Ukraine-EBRD: Difficult Cooperation

Although EBRD loan conditions are profitable for it, its relationship with Ukraine has recently become less than ideal. For one thing, loan projects worked out by state organizations get tabled from time to time. The reason is simple - Ukrainian government failed to find the money to fulfill their part of the contract. And suspended projects always cause damage.

The failures of the state projects’ bank experts are connected with the private interests of certain state officials interested only in feathering their own nests, which usually ends in default. For example, EBRD paid 4 million ECU to renovate Boryspil airport but failed to launch a state program to support small and medium business. Hradobank’s history showed EBRD how and at whose expense they protect the interests of domestic manufacturers in Ukraine. (Hradobank refused to finance a risky project of one state enterprise and was penalized for it. Later, the bank failed to fulfill the undertaken obligations.)

Considering all this, we might be surprised that EBRD decided to renew its activity in Ukraine last year, when the board of directors passed a new strategic program of activity in Ukraine. In particular, EBRD refused to artificially hold back Ukrainian project cost overruns. Last summer the bank included in its plans financing for building power units in Rivne and Khmelnytsky nuclear plants. Additional power units will compensate the losses caused by shutting down Chornobyl. Earlier the EBRD did not even consider the energy sector a priority. The optimistic plans still have not come true, for they failed to overcome the main obstacle for the EBRD, that the energy sector is inefficient.

The other EBRD strategic goal, increasing direct loans to and investments in Ukrainian enterprises, has been launched without Western sponsors and is also less than a complete success. Eventually such projects might crowd out investment in the state and joint enterprises. The first place in the priority list will be given to private business development. Last year the EBRD planned to make direct investments in a number of Ukrainian banks. It has purchased stock in the West Ukrainian Commercial Bank (Lviv) and VABank (Kyiv). Bank Ukrayina has refused this kind of cooperation.

Project financing (loans and direct investments in client enterprises) is one of the main services the bank grants. Recently the EBRD began opening multi-project lines for big corporations in addition to individual projects. The term of the loans is 10 years for commercial loans and 15 years for infrastructure projects. The interest rates are London financial market rate plus 1-5%, depending on project risk.

A loan application to the EBRD must be accompanied by a business plan, a financial audit, a legal audit, environmental impact statement, estimated project cost, etc. Recommendations are a major factor influencing project consideration and defines the project’s future. Recommendations should be made by banks, which have worked with the applicant. Considering the specific national legislation and the local traditions of informal relationships between businesses, only a careful check of the client’s reputation stands between the creditor and possible losses.

Ukraine became an EBRD member in August 1992. 80 million ECU is its part in the authorized fund of the bank. EBRD is a multilateral institution with capital of 10 billion ECU. There are 59 shareholders in the bank - 57 countries, interested in economy development in the countries of East Central Europe and the CIS, along with the European Union and European Investment Bank. The bank conducts its projects in 26 of its 57 member-states, the rest being donors. In 1993-97 EBRD granted 507 million ECU for financing 21 projects in Ukraine (5 state and 17private). The financial and banking sectors, post-privatization development and enterprise restructuring, small business improvement, and the agricultural complex are its leading priorities.

However, loan relationships with the EBRD is not the only sphere where problems in the bilateral cooperation have occurred from time to time. The openly hostile attitude of many members of Parliament, uncoordinated work by the government, corruption, and bureaucracy have all created obstacles to the EBRD annual meeting in Kyiv. Nonetheless, there is still hope that this business forum will be profitable not only for hotel owners and the Kyiv mayor’s office, but for those businessmen who can operate in the market economy.