The EBRD and Russia

By Richard Wallis


The Bank supported the country in all sectors of the economy where it invested

The EBRD's single biggest challenge at its creation was how to help Russia, still the world's largest country after the break-up of an even more gigantic state, the Soviet Union, and the collapse of over 70 years of totalitarian rule. The immediate task facing the members of the international community who grouped together to found the Bank was how to revive a bankrupt state whose economy had ceased to function and which could no longer feed its own population, then still numbering some 150 million people.

The country on which the market economy was to be grafted represented a strange world where, for instance, telephone directories and detailed street maps had not been publicly available because of security concerns. It is easy to forget those distant times and just how much progress has been made since then, despite inevitable setbacks.

The EBRD could obviously not intervene on day one of its existence, but its strategy for Russia in those early years was crystal clear.

Russia needed a sound and diversified banking system to inject money into its new economy. It was vital to develop land and sea transport, to invest in food retail and create efficient communication networks. Newly privatised industries had to be supported to help them modernise and gain access to export markets.

However, just as important a priority was to create jobs for people who had lost them when the communist state failed.

This led to the idea in 1993 of creating what became the country's oldest and most successful mechanism for supporting micro, small and medium-sized businesses, the Russia Small Business Fund (RSBF), set up by the EBRD with financial support from the G-7 and Switzerland.

The banks participating in the RSBF have since issued over 800,000 loans worth €16 billion, but however impressive, that figure is only part of the story. Many Russian banks have long since graduated from the RSBF, but nevertheless continue to use its highly successful technology, based on a detailed knowledge of its customers and how their businesses work. This technology was developed by the RSBF to help ensure that the proportion of loans repaid always remains extremely large, even during economic crises, a trait that highlights the useful role it can play in times of trouble.

When Russia in August 1998 massively devalued the rouble and defaulted on its domestic bonds (but not its international ones), it wiped out large parts of the country's fledgling banking system. Panic-stricken depositors stormed bank branches all over the country to try to recover their savings. The memory of those long queues is deeply impressed on the psyche of the generations which lived through that financial crisis and it helped to bring about the consequent change in Russia's political system.

For the EBRD, that crisis in its main country of operations represented an existential challenge as many of its clients went under. However, it eventually recovered its losses, thanks not only to a vigorous pursuit of debtors but also a realisation by most of them that at a time when the local banking system had been severely shaken, the EBRD was one of the few games left in town and that it intended to stay for the long term. In fact, several of the debtors inherited in 1998 by the EBRD from failing banks later became its regular clients.

The devaluation of the rouble helped the Russian economy to become more competitive and it quickly started to recover. The EBRD for its part considerably tightened checks on the integrity of potential clients and the financial health of their companies. It also launched a bureaucracy-free and speedy Trade Facilitation Programme to get East-West trade flows going again – with the EBRD acting as a guarantor on transactions, something that helped to restore confidence in the banking system throughout the entire EBRD region.

A key move to revive grassroots business activity in Russia was the creation of KMB Bank, Russia’s first small business bank, by the EBRD and other international financial institutions (IFIs). Its outstanding success proved to the market that small business could also be good business and later helped in the sale of KMB Bank to a foreign bank.

At a time when other banks were wary of getting involved in the reorganisation of the Russian power sector, the EBRD in 2001 provided a pioneering US$ 100 million loan to the energy giant RAO UES. This helped set in motion the reform of the sector, ultimately leading to the break-up of RAO UES itself, the first Russian natural monopoly to take the reform road and liquidate itself.

On the banking side, the EBRD shifted its focus to regional banks after the 1998 crisis. In terms of industry, it financed the entry of the first foreign car-maker into Russia, when General Motors and Russia's AvtoVAZ decided to set up a joint venture in Togliatti. It was the first of a series of deals that over the years saw the EBRD help international car-makers enter the Russian market. These in turn spawned smaller transactions that helped localise auto industry suppliers.

While the EBRD's business in Russia has always been heavily slanted towards the private sector (85 per cent), the Bank also played a key role in vital infrastructure. A good example was the building of a new passenger terminal at St Petersburg's Pulkovo airport where the presence of major IFIs helped to attract important support from commercial banks. The EBRD also helped fund the long-delayed completion of what was originally a Soviet-era project to protect the city of St Petersburg from freak floods. Thanks to a separate EBRD project, over 90 per cent of St Petersburg's wastewater is now treated before being released into the Neva river, a development that has been warmly welcomed by all Russia's Baltic Sea neighbours.

In total, the EBRD has invested €24 billion in Russia, spread over 800 projects. However, in July 2014 a majority of the EBRD's shareholders signalled to the Bank's management that they would not support any new Russian projects following events in Ukraine earlier that year. The EBRD nevertheless remains operational in Russia and continues to support existing projects in the country, as well as monitoring its Russian portfolio, which remains significant.