London-based European Bank for Reconstruction and Development, which has invested 9 billion euros in Ukraine’s economy since 1993, views corruption, a bloated banking sector and an ineffective energy policy as key factors pushing country into recession.
“It may take two to three years to lift the economy from its current condition which is the result of the way it was run for the past few years,” said Suma Chakrabarti, EBRD president, in an interview with the Kyiv Post.
EBRD investments
EBRD plans to invest 1 billion euros annually in Ukrainian projects. “We’ll do it as long as it’s required and as long as Ukraine has transition gaps to fill. It could be quite a long way into the future and is conditional on continuation of reforms,” Chakrabarti said.
On each 1 euro that EBRD invests, 2.5 more euros come from different sources, he added.
“We don’t take a rate of return approach to our investments, we’re not a commercial bank,” Chakrabarti emphasizes.
EBRD loans to the businesses have lower interest rates than loans provided by local commercial banks. For instance, businesspeople could obtain a one-year dollar credit with 8.5 interest rate from EBRD, while the mean rate for analogous credit from Ukrainian commercial banks stands at 11.3 percent.
EBRD could provide a longer maturity for the loan – up to 5 or 10 years, tells Chakrabarti and adds that bank is not experiencing drop in demand for credits due to hryvnia devaluation, which makes EBRD dollar-denominated loans more expensive.
The development bank’s level of non-performing loans stands at 3-4 percent, while Ukrainian banks’ figure is 40 percent, according to Standard & Poor’s credit rating agency.
Loans from the development bank are usually combined with technical assistance and direct advice.
Besides, the EBRD considers the possibility to invest in Ukrainian equity traded on the local stock market. “Ukrainian equity market has a potential to be much bigger. It needs proper environment, effectively working legal system,” comments Francis Malige, bank’s managing director for Eastern Europe and Caucasus.
Anticorruption initiative
On May 12, Chakrabarti signed a memorandum with Prime Minister Arseniy Yatsenyuk that launches Anticorruption initiative for the country whose high level of corruption is unanimously recognized as key obstacle for further development.
Initiative implies the establishment of the business ombudsman position. Business ombudsman will be receiving and examining complains from business of unfair treatment including corruption and passing those cases to law enforcement agencies. EBRD is going to provide a financial support for this institution.
“Private business would want independent regulation (of anticorruption issues),” explains Chakrabarti. Such an approach well fits into the anticorruption service model presented by Tetyana Chornovol, Ukraine’s chief anticorruption officer. The alternative model, presented by Viktor Chumak of Udar political party, could not be combined with EBRD’s view of fighting corruption since it offers to establish the state anticorruption body that would oversee both sectors – public and private.
When commenting about suspicious privatization auctions that passed state property to several businessman at bottom prices, Chakrabarti did not seem to be an apologist of reprivatization idea. “If you want to win public confidence, you have to show that new privatizations are done in a completely different way, transparent way, with best lessons learned around the world,” he admits.
Vision of reforms
“There are too many banks in Ukraine, banking sector needs consolidation,” mentions Chakrabarti. “Central bank has not been close enough to the banks,” he adds.
Therefore, huge reform of the banking sector is needed, EBRD president concludes. Different risk management and solvency ratio standards introduced by the central bank could lead to the reduction of non-performing loans amount and market consolidation.
Maybe, regulator should stimulate development of the market where banks could sell their debts, Chakrabarti mentions.
Energy efficiency is another important direction for the reforms. “Energy sector is such a drag on the economy,” Chakrabarti says.
Moreover, Ukraine needs better corporate governance standards, thus country should considering passing new law regulating this issue, while companies have to drop the tradition of double accounting – one for tax service and another one which reflects true figures.
Chakrabarti, 55, holds the position of EBRD president since May 2012. British citizen, he is graduate of New College in Oxford and the University of Sussex, previously served at the Great Britain’s Ministry of Justice.
EBRD earned 1.01 billion euros of net profit in 2013.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].
