On ice: EBRD waits in vain for frozen Russia relations to thaw
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Emerging Markets

On ice: EBRD waits in vain for frozen Russia relations to thaw

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International sanctions against Russia mean EBRD’s relationship with Russia has long been placed on ice. Don't expect a thaw any time soon

The frozen relationship between Russia and Europe’s leading development bank has clearly become a thorn in the side of the EBRD — however much officials at the London-based multilateral may vociferously deny the accusation.

The last Russia-directed transaction considered by the EBRD, in July 2014 — a Rub680m ($10.3m) senior unsecured loan to Moscow-based engineering firm Belaya Dacha — was never signed and never completed.

Since September 2013, a total of six provisional loan agreements have been cancelled. Of the 11 loan deals considered by the EBRD since the start of 2014, eight have been cancelled or left unsigned, incomplete, or are pending final board approval.

In his annual speech to the EBRD’s board of governors on Wednesday, president Sir Suma Chakrabarti again publicly underlined the institution’s commitment to the country, saying: “We have no intention of exiting Russia — we have a very large portfolio to manage [there].”

During an interview with Emerging Markets ahead of the meetings, he said the EBRD was committed to maintaining its portfolio in the country and “keeping its clients warm and engaging with them”.

Russian officials, in turn were, he added, “still keen to engage with us. Russia is a very important economy in its own right. When that economy catches a cold, as we have seen, it’s bad news” for large swathes of Central Asia and emerging Europe.

Yet the EBRD’s lack of new financial interaction with Russia, the bank’s largest country of operation both in terms of its economic size and clout, and its ability to influence positively and negatively the wider region, is clearly becoming a problem. Chakrabarti admits that “no new investment has been brought to the bank’s board for approval” in nearly two years.

PAINED FACES

But the deeper and harsher truth is that the bank’s commitment to Russia has been waning, in relative terms, for far longer than it may care publicly to admit. The EBRD has completed 788 projects in the country over the past quarter century, cumulatively worth €24.8bn ($28.3bn), €5bn of which are still active projects.

But internal data show that new lending by the EBRD to Russia-based projects peaked at €2.93bn in 2011, before sliding to €2.58bn in 2012 and €1.82bn in 2013. Fresh lending then fell off a cliff, following Russia’s annexation of Crimea, and the imposition of Western sanctions on Russia from March 2014. New loans to Russian corporates and projects fell to €608m in 2014, then to €106m in 2015.

EBRD bankers make pained, weary faces when asked about Russia. A bank set up to help central and eastern European countries (a list that includes the Russian Federation) make the difficult transition from controlled to market economy status clearly wants to revive its frozen relationship with Russia.

But officials privately admit that that possibility remains both far-off and beyond their control.

Europe will almost certainly renew its sanctions against Russia in July, while sanctions levied against the country by the United States — the EBRD’s largest and most influential shareholder — are likely to remain in place long after the current presidential cycle. For now, the chill between Russia and the EBRD will persist.

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