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How would you assess the current investment
climate in the Russian Federation, in particular
the role of the banking sector?
Well, I asses the investment climate as very good
and this assessment is based on the current climate
of political and macroeconomic stability. The
banking sector is one of the weaknesses, one of
the least ready sectors and there is therefore
a lot of work to be done. We can almost say that
the country has grown in spite of the financial
sector rather than with its help!
However, this is the reason that the management
of the Central Bank started to introduce some
changes. Firstly, the beginning of reforms in
the financial sector. Most recently, the new deposit
insurance key is being sent to the parliament
and the government and it seems that it will be
adopted, as asked for, by the Central Bank.
It is not only significant in that there will
be insurance on deposits but also because it represents
a re-licensing of the banks, which is key. Capital
adequacy requirements under this re-licensing
will be such that we think it will bring some
solution. It will create larger banks, which will
be better equipped to finance the economy.
Now, the banks which were owned by the Central
Bank were creating the conflict in the first place
so the second part of the sector's development
is the process of bringing banks under the ownership
of the government as an intermediary stage, before
being privatised or undergoing some form of restructuring.
This is also a form of construction.
Russia has been a member of the EBRD since
the Bank was founded in 1991. What is the EBRD's
history in and current relationship with Russia?
Russia is EBRD's largest client: It has been one
of our shareholders from the establishment of
the bank and is very, very important for the bank.
The bank was established for bringing about the
transition of economies to market economy status.
For us, I would say there is no EBRD without Russia.
Russia is one of the shareholders with a 4.5%
stake and also receives about 22% of the EBRD's
exposure.
EBRD is owned by states and our largest shareholders
are the United States, the European countries
and Japan but all transition countries are also
shareholders and have representatives on the EBRD
board, including Russia.
Our business in Russia is significant, its share
of our portfolio is about 22% but that changes
daily as we sign more projects. We have exposure
in all kinds of sectors and we are working with
almost every region in Russia.
In Russia, there has been plenty of discussion
about new corporate governance codes and progress
has been made. What is the EBRD's view on this
and what role is it playing in helping to establish
this code?
We financed the creation of that program and worked
closely with the Federal Securities Commission.
So, firstly, our role is supportive and we think
it has really been taking hold well in Russian
industry. More and more private companies are
adopting it. It wasn't only getting the code introduced
but also that lots of companies' shareholders
and board members learned what corporate governance
is all about. It is, however, quite extensive
and writes in great detail what in some other
countries is covered with a much broader brush!
It is an educational tool as well. It is not only
designed to make companies behave. We see more
and more companies in Russia actually applying
the code. We do hope that the government will
introduce requirements for companies in which
the government has a majority stake. We now see
much less resistance and much fewer incidences
of bad behaviour, which were fairly typical before
1998 or during the 1998 crisis.
EBRD is known for its involvement in a whole
range of projects. What characterises these projects?
Is there one characteristic that is common to
all of the projects?
No. There are three characteristics which all
our projects must have. One is that it must be
a so-called 'sound' business: projects have to
be financially viable. They must make sense. The
clients must be able to repay the loans. We are
not wasting good money on something which is not
useful. Financial and business discipline and
vigorous assessment of a good project is always
an element.
The second element is that the project ought to
be transitional. It ought to be bringing either
a company or industry or country closer to market
economy status.
The third element is what we call 'additionality',
meaning that EBRD should not be doing or financing
something which could be financed by private capital.
We don't aim to crowd out private capital, we
just enhance businesses' chances to succeed.
These are the three elements that all our projects
have in common. Some of this transitionality or
additionality is always relative. You can't always
find the ideal in every element but each of them
has to have something.
How did EBRD set up the 229 million dollar
injection into the 'Roads' project in Russia?
The first project, which we have already signed
this year, is worth 230 million dollars. Roads
are a part of our interest actually: any infrastructure
that helps the economy to function better is definitely
useful for the private sector. The roads, railways,
telecommunications and all of that kind of infrastructure
are very important for the movement of goods,
for trade and for the opening of the private sector
market.
Certainly, things in the road project that we
would call transitional would include procurement
procedures, where suppliers of services for all
construction would have open access and compete
among themselves for building and construction
and so on.
Technical solutions for the roads are also making
it more viable. In some of the infrastructure
projects, we have succeeded, but in Russia we
are looking for opportunities where we will have
private companies managing the maintenance of
the roads, where we introduce elements of private
capital working for their own reasons with state
companies. These are the elements we are looking
for, even in the road sector. We hope that next
year we will be able to sign the second part of
the project. The roads project is not exactly
typical; we have never done a roads project like
this before in Russia.
How important are small businesses for EBRD
and Russia?
We launched the EBRD's Russia Small Business Fund
in 1994 to help finance small and medium-sized
enterprises. This is a big element of our program
in Russia - really supporting small businesses.
It is a huge program. We work with seven banks
and have even created our own bank, which we own
with some other investors who are dedicated only
to that business. We have reached out to small
and micro businesses all across Russia. A few
weeks ago, we reached the one hundred thousand
loans to small businesses point. We have invested
one billion dollars into small businesses in Russia
and supported grass roots private capital in this
country with the program.
How do these projects come about? Do people
come to EBRD and ask for help or does EBRD find
the companies?
