May 9, 2017 / 12:09 PM / 3 months ago

Russia set to play awkward guest at EBRD party

FILE PHOTO: Russian Economy Minister Maxim Oreshkin delivers a speech during the congress of the Russian Union of Industrialists and Entrepreneurs (RSPP) in Moscow, Russia March 16, 2017.Sergei Karpukhin

NICOSIA (Reuters) - Prickly relations with Russia and lagging reforms in Ukraine risk souring the mood for the European Bank for Reconstruction and Development as it holds its annual meeting this week against a mostly cheerful background of quickening global growth.

Doubts persist over Ukraine's progress in tackling corruption and cleaning up its tax and customs services - important priorities for the EBRD, which is the country's biggest foreign investor.

In Turkey, now the biggest recipient of EBRD funds, the outlook is clouded by concerns at the increasing concentration of power in the hands of President Tayyip Erdogan, who has carried out a vast purge of the army and public servants since a failed coup attempt last July.

And Russia, once the bank's biggest lending destination, will again challenge a ban on new investments that the EBRD imposed after Moscow annexed Crimea from Ukraine in 2014.

Russian Economy Minister Maxim Oreshkin will address the bank on Wednesday to argue that the freeze breached internal EBRD rules. But his stance will almost certainly be rejected by shareholders at the meeting in Cyprus..

"This situation was discussed last year by our board and there was no change then to the guidance," EBRD President Suma Chakrabarti said. "I'm not expecting it to be very different (in Nicosia)."

Oreshkin may point out that the freeze leaves the EBRD with a shrinking 3.7 billion-euro portfolio in Russia's recovering economy. That may become a worry for bank profits if Ukraine's reforms stumble and Turkey's growth slows.

SPRING IN THE AIR

On the bright side, the EBRD, created in 1991 to invest in former Soviet-bloc states, starts the summit with expectations of accelerating growth in the 36 countries where it provides loans, equity investments and trade guarantees. The International Monetary Fund recently lifted 2017 world growth forecasts to 3.5 percent.

"I think there is something to what (IMF head) Christine Lagarde said about spring being in the air," Chakrabarti said. "Broadly speaking, most of our countries are heading in the right direction."

Growth and robust financial markets boost the EBRD's own bottom line. In euro terms, Polish and Greek stocks are up over 20 percent and Turkey, where the EBRD invested 2 billion euros in 2016, is up a similar amount.

Even crisis-hit economies such as Egypt, one of four Arab countries where the EBRD operates, are recovering.

Chakrabarti is keen to highlight the EBRD made one billion euros in profit last year and rarely makes a loss. That is important because the new administration of U.S. President Donald Trump has not clarified its position on funding development banks.

Washington, the EBRD's biggest shareholder, has not appointed a director to the board after the previous director's departure.

"I don't know what the (U.S.) view is yet, nor do any of us because we haven't got a team to talk to yet. It will be an interesting discussion when we do," Chakrabarti said.

Proponents of the bank see it a force for improving transparency and the rule of law, a role that goes well beyond the provision of funds.

"The EBRD should be greatly commended in taking an activist approach, in a reform area which has various cross wires – to energy policy, public finances plus also corporate governance, anti-corruption and graft," said Timothy Ash, a strategist at BlueBay Asset Management.

Officials from Uzbekistan will attend this week, for the first time in almost a decade, as the Central Asian state begins to repair ties with the West. The EBRD may also announce an investment fund targeting the West Bank.

But Chakrabarti has signaled caution about further expansion. "I would certainly counsel (development banks) to think carefully before they ask for a capital increase...because that is not the mood I see generally," he said.

Reporting by Marc Jones; Editing by Mark Trevelyan

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