself caused a problem. The undermining of the Western banking system has destroyed the sustainability of the model.

In terms of the transition, graduation, from our side, in the region we are seeing many reversals or slowdowns. All sectors of the economies in the region are being affected and so the definitions of graduation themselves must obviously be reviewed and we need to keep a very open mind; our shareholders, I am sure, are doing the same. I am sure the countries of operations themselves are recognising that the instruments or the strength of their economies look very different today than they did 12 months ago. Likewise – and this is going to be a big challenge for ourselves, the IMF, the other financial institutions, but also the countries themselves – we are in the process of re-writing banking regulation, banking supervision, and the structure of banking in the Western world. This all has to be adopted as part of what we classify transition in our countries of operations. We have spent nearly 20 years now working with local governments and supervisors and getting the banking system in our countries of operations to a much stronger position than where they were 20 years ago. Obviously, we will need to spend a bit more time helping them in the context of a completely changed financial architecture in the Western economies.

VITALY MAKARSHEV (Tass News Agency): Are you involved in any talks on the possible restructuring of Russian companies’ external debt and how seriously do you think this could influence the Russian economic situation?

MR SCHEPERS: The Bank’s most important portfolio and most important country on an annual basis is Russia, and we continue to work closely with the companies and the banks that we have supported. On the whole, our portfolio in Russia is slightly more focused on the banking sector but also the corporate sector and infrastructure. We are not really that involved in things such as the natural resource sector and the exploration sectors. Those companies that we have are affected by re-financings. The difference between our projects and the most traditional projects in Russia were, coming back to the earlier comment by the gentleman from Reuters, that we tend to lend long-term, and so the short-term refinancing problems that are now appearing with some Russian companies on the whole tend to be companies that were not really utilising the long-term project finance that EBRD was offering. It is more banks that were refinancing themselves on the short-term Russian market. The Russian bond market on the whole was very short-term but also a lot of domestic loans were very short-term, both hard currency and local currency.

We are working closely with our companies in Russia and the bank customers we have in Russia but, in terms of the large company restructurings that are going on, on the whole they are not EBRD projects, not projects we are involved in.

VITALY MAKARSHEV: A follow-up question: how big is the request from Russia for new money?

MR SCHEPERS: The expectation for 2009 is to do a share of the Bank’s business in Russia which is very similar to last year. Last year we had 36 per cent; I think this year it will be a similar percentage of the level that I mentioned, the €7 billon objective that we have for this year.

In terms of the priorities in Russia, again, there are clearly key priorities within the financial institution sector, and within the infrastructure sector and the corporate sector there are key priorities. We are working closely with the Russian Government in terms also of the way they are intervening, the different methods that they are using, but on the whole the strategy in Russia itself at the medium-term level will be very similar to what we have had over the past years.

PAUL HANNON (Dow Jones): You mentioned that in the final quarter of last year approvals of new investments slowed and that is why the year as a whole ended up being a little bit softer than you had expected. Just a few minutes ago, when you were talking about credit growth in the region, you mentioned the fact that in a recession people tend not to borrow as much. This call that we hear all around us, including in this country, for credit to grow leaves out the fact that maybe people are too frightened of the future to demand credit. Why are you an exception? Why is the EBRD going to be in a position, given its experience in the last quarter, given what you have just observed about the demand for investment and credit, to boost your investments this year by 30 per cent?

MR SCHEPERS: The key mandate or mantra for our investment strategy is that we invest in sound projects. We are not going to be doing any bail-out financing. There are lots of bail-out financings required in the current environment and that is not our business. We invest in companies where there are clear transition benefits and, as I mentioned earlier, that is something which one needs to have a slightly different view on in light of the crisis, as many sectors are going in different directions. Also, there is the issue of additionality, that if the private sector is willing and able to provide the finance for a project, that is great and we do not need to do so any more. I think it is the latter that is the major driver behind our greater need. It is not that we have lowered our transition benchmarks or our objectives. We need to adopt transition in light of the crisis. It is not that we are going to be doing unsound business. That would be a waste of shareholders’ money but what we are seeing is an absence of the international banks and the private sector in providing finance.

That does also mean that certain projects across sectors which might have been viable last year are clearly not viable now, because the outlook for the economies is lower, but it is very clear, if you look at the amount of finance that was provided in the past, that even if aggregate credit demand goes down by more than 50 per cent on a relative basis, there is a greater need for the Bank. We are also seeing, of course, not only a reduction in the loan market; there is a total absence of the international bond market and the international equity market. So there are many areas where there is a dramatic drop in the provision. There is clearly also a dramatic drop in demand but the gap is still very significant, which is why there is confidence that the investment that we have boosted to respond to the crisis will be deployed across the region.

KONUL KHALILOVA (BBC World Service, Azeri Service): My question is, what immediate measures to cope with the downturn is EBRD suggesting for countries like Azerbaijan? Is the Azerbaijan Government’s optimism about the country’s immunity from the global financial crisis justified?

MR SCHEPERS: I am not the greatest specialist on the detail of Azerbaijan, so I apologise for that, but what we are seeing in the Caucasus and central Europe is, to some extent, that the countries that were less reliant on international credit, the countries that were less reliant on international banks, the countries that have significant natural resource income, in spite of the decline in both metal prices and energy prices, obviously have an ability to sustain the downturn slightly better than those open economies that were very reliant on external credit, that did not have any income from either metals or energy exports, who are the worst affected. There is some justification for these countries to be a little more optimistic than others on the basis that they have income and less exposure to the sharp reduction in international credit provision. At a more micro level, those parts of the economy that were dependent on new investment I am sure will also see a slowdown, as in areas like the energy sector, with the oil price declining, things are going to be slightly slower, but on the whole, obviously, those countries have slightly more shock absorbers than the more open economies.