The Times: The bankers who lend credibility march east

By Carl Mortished
THE trouble with banks is that they love to lend to those with the least need to borrow.
Credit availability is in inverse relationship with credit risk — and that was the logic behind the creation of the European Bank for Reconstruction and Development (EBRD), which last year made a net profit of €1.5 billion (£1 billion) as it cashed in the returns from its Central European equity portfolio. Set up in 1991, the EBRD’s task has been to get the private sector going in “transition economies”, the former communist countries of Central and Eastern Europe. Seed capital from rich Western governments would help to lubricate wheels in underdeveloped markets.
The EBRD wants to be a braver lender, bringing credit to places that no loan officer has ventured to before. It suffered a false start under its first president, Jacques Attali, who was distracted from the tiresome task of rebuilding Europe by the business of building a fine banking hall. Since then, however, the EBRD has invested vigorously and the question some of its founders are asking is whether the transition from commune to marketplace is now complete.
Firmly embedded in the European Union, there is little doubt that states such as Estonia, Hungary, the Czech Republic and Poland are market economies that attract commercial lenders. The EBRD is slowly winding down its EU presence, with lending to “advanced” transition countries reduced from almost €1 billion in 2004 to €699 million in 2005.
One shareholder, the US Government, wants this lending to end now, being ideologically opposed to a government-funded institution competing where private lenders operate effectively.
The EBRD says that there is still a job to do, albeit a smaller one, lending to small businesses. Core EU shareholders, notably France and Germany, want the EBRD to carry on, not least because the bank’s activity mitigates the call on the European Commission’s budget. The bank’s new mantra is “south and east”. Last year’s profits, earned largely beneath the EU’s protective cloak, will be reinvested in Europe’s fringe and beyond, in Asia. The Balkan states, the Caucasus and Central Asia accounted for more than half of the €4.3 billion invested by the EBRD in 2005.
Russian investments totalled €1.1 billion. The eastwards push poses the question whether the bank remains European. It is more than a matter of geography and nomenclature. The EBRD’s mandate is to promote the private sector in countries committed to democracy, pluralism and free markets — in other words, liquidity for people who want to be like us.
It worked in Central Europe, but will it work in the former Soviet Union? Without the prospect of EU membership, the pre-condition embedded in the EBRD’s mandate will prove difficult to satisfy. Transition in Central Europe was policed by the European Commission, a prop without which the EBRD faces enlarged political risk from despotic Central Asian governments and gangster capitalism.
Further east, the EBRD will be lending to resource-based economies where basic infrastructure is the primary need and which lack an entrepreneurial middle class. Loans to energy projects accounted for a big portion of the EBRD’s Russian investment last year, a questionable allocation of resources when international banks fight for access to oil and gas deals. The high price of crude is swelling Russian state coffers. What should be the role of a development bank in Russia? The EBRD would like to stimulate enterprise and small business lending, but barriers to that activity are political and cultural, not financial. It is the dead hand of the State and the slow pace of reform that hinders smaller businesses, while crony and oligarch capitalism dominates the Russian private sector.
Meanwhile, the EBRD frets over one of its big tasks in Russia, a loan to Sakhalin II, a $20 billion (£11.5 billion) gas project operated by Shell in eastern Siberia. The issue is not funding — Shell is rich. Project lenders want the EBRD to bless a project that arouses passionate concern because of fears over the survival of a population of rare whales. The EBRD is under pressure to reject Shell’s plans, which would be a blow to the company but would not stop Russia from developing the Sakhalin gasfields.
It’s a political game in which public institutions, such as the World Bank and EBRD, play judge and jury, lending not money but credibility to controversial infrastructure.
Commercial banks want the EBRD to take on this burden, but it is risky. Were the bank to reject Sakhalin, it would enjoy a moment of green glory, but would find its march to the east brought to a sudden halt.
Yukos carcass leaves nasty odour
THE march of investment banks to Moscow is turning into an unseemly scramble for commissions.
A consortium of lenders has pulled the plug on Yukos, petitioning a court in Moscow to declare it bankrupt. The banks, including Société Générale, BNP Paribas, Deutsche Bank and Citigroup, are seeking repayment of $475 million outstanding on a $1 billion (£570 million) loan to Yukos.
The loan was secured on Yuganskneftegaz, a Yukos oil subsidiary that was transferred to Rosneft, the Russian state oil company, after an auction ordered by the Russian tax authorities.
Some regard the winding up of Yukos as a blessed release, but it’s not clear that it is in anyone’s interest, least of all Rosneft. The state oil company is in technical default because it owns Yugansk and, more importantly, is being groomed for a big public offering in London to raise $20 billion.
Some say that the syndicate is doing the Kremlin’s bidding, clearing up a debt prior to the float and causing Yukos, an eyesore on Russia’s financial landscape, to disappear.
Unfortunately, carcasses have a tendency to leave an odour if you don’t dispose of them properly. Only last week, and just months before the float, Sergei Alexeyev, Rosneft’s chief financial officer and head of investor relations, quit without explanation.
The Rosneft listing documents should make very interesting reading.
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