The contribution of private investors to the recovery of Ukraine is crucial

The contribution of private investors to the recovery of Ukraine is crucial

Odile Renaud-Basso, President of the EBRD told about the prospects for the recovery of the Ukrainian economy and the role of the EBRD in this process
The EBRD is the largest institutional investor in Ukraine. The Bank preliminarily estimates its investments at €1.5 billion in 2022. What part of them was provided by donors (in what projects, volumes)?

Despite the exceptional situation created by the war, which makes project financing more difficult and risky, we have made the strategic choice, since the beginning of the Russian aggression, to continue to invest in Ukraine to support its real economy, both the private sector and critical infrastructure. We have committed to invest €3 billion over 2022-2023, which represents a 50% increase in our commitment to Ukraine compared to what we were doing before the war. This is a very strong sign of our total commitment to support the brave Ukrainian people at such a tragic time. It is also our duty as a historical partner of independent Ukraine for 30 years.

By the end of November, the Bank had already undertaken well over €1 billion of activity in the country for the year 2022 and our full 2022 results will be announced at the beginning of next year. Half of that was on our own balance sheet, the other half in the form of generous support from our donors and partners in the form of funds, first loss or risk-sharing guarantees.

We have already mobilised over €1.4 billion of donor support. This includes €1.1 billion of funding being secured and signed with a further €0.3 billion having been pledged. Donors include the United States of America, which contributed US$ 500 million to our Ukraine crisis response fund; Norway, which is providing €200 million in support for Ukraine’s energy and food security via the EBRD; the United Kingdom, which is providing a €54.4 million guarantee to support an EBRD loan to Ukrenergo; Canada and Germany which have provided a €36.5 million and a €50.0 million guarantees respectively to support €300 million EBRD loan to NAK Naftogaz of Ukraine for procurement of gas for the winter season; and the Netherlands, which is extending €72 million grant for Ukrenergo aimed at emergency repairs of the national electricity grid. The European Union has provided guarantees worth €66.8 million to support EBRD loans extended to Ukrenergo, Ukrainian Railways and Farmak. Other donors include France (which will be providing EUR 100m of unfunded guarantees to NAK Naftogaz and Ukrainian Railways), Spain (which committed to extending an up to EUR 100m unfunded guarantee to support the food security and municipal sectors), Italy, Japan, Denmark, Switzerland and others.

The Bank's representatives stated the possibility of maintaining the same amount of investments in 2023 - €1.5 billion, while the Ukrainian side would like to increase this amount to €3 billion. How realistic is this and what does it depend on?

We will continue to strongly support our clients and vital infrastructure into 2023.  Our commitments to investments in Ukraine depend on several factors, including support from our shareholders and donors to share the risk on any new investments, the availability of sound, bankable projects in Ukraine, and the future direction of the war.

We would also like to see the involvement of the private sector. The needs for rebuilding the Ukrainian economy are huge, and they cannot all be covered by international financial institutions and multilateral development banks. The participation of private investors is crucial.

How will the investment areas and priorities change in 2023? To what extent is the Bank able to increase the share of grant funding, capital investments? How will the proportion of projects between the public and private sectors change?

We focus on supporting the real economy, which is complementary to budget support provided by the other international partners. Since the start of the Russian aggression, our investments target five main areas – energy security, trade finance, vital infrastructure and support to municipalities, food security, and the corporate sector (for instance in the pharmaceutical sector).

It is too soon to tell how priorities and investments will change in 2023 as this depends on the war and many other factors, but we will in any case continue to strongly support the real economy.

On increasing the share of grants and investments, this will depend on our shareholders and donors, as all our investments are done on a risk-sharing or partial guarantee basis with donors. So far we have seen very strong support from the international community to quickly and efficiently mobilise funds for Ukraine or provide guarantees to reduce our investment risks. Any additional grant funding, guarantees or other form of financial support will be decided by them.

Ukrainian companies complain that the standard procedures for funds allocation and procurement in the bank projects are too long for wartime? Is it advisable to change them and how can it be done?

We support our countries and clients in good times and in bad times. The EBRD has strict requirements when considering new investments, to ensure transparency and sound banking. Each of the Bank’s projects undergoes a thorough rigorous assessment before it is signed and disbursed – this includes integrity, financial, environmental, and procurement due diligence. While this process does take time, it minimises risk in the implementation of Bank-financed operations and ensures that our projects come with “gold standard” guarantees. The Bank stands by this principle and is determined that when supporting Ukraine we do not compromise on quality. This is in everyone’s interests and it is a legitimate requirement from our shareholders, who are accountable for the use of their taxpayers’ money. These standards are very much alike for all international institutions.

But these standards are not incompatible with a sense of urgency and greater flexibility. At the EBRD, we value our agility and our ability to respond very quickly to our clients' needs. We demonstrate this every day through the mobilisation of our teams, who are dedicated to the cause of Ukraine. We have substantially streamlined our internal processes by establishing a dedicated framework for financing our projects in Ukraine which allows us to speed up our internal review and approval. A recent example: it took only one month between my visit to Kyiv in mid-October, when the Russian bombardment of the electricity infrastructure had just dramatically intensified, and the decision of our Board to increase our financing of Ukrenergo by 300 million euros, notably for emergency repairs.

How will the bank solve the problem of war risk insurance in commercial projects?