We work with SberBank. SberBank is based here
in Moscow but has branches in all kinds of transitional
towns and places. This program is more in small
towns. It exists in Moscow as well but not with
SberBank. We have our own bank, with twenty-six
branches or offices across Russia, and we have
several regional banks which participate in our
program. They have offices in the streets and
at the marketplace, they advertise heavily, they
approach people,
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People also approach
us because, once you give a loan to one kiosk, all
of the kiosks in that row learn about it and come
to you. It is advertisement, it is going to see
people, it is people coming to us, all kinds of
things, a hundred thousand loans. There has to be
various methods for getting there. We work with
local banks and our own bank.
How do the four regional venture funds you have
work and at what stage are the seven planned funds?
We had more but we shed most of them after the crisis
to make the system more efficient. These are fundswhich
are actually making quasi-equity investments or
subordinate investments in smaller companies.
It is doing well; it is capital which doesn't exist
easily in this country and it is supporting newly
created companies. Very few of these companies were
gained in the privatisation process; this is mainly
companies which were created by good entrepreneurs
or good groups of people and obviously capital was
key to their growth.
There are companies in all kinds of industries;
several of them are printing companies and design
houses, pharmaceuticals, food processing, supermarkets
and distribution companies.
Each fund maybe puts up to three million dollars
into equity but funds can join together and make
six or even nine million dollar investments. Nine
million dollars in equity is a sizeable contribution
to companies!
One of the objectives of the EBRD is to attract
strategic investors in Russia. It is no secret that
Russia has been struggling a bit with its image
abroad. How do you think Russia can improve this?
Well, a lot of people lost quite a lot of money
in the 1998 rouble crisis and lots of investors
had some unpleasant experiences early on, where
their property and ownership rights were not respected.
We see many foreign companies getting interested
in this market. We see lots of those who came before
doing well but the attraction of this market and
the availability of inexpensive input material is
such that they have to move in.
Performance over the last several years has been
very good and fewer cases of abuse are now being
reported; incidents are happening in more distant
regions. I think it is changing gradually, I don't
know how fast it is going to change or if it will
be totally forgotten in three years. I suppose each
company had its own experience but we are seeing
many, many more foreign investors arriving.
Where do you see the potential now: oil and gas
are of course the easy answer but which other sectors?
First and foremost oil and gas, of course. Then
a bigger wave of investors in consumer goods, the
local market, food processing companies. Now we
are seeing consumer goods, various appliances and
furniture. Then, you have cars; we have made a large
investment with General Motors, cars and suppliers,
construction materials. We see many foreign investors
moving into construction materials.
So, things for the local market. Most recently,
we have seen companies buying more sophisticated
things like turbine producers and engines: machines
and so on. It has a kind of sequence, which is very
logical.
How would you rate the Telecom and IT sector?
Telecom is very good. Russia has very good telecom
companies now and we have invested in almost every
single one of them. The reform of main supplier's
land lines is still going on. We have financed technical
assistance to look into new legislation and the
restructuring of the main telecom network.
Hopefully, that will happen as well now. I think
telecom providers are doing very good business.
I think they are happy with their business in Russia
and lots of them are looking into regional expansion
and that has to be financed.
I think their performance and the government's track
record and earnings in telecom is very good. IT
and the high-tech sector are also growing quite
well but all of the local companies are still small
in size.
It is a very interesting sector in Russia. I have
met with large chip producers near Moscow and they
say foreign companies are looking at Russia and
comparing it to India. They see Russia as a place
to buy the 'Armani' of IT and India as the place
to buy regular blue jeans! It was nice of them to
try and find a metaphor that a woman could understand!
There are quite a few software companies which are
already working with the US and Europe. It is growing.
They are not such big companies where you can go
and pick investments right now.
How do you see Russia developing in the next
five or ten years?
You know, we have had so many surprises, nobody
here wants to predict what will happen: we always
look at the downside, nobody looks at the upside.
If they continue in the direction that they are
currently going in, if they maintain macro-economic
stability, if they really can implement the reforms.
With these natural resources they have and with
this huge and very talented pool of human capital,
they ought to be doing very well. As for the projections
on growth, even if Russia grows at this speed over
the next twenty years, they say they will not catch
up with Portugal. I don't know, I can't tell. They
are doing well and I think that, if they can maintain
this growth, they will do even better across the
country.
Fiscal policy and all of those kinds of things are
problems for many other countries, as well.
Could you tell us a little bit about yourself.
Who is the head of the EBRD in Russia? What experience
do you have and how do you use it here in Russia?
I come form the former Yugoslavia, so I am from
a transitional country and one which is a Slavic
transition country, so this is one of the experiences
that helps me here to understand the Russian people,
their history and way of life and thinking.
Secondly, I lived abroad in the United States from
1975 and then in England from 1991 so I have also
been educated in the West. I think I have a fairly
good grip on the concept of the market economy and
an understanding of what drives the commercial way
of thinking in the west.
I have been working with transition countries since
1991. I have seen what happened in countries like
Slovenia, the Czech republic, Poland and the Baltic
states: I have worked in almost all of them. So
I think I have some relevant experiences. I am committed
to my job. I like to get into some good things,
like Russia.
What would your final message be to international
investors looking at Russia as a country to invest
in?
If companies believe that this is a potentially
interesting market, they should not rule it out
a priori without really trying to understand better
what the situation is.
The foreign press mainly reports bad things. If
you think this is the market for you, come and get
more information before you make up your mind. Otherwise
you will be left behind.
We talk to so many people in so many countries and
we still get so many basic questions about Russia,
which are really beginner-like: A to Z basic knowledge
about the country. Find out more!
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