AGM EBRD - Sarajevo 2019
The EBRD: origins and mandate
The European Bank for Reconstruction and Development (EBRD) is an international financial institution created in 1991 whose aim is “to foster the transition towards open market-oriented economies and to promote private and entrepreneurial initiative in the Central and Eastern European countries committed to and applying the principles of multiparty democracy, pluralism and market economics” (Art. 1 of the EBRD’s statute). The EBRD collaborates with other international finance institutions and follows a project-based model, funding projects or investments, granting loans and guarantees, and acquiring shareholdings. Its model is commercial: its loans are issued at market interest rates and sound banking is one of the three principles regulating all its operations. (The other two are transition impact and additionality).
The EBRD currently has over 73 shareholders (in recent years San Marino, Libya, Algeria and the UAE have joined them), including the EU and the European Investment Bank. Iraq is in the process of joining. The Bank operates in 38 countries, including, temporarily, in Cyprus and Greece (from 2014 and 2016 respectively) and, following the pandemic, in the Czech Republic, which has become one of its countries of operation after being the only country in the history of the Bank to “graduate”. In July 2014 the EBRD suspended all new investment projects in Russia, upon the request of the most important western shareholders, while retaining contact with existing clients in the country and continuing its pre-existing portfolio management there until April 2022.
The Bank, sometimes in collaboration with other multilateral banks, follows a project-based, demand-driven model, providing funding for projects or investments, granting loans and guarantees and acquiring shares in capital at risk.
The EBRD operates according to commercial models: loans are given at very advantageous market interest rates (earning the bank a triple-A rating from the major rating agencies). One of the principles governing its operations is sound banking; the other two are support for the transition of state economies to market-economy systems and additionality (intervention by the Bank must not replace intervention by a private actor). The impact of transition is evaluated on the basis of six parameters, which subscribe to the UN’s 2015 Sustainable Development Goals and Agenda 2030 and which are regularly updated in the light of macro-economic and political developments: competitiveness, quality of governance, inclusivity, environmental sustainability, resilience and integration.
The Bank also runs specific interventions funded by grants from donors. There are currently around 50 donors, both bilateral and multilateral, including governments, other financial institutions, and private partners. The EBRD also has its own Shareholder Special Fund, which is drawn from its profits. The other instruments that it uses include capex grants, concessional lending, and technical-assistance programmes. It also increasingly uses forms of guarantee. It invests in the innovation of financial instruments and the demobilisation of private investments, such as trade-union agreements.
The EBRD’s support for economic transition in its countries of operation is conditional on the existence of a democratic regime and political pluralism. Verifying that these conditions are met is an integral part of the Bank’s operations.
Uniquely among multilateral development banks, the EBRD prioritises operations with the private sector and aims to ensure that its interventions, even when they involve public actors, “crowd in” private finance. In the space of just a few years the EBRD has also become a leader in financing environmental sustainability (over 40% of its new lines of financing are dedicated to green projects, and the 2021-25 strategic plan aims to increase this to 50%). It prioritises using local currency when financing projects, which increases the resilience of creditors.
In addition to its investment operations, the EBRD engages in policy engagement and capacity building, as well as technical assistance using donated funds. The bank also employs local experts in its regional offices, of which there are over 50.
Over the years, the EBRD has transformed into a multiregional development bank, based in Europe but running operations on three continents and with an essentially global shareholder base. Its area of operation has gradually extended from central Europe, the Baltics and eastern Europe to the former Commonwealth of Independent States and Central Asia. Following the Arab Spring and the resulting support expressed by the G8 heads of state and government (led by Italy), the Bank expanded its geographical mandate to the south-east Mediterranean (SEMED).
Annual Meetings
The governors meet every year to approve the budget, the accounts and other major decisions.
The 2017 Annual Meeting in Cyprus reviewed the strategic plans for activities and investments, focusing on environmental sustainability and reinforcement of political dialogue.
At the 2018 Annual Meeting in Jordan (the first one in the SEMED region) the decision was made to look into expanding further in the region.
At the 2019 Annual Meeting in Sarajevo the Balkans were confirmed as a priority area and work began on setting up the 2021-25 Strategic Capital Framework.
The first Annual Meeting of the pandemic era was held remotely in October 2020. During the meeting Odile Renaud-Basso was elected to the French presidency, replacing Sir Suma Chakrabarti, and the 2021-25 Strategic Capital Framework was launched, with five focus areas:
a) Strengthening investment policies in the current countries of operation in order to maximise the impact of transition;
b) Preparing for a possible expansion into new countries in the Middle Eastern Mediterranean region;
c) Evaluating whether to increase reserves beyond the current prudential requirements, in anticipation of cyclical developments;
d) Exploring options for expansion into new countries outside the Bank’s current geographical mandate, notably in Africa;
e) Examining the option of returning capital to shareholders.
The economic and social impact of the covid-19 pandemic presented one of the greatest challenges in the Bank’s history, leading to record investment in 2020 – of over €11bn in 411 projects (an increase of more than 10% relative to the previous financial year) – and expanded programmes for assistance in technical cooperation.