The EBRD cannot provide insurance instruments per se, but we are working with other institutions in order to develop a war insurance product, particularly as this will help to bring back foreign direct investment into the country and could enable faster reconstruction efforts. 

What municipalities do you continue to work with? What new programmes are planned for Kyiv, Dnipro and Lviv? What other cities (especially the east and the south) will receive your support in 2023, in what areas?

Support for municipalities is one of our key priorities for our support in Ukraine. We’ve recently signed a technical cooperation agreement with the city of Mariupol to conduct damage and needs assessment, which will form the basis for preparation of the reconstruction of the city. We are now in discussions with other municipalities, including in the recently de-occupied territories, and are ready to support them. Overall, we are working with 19 municipalities across the country. The focus now is on liquidity financing, but where possible we continue to support priority investments as well.

What is the state of the loan portfolio issued before the war? How much of it is currently unserved or non-performing? What ways of solving this problem will the bank offer (restructuring, securitization, write-off, factoring)? What do you think about the idea of ​​the NBU and Valeria Gontareva to create a special fund to work with military NPLs?

Our corporate clients have been affected by the war and are operating at a reduced capacity, due to restricted logistics (in particular exporters), damages to their assets, reduced local demand and shortage of personnel. Since the beginning of the war, EBRD has applied a constructive approach to managing its portfolio providing forbearance, deferrals and restructuring in parallel with new funding supporting their short-term liquidity and vital operations.

We are aware that Ukrainian banks and partners are currently developing a mechanism to tackle an anticipated steep increase in non-performing loans caused by Russia’s completely unprovoked aggression against Ukraine. The EBRD is not involved in this effort and our main ambition is plugging the capital shortfalls in Ukraine’s banks to contribute to a well-functioning banking sector and avoid any delay in the reconstruction of the country.

Does the bank retain interest in entering the capital of the state OshadBank and is it ready to participate in the recapitalization of Raiffeisen Bank and Ukrsibbank, if needed? In your opinion, why haven’t the presence of the EBRD and other IFIs in Megabank capital saved it from bankruptcy?

EBRD will be considering providing new capital instruments to banks when and if they need it to return to growth and active financing of the real economy, including together with our partners in Raiffeisen and BNP. Once the situation allows, and the State returns to the strategy of privatising Oschadbank, we will resume our dialogue with the authorities on EBRD’s role in reducing the share of the State in the banking sector.

We cannot provide comments on an individual transaction with a private client, as this is a sensitive commercial matter.

How does the Bank assess its losses from the Russia aggression? How do you plan to compensate them? Will you sue the Russia?

The war will of course affect our financial results this year. We do not yet know the full extent.

That said, the Bank is well capitalised to deal with this impact. Last month, Fitch reaffirmed the EBRD’s AAA - rating with Stable Outlook, noting that thanks to the Bank’s well-managed capital buffers, the EBRD has absorbed significant losses in relation to the Russian-led war on Ukraine, while still maintaining 'excellent' capital ratios under Fitch's criteria.

How does the Bank see its role in the Coordination Platform for the Recovery of Ukraine, which is currently being created?

The EBRD is the largest institutional investor in Ukraine and since the invasion of Ukraine, the Bank has convened regular informal coordination meetings with other Multilateral Development Banks and the EU to exchange notes, and we are ready to participate in a more formal coordination platform. We believe international institutions, governments and Ukrainian authorities need to work together to push forward reforms and set up strong institutional frameworks that would be conducive to future reconstruction efforts. 

At the same time, we should not forget the role of the private sector. The recovery of Ukraine’s economy cannot just be the work of bilateral or multilateral donors and international institutions. It is vital that we involve private sector players and coordinate our efforts.

Russia remains a shareholder of the EBRD. Is this right in your opinion?

Our Governors decided to suspend Russia and Belarus’s access to the EBRD’s finance and expertise ‘open-endedly’ in early April.

This means that there can be no new financing of projects or technical cooperation activities in either country. Furthermore, the Bank avails itself of all rights to suspend or cancel further disbursements of funding on existing projects.  

We have closed our offices in Moscow and Minsk.

On Russia’s status as an EBRD shareholder (with a share in capital of just over 4%) – this is a matter for all our shareholders and needs to be looked at across all international institutions, rather than narrowly in individual institutions.  But it is very clear that the presence of Russia does not prevent the EBRD from both making an explicit and unequivocal statement of the strongest condemnation of Russia’s brutal and illegal aggression of Ukraine, but also from providing massive and concrete support to the Ukrainian economy and people, in a way that is unique among multilateral banks. In the end, this is what matters for the brave Ukrainian people more than governance issues, important as they are.

With the support of the EBRD, Chapter Zero Ukraine & Caucasus started its operations in Ukraine this year. How have the requirements for "environmental" projects changed in general considering the military actions?

The Bank has committed to fully align its activities with the goals of the Paris Agreement by the end of 2022. As such, each of the EBRD’s investments is screened extensively to ensure they are consistent with this goal.  Our environmental (including climate) standards have not changed. We have had to find new ways to apply those standards, carry out due diligence in difficult situations and move fast. But we are determined that, when supporting Ukraine, we will not compromise on quality.

The launch of Chapter Zero in Ukraine is a good example of how, while assisting Ukrainians to meet their immediate needs, we are also helping them build the institutions and policies that will underpin a greener, better Ukraine in the future.

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