In total EBRD has invested over €10 billion in Ukraine.
The European Bank for Reconstruction and Development (ERBD), one of the biggest European financial institutions, is one of the largest investors in Ukraine. Throughout the history of its operations in our country it has provided loans worth €10 billion in total, and it continues to invest about €1 billion per year. EBRD loans are usually competitively priced and long-term compared to commercial bank loans.
In order to see the whole picture of EBRD activities in Ukraine, we talked to Anton Usov, senior adviser for external affairs at the EBRD.
What is the average amount of funds the ERBD provides to Ukraine?
For the past five to six years our investment capacity as a bank in Ukraine has been roughly about €1 billion per year. We try to invest around €1 billion more or less successfully in all these years. In 2013 there was a slight decline to under €900 million, but it was insignificant. We still delivered quite a lot. This slight drop can be explained by the fact that we did almost no public sector projects.
As the EBRD operational charter says, most of the lending should go to the private sector. At least 60% of all our loans are directed towards private sector clients. So far we have invested in total over €10 billion in Ukraine.
What are the EBRD’s priorities in the private sector – SMEs or big business?
SMEs should be our priority regardless of the financial or political situation in the given country, and Ukraine is not an exception. But in recent years it has been difficult to lend to the small and medium-sized business sector for various reasons. One of those is that we are limited in the currency of loans we provide, and local businesses in Ukraine need long-term loans in the local currency, which is hryvnia. Unfortunately, now we don’t have the technical ability to provide lending in hryvnia.
Does this mean that the SMEs programme is mostly on hold?
It is not as active as we would like it to be. We do give loans to smaller companies, but they are mostly tied to such areas as energy efficiency or renewable energy. Full-fledged small and medium business lending operations are pretty much on hold at the moment, [because we cannot lend in hryvnia]. So EBRD lending goes mostly to larger companies.
When can it be restored? What conditions need to be met to renew the SME programme?
We are trying to push that forward as much as we can. There are certain pieces of legislation that allow us to issue bonds in domestic currency and use these resources to lend to companies in Ukraine, including small businesses. But I think it would be speculative to give a date or time.
Let us talk about energy efficiency. What are your priorities in this sphere?
Energy efficiency is a buzzword at the moment. Every single company that comes to the EBRD does an energy efficiency audit, unless it is a bank. Every single company has a significant component linked to energy efficiency. That can be the introduction of new technologies, switching to different types of fuel, giving up on gas and reshaping the production cycle to use wooden pallets, for example.
How do you proceed with these energy efficiency lending activities? Is it put in place through commercial banks?
There are certain programmes that allow us to work with smaller companies. They do all the necessary installations. They change their technologies and the way they work. But we also work with other companies facing absolutely similar problems. They also need energy efficiency products.
If a company wants to get funds from you, should it address the EBRD directly, or do you have some other process?
There are financing criteria that are available on the EBRD website. So we typically advise companies to look at those criteria before they approach us. If a company is big enough, it can certainly call us directly. These are larger loans. The smallest loan we can provide is €5 million, and it would make up to 40% of the total project cost.
Realistically, if we talk about direct lending with the EBRD, we look at projects in the range of €12 to 15 million, which is pretty big for a company. Smaller companies cannot work with us directly. They should go to our partner banks and we have quite a few of them in Ukraine. We give money to commercial banks because in order to serve small businesses you need to have a good network of branches all over the country.
What are those banks?
Our active partner banks, especially ones that work with energy efficiency programmes, are UkreksimBank, Megabank, Unicredit Bank, Raiffeisen bank, etc. Altogether there are not very many banks we can work with in Ukraine, because of the strict criteria. So, we have less than 10 partner banks in the country.
Agriculture is our top priority. It is a sector that will drive the economy to its revival. So we also push for Ukraine to become not only an exporter of grain, which has been a very popular topic in recent years. But we are also pushing Ukraine and Ukrainian producers towards manufacturing value-added products for export. We look at all markets from Europe to Africa and Asia, and that is the type of companies we would like to support. Value-added products mean not just raw milk, but yoghurts, for example; not just grain, but bread, etc.
Do you provide loans for projects aiming at more value added?
Exactly. We give money to companies that do breeding, land cultivation, that process, retail, and package. In our terminology it is not agriculture— it is agribusiness. Anything to do with processing, packaging, or transporting. It is all linked.
What are the most successful projects in your opinion?
