In a nation with a normal market economy, the European Bank for Reconstruction and Development would have a minor role, if any at all.
But this is Ukraine, so the EBRD stands out as the nation’s largest investor, with $12 billion in cumulative investment in 363 projects, in both the public and private sectors.
Last year’s investment alone came in at just a shade under $1 billion. Still, Ukraine is only about 10 percent of EBRD’s portfolio of $40 billion in investments or loans in the 25 nations where it operates. Its mandate is two-fold and clear: To make money (which it has done in every year except 2014) and to participate in projects that advance the transition of nations to market economies.
If all goes the way that some hope, in fact, the EBRD could become even more deeply involved in helping Ukraine accelerate its 25-year transition from an outdated Soviet to a modern free-market economy.
Ukrainian banking officials are hoping that the EBRD will take minority stakes in some of its state-owned banks, to bring both investment, transparency and better business practices to the troubled industry. But Malige said that any EBRD involvement in Ukraine’s banking sector is premature.
Ukraine is also reorienting its economy — and particularly its exports — away from Russia, its chief trading partner before the Kremlin started its war against Ukraine two years ago, beginning with the forcible annexation of Crimea.
As businesses in Ukraine seek to refocus on European Union and other markets, the EBRD’s loans, investments and expertise could prove to be essential in the transition under way.
The EBRD’s top regional person is Francis Malige, managing director of the bank’s operations in Ukraine and five other former Soviet republics: Belarus, Moldova, Armenia, Azerbaijan and Georgia.
Malige, a French citizen, will be a speaker at the Kyiv Post’s Capturing New Markets panel on the afternoon of March 29 at the Hilton Kyiv Hotel. He will participate in the European panel.
Ukrainian companies ‘flexible, active’
“When you look at Ukrainian companies, I am amazed how flexible and active they have become in reorienting their exports,” Malige told the Kyiv Post in an interview this month. “Our entrepreneurial clients are adapting to new market conditions.”
The EBRD approves of the diversification. “We do not encourage our clients to be overly dependent on one single” customer or country for export, Malige said.
He contrasts the experience of two clients: A diversification success story that involves a tomato paste maker in Mykolayiv that is now exporting to the European Union in excess of the duty-free quotas. The other example involves a Belarusian company that exports 95 pereent of its seasonal construction building materials to Russia alone.
But entering a new market, Malige said, takes real commitment. “You need clients, distribution capacity, quality. You need to meet standards. You can’t just show up in Germany…you have to build the clients’ trust. ”
‘A difficult year’
Even though the first quarter of 2016 is not even over, Malige can tell “it is going to be a difficult year” in the regional economies that he oversees for EBRD.
“We see continued pressure on currencies,” he said, from 30 percent devaluation in Georgia to 70 percent in Ukraine. All are ripple effects from Russia’s shrinking economy due to lower oil and gas prices.
Weaker currencies create predictable outcomes: Imports are more expensive, people cut spending and investors are more cautious.
And that’s the situation now.
Ukraine is compounding its economic downturn with the slow pace of privatization of 1,833 state-owned enterprises, its failure to prosecute people for stealing money and its seemingly endless political crises — including a largely behind-the-scenes battle over who will succeed Arseniy Yatsenyuk as prime minister.
Government must help boost exports
On the trade front, Ukraine’s government has been slow to set up commercial sections in embassies abroad, despite a wide network of missions across the world.
This will have to change, Malige said, if Ukraine is going to boost its exports around the world and take advantage of EU technical assistance.
“There is a big disconnect compared to other countries, given the number of embassies the country has in the world. The number of trade missions is comparatively few, really small compared to other countries,” Malige said. “It’s a transition that needs to happen in the diplomatic service.”
Many ambassadors represent their nations’ businesses and Ukraine must do the same. “That is an evolution that needs to take place in the Ukrainian diplomatic service,” Malige said. “Every country is going down that path.”
Part of the reason that Ukraine has not moved fast enough in this area, Malige surmised, is that — after the collapse of the Soviet Union — the former republics still had common standards and common knowledge of each other.
“You didn’t have to make that extra effort. Everything you did outside of the former Soviet Union came as an added benefit,” Malige said. “Now it’s a different game. It’s time to develop exports into markets where there has never been a common economic space. Tthat just doesn’t go for the EU by the way. It goes for the rest of the world.”
Navigating human rights
The EBRD is owned by 65 countries, the EU and the European Investment Bank. The shareholders have each made a capital contribution, which forms the core funding for EBRD.
After Russia’s forced annexation of Ukraine’s Crimean peninsula and invasion of Ukraine’s eastern Donbas, EBRD’s shareholders in 2014 refused to support any projects from Russia. That ban holds today.
The EBRD treads cautiously in other areas within Malige’s regional assignment, including in two ex-Soviet republics run by dictators — Alexander Lukashenko of Belarus and Ilham Aliyev of Azerbaijan. Critics believe EBRD investments in undemocratic nations only help strengthen dictators and worsen the human rights situation.
