EBRD shareholders and staff are nervous about the impact on profitability of the shift out of central Europe towards the CIS and the Balkans, which will be approved by the governors this weekend.
The board’s decision last month to cease operations in the new EU accession countries by the end of 2010 marked the successful conclusion of a long, vigorous campaign by the EBRD’s largest shareholder, the US.
But a compromise was hammered out with western European powers, under which central European transition countries will themselves agree on the timing of their “graduation” from being EBRD countries of operation.
Looking forward, bank staff are asking how operations in difficult markets will be financed. Profits generated in central Europe – which have in recent years effectively
subsidized the bank’s work in central Asia and other high-risk regions – will inevitably decline, despite a possible short-term impact from one-off sales of equity stakes.
Future financing without the contribution from central Europe will be “more challenging”, EBRD president Jean Lemierre admitted to Emerging Markets, adding that he was “comfortable” the bank will still be able to generate the cash it needs.
The sale of bank stakes acquired by the EBRD in the mid-1990s has swelled profits from central Europe in recent years. In 2005, when the EBRD’s remaining share in Hansa bank of Estonia was sold to Swedbank for about $200 million, the EU accession countries accounted for “close to 50%” of the bank’s E1.5 billion profit, according to a government source in a western European country. The bank does not disclose a country-by-country or regional breakdown of its results.
An EBRD source pointed out: “We have to think about how we will finance our activity in the early transition countries [i.e. the seven poorest countries of operations: Armenia, Azerbaijan, Georgia, Kyrgyzstan, Moldova, Tajikistan and Uzbekistan]. At the moment, donor funding is needed for EBRD projects to fly at all.” Since November 2004 the ETC multi-donor fund, which is used alongside EBRD funding, has received E37.1 million.
Lemierre told Emerging Markets it was “reasonable to expect” the first graduation to be announced in 2008. He declined to comment on which country that might be.
The EBRD has lifted its freeze on raising capital resources, and they will be increased by 13% over the next five years.