Well, that is a tough question. I wouldn’t name the most or least successful projects. We have clients that have been with us for a number of years and we are carrying on more projects with companies like Nibulon, Astarta, and others.
You can be reproached for supporting companies that already have funds, while at the same time, loans are more needed by SMEs.
If we talk about farmers, it is even a larger problem than smaller businesses located in towns or cities. These farmers have insufficient funds or assets to pledge against these loans, which is a problem. Typically they operate in the local market. So for them, borrowing in foreign currency is suicidal.
But, for example, we support companies that process beetroot, grain or milk – and they have links to local small farmers, which guarantees stable purchases of their products throughout the year and for future periods. So in this way we also support smaller producers.
There are also many companies that are involved in growing and cultivation. They teach farmers how to cultivate their land properly. They give them certain fertilisers and seeds for free. They provide them with education. And there are many examples like that. That is something that we support.
Do you encourage the companies you finance to contribute to the development of small farmers?
Yes, we think that it is very important, especially in terms of purchasing raw materials from small farmers. We make it a condition for some of our loans. It has been effective.
What about milk? Ukraine is facing the huge problem that it cannot export milk to the EU because of phytosanitary restrictions. There are some technologies that need to be installed, like refrigerators and automatic drain equipment. Do you support these innovations?
Yes, absolutely. We have two very important initiatives in the dairy and grain sectors. We bring together regulators, operators and other stakeholders. Regarding the dairy sector, we had a few roundtables where we had some programmes with the Association of Milk Producers. Now there is definitely a much better picture than we had several years ago. There is much more cohesion between market players in the industry.
Let us now turn to infrastructure. You also fund transportation and gas infrastructure. What is the scale of such projects?
It is huge. Just to give you an example, the project we signed back in May 2014, which funds reconstruction of approaches to Kyiv, is worth €200 million. It will be co-financed with the European Investment Bank for the same amount. So it is nearly half a billion euro for one project. It is a public sector project guaranteed by the state of Ukraine. It is a sovereign loan, because technically Ukravtodor is not a company but a state service, so by the law of Ukraine it cannot borrow otherwise except to be backed up by the Ukrainian budget.
What are the ERBD’s other plans concerning roads? Are you planning some new projects?
Surely. Ukraine needs roads absolutely everywhere. The trouble is that with the current budget, Ukraine can only borrow a certain amount each year, so it has to prioritise what is of top importance. At the moment I think that Ukraine’s top interest is in energy security and energy-related themes. The roads are also important, but I guess it is priority number two.
Let me turn to a different topic: the idea of a business ombudsman. The EBRD was one of the initiators of this idea. What is behind it?
There were seven parties altogether that initiated this project: OECD, EBRD, the government of Ukraine, and business associations (American Chamber of Commerce, European Business Association, etc.). The idea surfaced back in 2012, when we saw lots of our clients suffering from different forms of injustice, be that legal pressure or different forms from the controlling bodies.
Is this an institution that will protect the rights of businesses?
Yes. But likewise it will be a body that will look at the problem from the both sides: from the business side and from the governmental side. So, if businesses are violating legislation, they will be as much accountable as the controlling bodies that are making lives of businesses difficult.
As I have said, the idea goes back to 2012. It materialised more or less in 2013, and we signed it last year. The business ombudsman has now been selected. It is Algirdas Semeta, a former European Commissioner for taxation, customs, statistics, audit, and anti-fraud.
He is setting up an office right now. He will have about 15 employees and they will look at various cases of legal and procedural disputes between the regulators and businesses in Ukraine. He will have access to governmental meetings. His function will predominantly be to highlight and publicise difficult cases of possible money extortion or unjust pressure on businesses and wrongdoings of businesses towards the state of Ukraine.
Do you think it will improve the business climate?
It has to. This is something that exists in other countries. During the set-up we involved specialists who were responsible for setting up similar institutions across the world. And if it works in countries like Malawi, Mozambique, and Venezuela, I think it has a good chance of working in Ukraine.
Can we say that the very fact of setting up this institution, and engaging the former Commissioner to contribute to it, is a signal to the business and financial sectors?
Yes, it gives more confidence to the existing investors, because at the moment many people panic. If they are called to court, they panic, because their chances of losing in court are very high. At the moment they know that there is someone to protect their rights. Although the institution is not properly functioning, the ombudsman is already here. He is working in Ukraine and we have a number of cases already filed for his consideration. He will have a 15-person staff of deputies and professional investigators, who will look at all cases on an individual basis and hopefully resolve them.
More information: EBRD website