The Annual Meeting in July 2021 (the year that marked the 30th anniversary of the Bank’s founding), was once again held remotely. The picture that emerged from this meeting was one of a resilient institution in good health, ready to confront challenges of post-pandemic reconstruction and move forward with the process of transition in its countries of operation. The Bank was lauded for its prompt reaction to the pandemic, which included approving two packages of aid measures within weeks of the crisis beginning. It was also praised for its effective implementation of remote working, which allowed it to resume its investment activities after the initial shock with no damage to trust. The other key issues discussed in the meeting were green and sustainable support for the recovery, in line with the Paris climate agreement (the Bank plans to complete its alignment with the Paris agreement ahead of schedule, by 21 December 2022) and the strengthening of the energy strategy. Other topics covered were digitalisation and innovation, increased equity, greater support for SMEs, and technical cooperation. The appointments made during the year substantially reduced the number of Italians in key positions.
In 2021 the Bank recorded spectacular performance on all financial and operational indicators: €10.4bn invested and a year that closed with record profits of €2.5bn, thanks to a general economic activity driven by the post-covid recovery. There was also an unprecedented increase in green projects, which reached a share of over 50%; there were major advances in gender equality and digitalisation; and the United Arab Emirates and Algeria joined as shareholders.
Ukraine war
In 2022 Russia’s invasion of Ukraine drove the budget into negative figures, with losses of almost €2.5m in the first quarter of the year. This was the worst performance in the Bank’s history and was mainly due to the devaluation of shares (particularly in Russia, Belarus and Ukraine), adverse movements on the markets and in currencies, and hoarding of stocks to mitigate losses on the credit portfolio. The predictions for the remainder of the year are gloomy, both because of the direct effects of the recession on Ukraine and its neighbours and because of the indirect effects arising from inflation.
The confict in Ukraine has given rise to an unprecedented situation, particularly in light of the fact that it was among the countries in which the EBRD had invested the most, with €17bn in 500 projects since the Bank’s founding. The Bank has had to radically adjust its strategic programme for the coming years. At the end of March 2022, a few weeks into the hostilities, the governors passed an unprecedented resolution to suspend all activity in the Russian Federation and Belarus and to gradually liquidate the portfolios in both countries and close its offices there.
The EBRD mobilised immediately to mitigate the damage to Ukraine’s economy and infrastructure. The first package of measures, with a value of a billion euros, aimed to provide immediate support for people and businesses in the country and was approved on 9 March 2022. A further billion was added at the beginning of April, together with an extraordinary effort to boost donations, both by modifying existing lines of funding (including those previously intended for Russia and Belarus, the Special Shareholders’ Fund, and the resources set aside for the post-graduation programme) and by gathering new resources.
The conflict in Ukraine dominated the 31st Annual Meeting hosted in March in Marrakesh – the first in-person Annual Meeting since the beginning of the pandemic. The governors unreservedly condemned Russia’s aggression and reiterated their solidarity with the people affected. They approved a modification of the EBRD’s strategic direction, mobilising resources and efforts to confront the greatest threat in the Bank’s history. One of the two main resolutions approved contains a clear signal of support for the Bank’s budget. Firstly, it commits to protecting the Bank’s financial strength through methods still to be defined – that is to say, it grants an explorative mandate to work out how to strengthen the Bank’s financial capacity and maintain its Triple A rating. Secondly, the Bank will collect additional donations, in order to guarantee at least half of the €1bn set aside for 2022, thus avoiding excessive growth of operational activities relative to the minimum capital requirements. Under the Ukraine Response Platform, the Bank is redirecting the various grants and other external resources into a new EBRD Crisis Response Fund, which is the main vehicle by which donors are mobilised to set up co-financing, guarantees, shares of re-risk, etc.
At the Annual Meeting in Marrakesh there was virtually unanimous support for the Bank concerning Ukraine. There was also discussion of the other aims for the current strategic cycle (2021-25): maintaining and accelerating economic transition in the Bank’s countries of operation, and maximising support for the three key areas of decarbonisation, equality and parity of gender, and digitalisation.
In 2020 approval in principle was given for limited, incremental expansion into sub-Saharan Africa and Iraq, and in 2021 issues were identified to be examined before giving final approval (including risk profiles, capital requirements, budget, governance, methods for amending article 1 of the constitution, and the added value of such an expansion). It was decided that the EBRD was ready to set up operations in these countries.
However, in 2022 the process was interrupted when the Ukraine conflict broke out during the Marrakesh Annual Meeting. The governors approved the expansion in principle but postponed the final decision to the following year, making it conditional upon ensuring that the conflict did not have an excessive impact on the Bank’s financial activities and that the Bank had sufficient financial stability to maintain its Triple A rating. The question of expansion will be re-examined at the 2023 Annual Meeting in Samarcanda.
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Italy’s role
Italy is a founding member of the EBRD. In addition to being a major shareholder, with a share of 8.52% (after the US, Italy is in the group of largest shareholders, together with Germany, France, the UK and Japan), Italy is also a major donor. It contributes to the Bank’s programmes through its support for the Technical Cooperation Funds Programme (TCFP). Specifically, it contributes to the Italian Technical Cooperation Fund (for technical cooperation) and the Italian Investment Cooperation Fund (co-investments, primarily guarantees), both of which fall under the remit of the Ministry of Economy and Finance. Since the founding of the Bank, these funds have reached a total volume of over €133m. In addition to this, Italy has made contributions to the nuclear-safety initiatives launched during the G7 (the Nuclear Safety Account and Chernobyl Shelter Fund, €102m) and those run by the Ministry of Foreign Affairs and International Cooperation under the umbrella of the fund for the Central European Initiative (to which Italy is the only donor).
Italian personnel
Out of a total of 2,119 employees on open-ended contracts (plus 512 support staff and around 1,600 consultants or professionals), the EBRD has approximately 80 Italian staff members.
