EBRD headquarters, London, UK (EBRD, CC BY-NC-ND 2.0)
The EBRD suspended approval of all new programs in Russia in 2014, following a corresponding decision of its major shareholders: the EU member states, the US and Canada. These countries had stepped up sanctions on Moscow due to Russia’s annexation of Crimea and fueling of the Donbas rebellion. Until the freeze on new lending, Russia was a major recipient of funding from the EBRD, accounting for around one third of the bank’s lending volumes (up to EUR2bn per year). As a result of the lending ban, the EBRD was forced to redirect its investments, above all to Ukraine, Central Asian states and Turkey.
According to the bank, the most recent communications with Russian senior officials took place in 2017, when Economy Minister Maksim Oreshkin addressed the EBRD’s board of governors during a meeting in Nicosia, arguing that the freeze was politically motivated and violated the bank’s own rules. „Oreshkin questioned our right to adopt politically-motivated decisions. However, these discussions amounted to nothing. We have had no active contact [with the Russian government] since then,” an EBRD official tells the CE Financial Observer on condition of anonymity.
The Normandy format talks in December between leaders of Russia, Ukraine, Germany and France, which restarted the Ukraine peace settlement after a four-year stalemate, seem to have brought little change to the EBRD’s approach towards operations in Russia. „Europe is tired of this situation regarding sanctions [against Russia]. However, there is no feeling of a breakthrough [in the Ukraine peace process]. As long as there are no intermediate results, the current status quo will remain,” a bank source says.
Mark McNamee, a London-based practice leader in the DuckerFrontier consulting company, believes that ultimately, the end of EBRD lending in Russia emanated from geopolitical disputes over Crimea and Donbas. However, „it has expanded and has become a broader issue of mutual distrust and bad blood, that is a part of the wider Russian-West geopolitical relationship,” he said.
„A resumption of EBRD lending would require a political re-orientation of the Russian government and marked genuine improvement in relations with the West, but that’s not expected in the next several years, or at least through the end of [President Vladimir] Putin’s current term,” Mr. McNamee tells the CE Financial Observer.
The tenure of the EBRD’s current president, Sir Suma Chakrabarti, ends in May 2020. The EBRD officials believe that the attitude of the bank’s next head towards Russia will also be an important factor. „Let’s wait for the program of a new president,” they say.
Meanwhile, the EBRD faces a growing financial rivalry with Russian state-owned banks and the Moscow-led Eurasian Development Bank (EDB) in the post-Soviet countries, which the Kremlin traditionally considers as its „zone of influence”.
Specifically, the EDB’s current investment portfolio in Kazakhstan, a core market for both the EDB and the EBRD, has grown from slightly less than USD1bn in late 2017 to USD1.2bn in late 2018. At the same time, the EBRD is Kazakhstan’s largest foreign direct investor outside the oil sector. Since the start of its operations in the country, the bank has invested more than EUR8bn in the Kazakh economy, two thirds in the private sector.
„Kazakhstan offers some very significant opportunities,” the EBRD’s president said in October. „As the country makes more progress in its plans to accelerate privatization, there will be more and more opportunities.”
Russia’s second-largest bank VTB is also stepping on the EBRD’s toes in Kazakhstan. In October, VTB’s president and board chairman Andrei Kostin said that the lender intends to expand its loan portfolio to Kazakh companies, which currently amounts to about USD4bn, to USD5-6bn by the end of 2020. „This will strengthen VTB’s role as one of the key financial institutions for economic development of Kazakhstan. The basic products of the VTB group in Kazakhstan are lending, operations in commodity markets and financial consulting,” a VTB statement reads.
The key clients of the VTB group in Kazakhstan are the largest companies in the mining, electric power and oil-gas industries, which form the basis of the country’s national economy. VTB acts not only as a lender, but also as a consultant for project development by Kazakh companies in Russia, the bank added.
Mr. McNamee believes that the EDB and Russian state-owned banks are driven by both financial and political reasons. „With sanctions in place, this limits options for expansion outside of Russia while there is a clear political aspect to most of Russia’s financial and economic engagements abroad,” he said.
„In light of the political motivation by the Kremlin, the EFSD and state-owned banks are able to enter these countries and undercut the competition on price, thanks to political and financial support from Moscow — somewhat akin to the political nature of Chinese financing abroad in recent years. Naturally, this presents a problem for the EBRD, since they need to prove the merit of their projects on a commercial basis, while competing against politically-driven entities in the region,” the expert underlined.
Meanwhile, the EDB has also beefed up its investments in Russia following the EBRD’s freeze on new lending in this country. According to the EDB’s financial reports, its current investment portfolio has increased from USD0.9bn in late 2017 to USD1.6bn in late 2018.
In 2018, Russia’s largest lender Sberbank said it intends to reduce its presence in Europe, and to expand in Kazakhstan and Belarus. Currently, the bank is represented in nine countries of Central and Southeast Europe via its subsidiary Sberbank Europe AG (formerly Volksbank International).
Mr. McNamee believes that Western sanctions against Russia play a larger role in these plans, as Sberbank’s external expansion options have become quite limited. „Sberbank’s subsidiaries in CSE have had to carry around the weight of its mother bank back in Moscow, and with local firms and banks evaluating not only the local bank but also its sanctioned parent, this massively raises uncertainty and risk. Thus, these subsidiaries can never become fully independent entities untainted by the parent back home, and as Sberbank recognized that these conditions would not be changing any time soon, the bank opted to sell off these entities and look closer to its historic region,” he said. „However, this does not appear to be a major opportunity for Sberbank to significantly expand its business in Kazakhstan or Belarus, because of structural constraints in these countries,” Mr. McNamee added.
„Thus, the move is likely more driven by the lack of economic options than political calculations, though naturally a political element exists. As ever, Moscow is eager to increase its linkages — in this case financial — to its neighbors to help ensure their orientation towards Moscow, although in this case there appears to be only a marginal economic benefit to Moscow,” Mr. McNamee stressed.