A modest investment by the European Bank for Reconstruction and Development (EBRD) in a Russian travel company may prove to be the sanctions dambuster that the Kremlin has been longing for.
The London-headquartered bank announced on April 7 it would provide finance to a Russian travel aggregator Travelata as part of its €1bn coronavirus (COVID-19) funding programme, which is designed to help existing portfolio companies with liquidity, trade finance and restructuring of short-term debt. This is the first fresh capital injected by the EBRD in any Russia company since July 2014, when Western sanctions were triggered by the Kremlin's annexation of Crimea.
“This is actually a huge deal and may smash the sanctions dam and open the floodgates,” a former EBRD banker told bne IntelliNews. “The Russians, as shareholders of the bank, have been lobbying like hell for this to happen for a long time but probably thought it was never coming.”
The world’s biggest investment banks, fund managers and insurers closed their Moscow operations and shut their Russia funds after the US and Europe introduced tough sanctions in 2014 to penalise the Kremlin’s aggression in Ukraine. The roster list of departing Wall Street and European investors got longer and longer over the years as sanctions starved the country’s energy and banking sectors of financing and helped prolong Russia’s recession.
The EBRD tried to downplay the significance of the new investment, which must have been mulled over with a fine-tooth comb by the lender's army of lawyers. “No new investments, not a change of strategy – just helping old clients,” a spokesman told bne IntelliNews.
As for future punts in Russia, the EBRD spokesman said: “Such defensive investments will be considered on a case-by-case-basis” and are “designed to protect the value of our assets.”
On March 13, the EBRD unveiled an emergency €1bn “Solidarity Package” of measures to help companies in its regions deal with the impact of the coronavirus pandemic without specifying any aid for Russia.
Under the emergency programme, the EBRD will set up a “resilience framework” to provide financing for existing EBRD clients with strong business fundamentals but who are experiencing temporary credit difficulties.
Commenting on the EBRD’s response to the global health crisis, EBRD President Sir Suma Chakrabarti said: “The COVID-19 pandemic and its economic consequences present an unprecedented challenge to the EBRD and its countries of operations.”
He added: “To respond in solidarity with its shareholders, countries of operations, partners and clients, the bank has established a resilience framework comprising €1bn of new and additional funding for existing clients, comprising emergency liquidity, working capital and trade finance. This is a first step. The bank stands ready to further scale up its response, and is taking active and urgent steps to review, adjust and expand its financing instruments, in partnership with its countries of operations, partner IFIs and the international community.”
The EBRD is closely following the statements of its major shareholders and co-ordinating with other multilateral development banks, so it is highly conceivable that other international financial institutions such as the World Bank’s IFC private equity arm are getting ready to re-invest in Russia.
On March 6, the World Bank said it was making up to $12bn in immediate support to assist countries coping with the health and economic impacts of the global outbreak. This financing is designed to help member countries take effective action to respond to and, where possible, lessen the tragic impacts posed by the COVID-19. It has not yet specified whether the IFC will use its financial firepower to reactivate in Russia.
The EBRD is owned by 65 countries, the EU and the European Investment Bank, but the countries with the largest stakes are Germany and the UK with 9.5% each, and it is said that politicians from Berlin and London exert great influence over the bank’s Russia policy. The US, which is much more strongly opposed to active EBRD involvement in Russia, has previously carried great weight. Russia has a 4.1% stake.
According to its website, the EBRD’s Russian portfolio has shrunk to €1.63bn from €6.3bn in 2015 following a raft of fire-sale exits, such as the disposal of Transcontainer for a loss of $100mn. About 90% is invested in the private sector, with the remainder in state-controlled entities. Some 54% is invested in industry, commerce and agribusiness, with 24% in financials and 22% in sustainable infrastructure.
President Vladimir Putin has suggested sanctions against his country should be relaxed in light of the COVID-19 pandemic. At a virtual meeting of G-20 leaders on March 26, Putin raised the topic of lifting sanctions and proposed an option for a joint moratorium on some kind of restrictions.
"Ideally, we should introduce a moratorium, a solid moratorium on restrictions on essential goods as well as financial transactions for buying them," he said.
Dmitry Medvedev, deputy chairman of the Security Council of the Russian Federation, has also spoken out against sanctions.
"As [we defended] our values shoulder-to-shoulder and fought for peace for future generations, so our countries must now demonstrate unity and leadership in order to win the war against coronavirus," said Medvedev, who was recently replaced as Prime Minister.
But the sanctions have so far been rolled over despite increasing noise from major European countries such as Germany and France to ease some of the measures.
Russia is in a relatively good fiscal position to withstand the combination of a low oil price and the initial onslaught of COVID-19, but Putin knows investment flow is critical for the economy's long-term development. The current sanctions have been an enormous drag on inward investment as investors are reluctant to engage due to the perceived reputational and business risk.
The definition of the law surrounding sanctions has not altered but COVID-19 has changed the optics as mutual economic co-operation becomes more important than politics.
Andrei Bystritsky, chairman of the Valdai International Discussion Club Foundation Council, believes sanctions will be on the table by September when he expects the world’s biggest countries will meet to come up with a development plan to overcome a global depression.
“That sancions will be severely reduced – or changed – is quite high,” Bystritsky told the news agency Prime .” It will be necessary to restore the world by developing some common plan of action and sanctions are a completely unnecessary obstacle.”