Press statement by Minister of Economic Development of the Russian Federation Maksim Oreshkin following the 26th Annual Meeting of the Board of Governors of the EBRD in Nicosia, Cyprus on the 9-11 May 2017
EBRD shareholders took decision to keep bank’s stance on Russia unchanged, the bank is keeping the ban to lend to any name in Russia. We’ve highlighted that the way it was imposed broke the bank’s own rules. We have a clear case, it shows that the freeze is unfair as it affects lending to the whole economy, not just selected sectors as broader EU and US sanctions do. Our case was confirmed by external legal opinion.
We presented our case with the supporting documents but unfortunately major shareholders of the EBRD evaded the substantive discussion on serious and well grounded concerns raised by the Russian Federation.
We were particularly surprised that the majority of EBRD shareholders also voted down the very first part of our Draft Resolution that reads: “…(1) No right of any member pursuant to the agreement establishing the Bank may be suspended or otherwise restricted on any ground or in any manner not set forth in the agreement establishing the Bank …” This created an extremely dangerous precedent in the international financial relations and de facto a new norm by which an international financial institution can curtail member rights disregarding its statutory documents.
We see that EBRD became a tool of foreign policy and not a development institute.
We believe that there is also another important angle to this story. When we were presenting our case, we were highlighting that it is not Russia needs EBRD, it is the EBRD that needs Russia. If you look at Russia’s current economic situation you will find out that we are doing well: economy has returned back to growth, we expect it to hit 2% level this year, inflation is at CBR’s target of 4%. Russia is facing significant capital inflows.
On the bank side picture is different. When management took a political decision to stop operating in Russia it became a pivot point for bank’s business model, because Russia was delivering half of all the revenues of the bank. Even last year 1/3 of the bank’s revenues came from Russia’s portfolio.
As revenue flow from Russia naturally declines bank will face fast declining profitability. Already in 2016 cost-to-income ratio has increased to 42%, well above set goal of 33%. If you exclude revenues from discontinuing operations in Russia, this ratio will be much worse. Administrative costs have surged by 71% since 2011.
Facing downward asset and revenue trends management started to look for ways to revive the bank. Unfortunately, they chose a path which rises a lot of questions.
First, bank has deviated from its original mandate. 1/3 of all significant transactions in 2016 were restructuring, refinancing or retroactive financing. Nowadays bank operations are crowding out private activities. In order to justify such operations management has changed additionality and transition to market methodology. Bank has shifted from pre-ipo financing to IPO participation and even participated in LBO deal last year, with bank’s money going to previous shareholder, which is not located in country of operations.
Second, bank has significantly worsened its risk/return profile by increasing volumes of operations outside Russia. According to the management own estimates Russia is the only country in portfolio which can deliver RAROC at portfolio average of 10,5% and where economic situation is improving.
Third, bank is using looser approach in its risk management. Bank is not fully provisioning restructuring deals. Bank has changed its approach to assess clients risks. If in Russia’s case ratings of Russian clients were 4-5 notches below sovereign, now for other countries they are assumed equal to sovereign.
It is always a case, when political motivation stands in front of an economic one, P&L and balance sheets are deteriorating fast. So, we expect that within next several years banks financial situation will significantly deteriorate both on asset quality and revenue generating capability.
In order to protect shareholders and debt investors we will be communicating with rating agencies on all those risks which EBRD is facing. We believe that current financial condition of the bank doesn’t deserve AAA rating. And we also highlight that we will have no intention to participate in bank’s recapitalization when it will be needed.
On our side, we won’t get involved in any discussion of a new project in Russia and will be concentrating on work with depoliticized development banks like Asian Bank of Infrastructure Investment and BRICS bank and will concentrate on improvement of quality of our local development institutes like VEB.