You're reading: EBRD ready to help with energy independence, privatization but needs reforms

The European Bank for Reconstruction and Development will soon take part in talks with other international financing institutions on funding possibilities for storage of so-called "reverse gas," the supplies that Ukraine buys from non-Russian sources.

If succeeds, this project could become one of the largest EBRD commitments this year.

Privatization of state enterprises is another bank’s key expertise area which they would be very much interested in in Ukraine, but not before government reaches a consensus on the list for privatizable enterprises.

EBRD, Ukrainian biggest foreign investor, is aiming at further $1 billion this year for projects in energy security and efficiency, agriculture, banking, and privatization. All of those depend heavily on the government’s progress in delivering tangible change in ways of doing business in the sectors.

In general, too many “buts” are still in place for the investor.

“There is plenty of investment opportunities for EBRD … but we need reform and reform to be implemented,” Suma Chakrabarti, EBRD president, told the Kyiv Post, Reuters and Bloomberg in an interview on July 2.

While acknowledging progress and commitment by government, Chakrabarti voiced a concern also shared by many businesses in Ukraine: what has been done is not yet translating into real changes.

“Good laws in themselves are only really good if they are enforced and implemented,” he said. “There is a start of the reform process, one can definitely see that,” but public administration is what hasn’t changed even if the politics has, still hiding plenty of opportunities for bad behavior on low levels.

Independent enforcement agencies stepping up also against petty corruption are crucial for the investment climate, Chakrabarti believes.

Macroeconomic adjustments agreed with the IMF, like increased energy tariffs and fiscal reform, have been generally moving faster while a lot still has to be done on micro level, particularly in energy and banking.

Gas supply project is conditional upon the institutional reforms in energy sector and corporate governance in Naftogas, banking sector would only get investment if there is a clear plan for consolidation, restructuring and recapitalization.

“Ukraine is an over-banked country,” Chakrabarti said.

The number of banks has already been reduced but there are still far too many. Turkey, which has an economy eight times bigger than Ukraine, has 49 banks. Ukraine should aim at even lower number, although 50 would be already better than the current 114.

The failure of Ukraine’s government to reimburse value-added tax is another fundamental issue for business survival in Ukraine .

Talks with the business ombudsman, who will publish his first report by the end of the month, revealed that among 172 complaints filed so far, tax and customs services, followed by the prosecutors head the top complaints list.

State control over the enterprises is often inefficient and the EBRD is excited to help solve that. Referring to the state-owned monopoly alcohol producer Ukrspyrt, Chakrabarti said: “I had no idea state is doing that still and that really is very out of date, even if the vodka is very good.”

As soon as the government puts it clear which enterprises are to be privatized and which should stay under state control, EBRD would also be able to step in through equity, loans or assistance in establishing the proper corporate governance for the strategically important state companies.

However, since the beginning of 2015 only $100 million were allocated. The bigger part of investments are expected in the second half of the year.

There is one country where EBRD operations are, perhaps, even more conditional upon political decisions.

Greece became a country of operations in February for a temporary period till 2020 but nothing has really happened since then. Previous government invited the bank o help with privatization but the changed administration is not clearly interested in it. Lack of clear and stable economic policy framework results in postponement of country strategy design to the second half of the year and even the first planned trade finance project of $20 million being kept on hold.

“If you are an investor this uncertainty can’t be helping. If you are a Greek or foreign investor, in this situation what would you do, why would you put your money in this country? It’s too uncertain,” Chakrabarti said.

EBRD president, however, doesn’t find current Greek crisis contagious for the neighboring countries even if worsened. Greek banks form an important part of the Balkans’ economy, but they are quite well capitalized and, therefore, quite insulated from their parents in Athens. What is needed to be done though is conveying that to people so that they didn’t start queuing for deposits, which might pose stability threats to the banking system.

Other economic implications of the crisis have been already priced in since 2008 so no further shocks are expected around Greece.

Kyiv Post staff writer Olena Gordiienko can be reached at [email protected]