By Duncan Hooper
Europe’s two supranationals jostle for position in the east
The eastward expansion of the European Union and its funding arm, the European Investment Bank, is squeezing the traditional territory of the EBRD. The 15-year-old development bank last week announced its retirement from central Europe but vows to stand its ground further east. EBRD president Jean Lemierre and his EIB counterpart Philippe Maystadt must now decide, is emerging Europe big enough for the both of us?
The EBRD’s geographical realignment has long been on the cards, advocated particularly vocally by the US. Lemierre attributes the decision to strength of commercial lending in the area, but the funding poured in through the activities of the EIB has also been a factor. Last year, the EU bank agreed more loans in the bloc’s eight central and eastern European members than its development counterpart signed in total.
Naturally both sides claim they can work complimentarily in the new climate, with the EIB’s ?50 billion bulk supporting the EBRD’s expertise and experience in transition countries.
“We have a huge experience of working with other people. Our job is never to take the full share; we’re very happy when other people come on board,” Lemierre told Emerging Markets in an interview. EIB vice-chairman Ivan Pilip takes a similar line predicting, “We can cooperate very well in the Balkan states and the neighbouring ex-soviet states.”
The lenders already know each other from working side-by-side in central and south-east Europe, where they have co-financed a number of road building projects in former Yugoslav countries and cooperated with the EU’s Joint Assistance for Preparing Projects in the European Regions programme.
Under the surface
But scratch beneath the surface and hints of tensions emerge. Both sides fiercely defend their independence, with the EIB asserting its right to move deeper into EBRD territory: “For the EIB, the door to the east will be opened further” as Brussels spreads its influence east, Pilip, a former Czech finance minister, promises. “Of course there are from time to time decisions about what should be our strategies in some countries, whether both of us should be there,” he admits.
Lemierre bridles at suggestions he’s been forced out of central Europe: “We’re not retreating in front of the EIB,” he declares, stating that he is proud that the job is done. He promises not to become subordinated to the EU lender in the former soviet countries. “They will be our projects, because we know the region. We welcome them [the EIB] to come on board with us,” he says.
As the world’s biggest supranational lender, the EIB is a force to be reckoned with and has its sights set firmly on the EBRD’s favourite hunting grounds of the former soviet states. The Ukrainian parliament’s recent ratification of a deal with the EU means that that market will soon join Russia as a recipient of EIB funds. Moldovia may be next to follow, bringing pretty much the entire eastern European region, bar the recalcitrant Belarus, into the investment bank’s sights.
“The world in which the EBRD works is changing; more countries, especially those which have acceded to the EU, are now prone to find other sources of financing, be they market originated or EIB sourced,” Jacques de Larosiere, a former EBRD president and IMF managing director, tells Emerging Markets.
One plus one
Larosiere is confident the two lenders can work together – “I don’t think it’s a problem” – as long as they can adapt to share responsibilities. The development bank has more freedom to take risks than the EU’s lender and can also provide a range of financing options, including buying equity, an option not available to the EIB.
“They will have subjects of collaboration, and I think it makes a lot of sense if you have one institution that can make a lot of lending and one that’s done a lot of work in those countries. You put the two together,” de Larosiere observes.
Lemierre fiercely rejects any suggestion that the EBRD will be relegated to a purely advisory role. “This is something we don’t do, and I don’t believe we should do. We’re a bank, and I don’t believe we should give advice without giving the money,” he says.
The EBRD is also forced to coexist with another regional lender. Since being squeezed out of central Europe, it’s been putting more money into central Asia, an area overlapping with the responsibilities of the Asian Development Bank, which last year put more than $150 million into Azerbaijan, Kazakhstan, the Kyrgyz Republic, Tajikistan and Uzbekistan. Critics contend that the two banks have not always been successful in their cooperation.
“What’s worrying is there’s a lack of coordination in the approach of the World Bank, the ADB and the EBRD. At the moment there’s a conflict of approaches,” alleges Petr Hlobil, a campaigner at NGO Bankwatch.
Lemierre admits that a difference in ideologies – the EBRD is specifically charged with promoting democracy, unlike its Asian counterpart – means that the two don’t always have the same objectives but he argues this hasn’t hampered relations.
Vive la difference
“We have different mandates, we have different views. At the same time, we have very good cooperation with our friends at the ADB,” he says.
One lesson to be learned from working with the Asian bank is the importance of harmonizing of rules and requirements to ease the burden on borrowers, Lemierre notes. The costs of complying with the various planning and reporting obligations associated with EBRD involvement can completely offset savings from lower interest rates, particularly in less developed nations. Introducing such harmonization, however, is likely to prove difficult across institutions with different political objectives.
The EBRD’s shift out of the EU is intended to be budget neutral, being offset by a corresponding increase in activity in Russia. In the past five years, business volumes in the so-called advanced countries, a group mainly consisting of the EU members, has halved to E700 million (16% of the total) compared with a doubling to E2.5 billion (58%) in central Asia, the Caucasus and south-east Europe. Russia’s share has jumped from E800 million to 1.1 billion in the same time.
Going forward, financing in the advanced nations is predicted to dwindle to E250,000, and activity in Russia will pick up to E1.6 billion. Other regions are likely to see little change in their share.
Certainly getting used to working together is by no means the only challenge faced by the two European supranationals in a changing world. They must also be more careful than before not to block out the commercial banks, which are also finding their European emerging markets operations squeezed into a tighter space. The EBRD and the EIB are both moving in the same direction in terms of trying to channel more funds into small and medium-sized enterprises, as governments and big businesses find themselves with a broadening array of financing options. In addition, the EIB is also trying to offer more advisory services and reach out to regions and municipalities that can benefit from the lower cost loans it provides.
Two particular concerns the investment bank has in the new member states are that cheap money, firstly, makes it difficult for governments to resist taking on debt at a time when EU rules require them to ease off on credit and, secondly, pushes up prices. A kilometre of road in eastern Europe can be a third more expensive than in the west, despite lower labour costs, Pilip asserts.
Industrial support
Lemierre, meanwhile, is conscious of not abandoning industries in the newer EU members even as his bank’s operations with the countries wind down. He sees the chance to give retailers and pharmaceutical companies the opportunity that eastern Europe’s financial sector never had of developing into cross-border players. He defends the much-criticized absorption of banks in the Czech Republic, Estonia and Poland by their western competitors as inevitable, observing that “those who say it was a failure do so because they had unrealistic expectations.”
Thanks to the capital and techniques brought in from abroad, Lemierre asserts, other industries can develop regional, if not international, champions by expanding east with the help of the EBRD. “You’re beginning to see a new generation of companies,” he notes.
In addition, his particular focus going into this year’s annual meeting is on energy. He speaks enthusiastically of modernizing soviet-era heating systems and cutting waste even among smaller businesses. He’s also keen to promote hydro-electric and wind power to help bridge the gap between those countries which can cash in on higher energy prices because of their natural resources and others left to foot the bill.
Lemierre says he relishes the new challenges that the EBRD faces in a reconstituted Europe. He’s adamant that the bank’s new role doesn’t require a new mandate and brushes off suggestions that the “European” designation no longer accurately reflects the geographical spread of activities.
The new situation facing the EBRD is a result of its own success as well as the changing global environment, according to de Larosiere. The bank has by no means put itself out of business, though, according to the multilateral veteran, who now serves as an adviser to BNP Paribas.
“There are more difficult projects in more difficult regions. There’s still a lot to do,” he concludes.