In typical bureaucratese, the pensive European Bank for Reconstruction and Development (EBRD) analyst ventures with the appearance of compunction: "A number of projects have fallen short of acceptable standards [notice the passive, exculpating voice—SV] and have put the reputation of the bank at risk."
If so, very little was risked. The outlandish lavishness of its headquarters, the apotheosis of the inevitable narcissism of its first president, Frenchman Jacques Attali—sliding marble slabs, motion-sensitive lighting and designer furniture—is, at this stage, its only tangible achievement.
Complete and utter bankers
In the territories of its constituencies and shareholders it is known equally for its pomposity, the irrelevance of its projects, its lack of perspicacity and its Kafkaesque procedures. And where the IMF sometimes indulges in oblique malice and corrupt opaqueness, the EBRD wallows merely in avuncular inefficacy. Both are havens of insouciant third-rate economists and bankers beyond rating.
Established in 1991, its purpose is:
...to foster the transition towards open market-oriented economies and to promote private and entrepreneurial initiative in the countries of Central and Eastern Europe and the Commonwealth of Independent States (CIS) committed to and applying the principles of multiparty democracy, pluralism and market economics.
The EBRD seeks to help its 26 countries of operations to implement structural and sectoral economic reforms, promoting competition, privatization and entrepreneurship, taking into account the particular needs of countries at different stages of transition. Through its investments it promotes private sector activity, the strengthening of financial institutions and legal systems and the development of the infrastructure needed to support the private sector. The Bank applies sound banking and investment principles in all of its operations.
Grandiloquence aside, the EBRD was supposed to foster the formation of the private sector in the revenant wreckage of Central and Eastern Europe, the Balkans, Russia and the New Independent States. This it was mandated to do by providing finance where there was none ("bridging the gaps in the post-communist financial system," to quote The Economist).
Put more intelligibly, it was not supposed to transform itself into a long-term investment portfolio with equity holdings in most blue-chip companies in the region. Yet, this is precisely what it ended up becoming. It avoided project financing like the plague and met the burgeoning capital needs of small and medium size enterprises (SMEs) grudgingly.
And it refuses to divest itself of stakes in the best-run and most efficiently managed firms from Russia to the Czech Republic. In a way, it competes head on with other investors and commercial banks—often crowding them out with its subsidized financing.
Dosh for the boys
One of its main mistakes, in a depressingly impressive salmagundi, is that it channelled precious resources to the budding SME sector, the dynamo of every economy, through the domestic, decrepit, venal and politically manhandled banking system. The inevitable result was a colossal waste of resources.
The money was allocated to sycophantic cronies and sinecured relatives (often one and the same) and to gigantic, state-owned or state-favoured loss makers. Most of it lay idle and yielded to its hosts a hefty income in arbitrage and speculation. As banks went bankrupt, they wiped out whole portfolios of EBRD SME funds, theoretically guaranteed by even more bankrupt states.
Thus, the only segments of the private sector to benefit handsomely from the EBRD were lawyers and accountants involved in the umpteen lawsuits the EBRD is mired in. It is a growth industry in "countries" such as Russia.
This is the melancholy outcome of indiscriminate, politically motivated lending and of a lackadaisical performance as both lenders and shareholders. In the spirit of its first president, the suave and titivated Attali, the bank is in a constant road show, mortified by the possibility of its dissolution by reason of irrelevance. It aims to impress the West with its grandiose projects, mega-investments, fast returns and acquiescence.
In behaving in this way, it is engaged in a perditionable perfidy of its fiduciary obligations. It lends to criminal managers, winking at their off-shore shenanigans and turning a blind eye to the scapegrace slaughter of minority shareholders. It throws good money after bad, cosies up to oligarchs near and far and engages in creative accounting. Instead of westernizing the Easterners, it has been easternized by them.
Its sedentary though peregrinating employees are more adept at wining and at dining the high and mighty and at haughtily maundering in the odd, tangential seminar than at managing a banking institution or looking after the interests of their nominal shareholders with the tutelary solicitude expected of a bank.
A tale of two countries
Consider two examples:
The nascent private sector is nowhere to be found in the list of projects the EBRD so sagely chose to falter into here. The electricity and telecoms monopolies are prime beneficiaries, as is the airport. The EBRD is also a passive shareholder in both big universal banks—until recently conduits of state mismanagement.
The SME and Trade Facilitation credit lines were conveniently divvied up among five domestic banks (one went belly up, the managers of two others are under criminal investigation and one was sold to a Greek state bank). Despite vigorous protestations to the contrary, none of this money reached its proclaimed entrepreneurial targets. Two loans were made to giant local firms—the natural preserve of commercial lenders and equity investors the world over.
The EBRD contributed nothing to the emergence of a management culture, to the development of proper corporate governance, to the safeguarding of property rights and the protection of minority shareholders here. Instead, it colluded in the perpetuation of monopolies, shoddy and shady banking practices, the pertinacious robbery entitled "privatization" and the pretence of funding languishing private sector enterprises.
Its USD two billion portfolio all but wiped out in the August 1998 financial crisis, the EBRD has now returned with 700 million new euros to be lent, conservatively, but not more safely, in major energy and telecom behemoths.
The historic, pre-1998 portfolio appeared impressive. Almost USD 11 billion was generated in additional, non-EBRD credits by less than USD 4 billion in credits from the EBRD. The bottom line reads 94 projects. Yet, when one neutralizes the infrastructural projects (including the gas and energy sector), one is left with less than 50 percent of the amount. Also cross off the "infrastructure-like" projects (water transportation and the like) and less than 30 percent of the portfolio went to what can properly be called the "private sector."
Moreover, even these investments and credits were geared towards traditional and smokestack industries: mining, food processing, pipelines, rubber and such. Not an entrepreneur in sight. And the EBRD's meagre loan-loss provisions and reserves cast serious doubts regarding the mental state of both its directors and its auditors.
Missing the target
To varying degrees, these two countries are typical. Development banks, like industrial policy, import substitution and poverty reduction, have gone in and out of multilateral fashion several times in the last few decades. But there is a consensus regarding some minimum aims of such bureaucracy-laden establishments—and the EBRD achieves none.
It does not encourage entrepreneurship. It does not improve corporate governance. It does not enhance property rights. It does not allocate
Sam Vaknin, 13 November 2000
The author is General Manager of Capital Markets Institute Ltd, a consultancy firm with operations in Macedonia and Russia. He is an Economic Advisor to the Government of Macedonia.
DISCLAIMER: The views presented in this article represent only the personal opinions and judgements of the author.
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