“We do a political assessment of our countries every year. We update it every year and adapt to what our shareholders tell us we should be doing,” Malige said.
For instance, in Azerbaijan, the EBRD is focused on developing the private sector. The “non-oil private sector,” in particular, is small. The EBRD is also helping to finance an oil and gas project in the Caspian Sea because it believes it is “essential for the energy security of Europe.”
The financing of public sector projects is very selective, Malige said, but such a project that may be worthy in Azerbaijan is a road-improvement project on the border with Georgia.
“It’s part of the Silk Road trade route, bringing goods from China to Europe. “Because of the interconnectivity, we are quite happy to look at it. We are in discussion with Azerbaijani authorities. We have not made a decision yet.”
Investment for reforms
Belarus, run by dictator Lukashenko since 1994, is another nation in which the ERBD employes a “restrictive strategy” as Malige said.
“We focus on the private sector and limited municipal infrastructure projects where there are clear benefits to the local population,” Malige said. ” We were under a strategy that prevents us from working with the state funds with Belarus. Discussions are under way. It’s time to renew the strategy and we are exploring different options. I don’t know the outcome.”
The EBRD has “a strategy of joint delivery of reforms and investment,” Malige said. “They deliver reforms. We deliver investments.”
Naftogaz, metros, wastewater treatment
The EBRD’s investments in the public sector must deliver long-lasting benefits to the population and be part of sustainable reforms.
Helping Naftogaz Ukraine, which had been sucking up to 7 percent of Ukraine’s gross domestic product in waste, subsidies, and corruption, is a case in point. Moving the state-gas energy provider to market-based — and hence sustainable pricing — is the type of investment the EBRD likes making.
Another involves improvements to the Kharkiv and Dnipropetrovsk metro systems, while a third involves upgrades to Moldova’s wastewater treatment plants.
“I will do public sector (loans and investments) where there is a genuine willingness on the part of the government to engage in public reforms in the sector,” Malige said.
In all cases, the EBRD brings much-needed transparency in its investment projects, requiring open and competitive tender conditions that are the “most stringent in the world.”
Unpunished bank fraud
That’s why some in Ukraine would like to see the EBRD take stakes in state-owned banks in Ukraine. The ailing sector has been hit badly by corruption, insider deals, non-transparency, and non-performing loans.
Cleanup is under way with the closure of a third of the nation’s banks, bringing the total down to 120. Some think the nation may need only 50-60 banks. At the same time, commercial lending has ground to a halt, partly because of high-interest rates.
While Malige said the EBRD’s involvement in the banking sector is premature, it’s a possibility.
“There has been significant progress in the banking sector over the last few years, but it has been far from being complete,” Malige said. The old system “made it very easy to launder money – or make it suck out the deposits to finance their own private ventures – the so-called pocket banks – which is on the wane. It’s been beaten by the actions of the central bank.”
The fact that nobody has been prosecuted yet for massive bank fraud that has cost the nation billions of dollars is a stain on Ukraine.
“It’s a part of the huge task that remains to be done. There certainly needs to be much more resolute action in terms of rule of law and to make sure that when people steal money, they go to jail, Malige said. “And frankly, when I see some of the schemes taking place, it doesn’t take a genius to unravel them. It takes a willingness to do so and a minimal level of competence on the part of law enforcement officers and courts of course that are exempt from the economic influence.”
Ukraine’s promising sectors
He said Ukraine’s top sectors remain agribusiness, financial, energy, public infrastructure and general industry – including specialized engineering and informational technology.
Ukraine’s advantages include cheap labor and disadvantages include poor rule of law and intrusive tax inspections. He notes that the most complained about area from business is the state tax inspection service, according to Ukrainian Business Ombudsman Algirdas Semeta, whose office the EBRD helped create and finance last year.
Ukraine must keep the momentum
Malige said Ukraine’s economy cannot afford political backsliding on reform.
“I am not in the business of governance or who should be minister for what,” Malige said. “What I am worried most about is that there has been a lot of progress. But it’s like riding the bicycle up the slope. If you stop pedaling, you are not going to stay where you are now. You are going to go back. That is the risk today. We have momentum that has in some instances has slowed down; Ukraine doesn’t have a choice. Ukraine has a need to go on reforming its economy. If it doesn’t it’s going to slide back. If a country starts backsliding we won’t see investment from the private sector. We might see people leaving the country. That’s what we need to avoid.”
About Francis Malige
Francis Malige joined the European Bank of Reconstruction and Development in February 2010 as a director in the financial institution’s team. Over the past four years, he has successfully developed the bank’s financial institutions business in the Balkans, Eastern Europe, Turkey and in the southern and eastern Mediterranean. Before joining the EBRD, he was managing director for corporate development at BNP Paribas, focusing on bank acquisitions. His earlier career was in accounting and consulting, at Arthur Andersen and McKinsey & Company, where he served clients in industry, high tech, and construction, as well as financial services. Malige is a graduate of ESCP Europe, a French business school. In addition to his native French, he is fluent in German, Italian and English.
Kyiv Post chief editor Brian Bonner can be reached at [email protected]
