Doing Well By Doing Good

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Muscovite sergei teteryuk had a great idea. After leaving the army in 1993 he started up a small business specializing in household fix-up products like wall paneling. Despite the vagaries of Russian commercial life, his firm Alta-Profile began to turn a profit. But last year he ran into the same problem faced by nearly every small enterprise around the world: he could not get the capital he needed for expansion at a reasonable interest rate. "We kept looking for a creditor, but the terms we were offered were not acceptable," says Teteryuk.

Then he saw an advertisement in a Moscow daily for KMB Bank, especially created to provide credit for small businesses, and went to see one of its loan officers. With a minimum of red tape, he got the capital he needed at an interest rate that wouldn't break him. What the 33-year-old capitalist did not know at the time was that his tiny company's loan was made possible by a financial institution based in the City of London. The European Bank for Reconstruction and Development had extended a $60 million line of credit to KMB so it could make loans to small and medium-sized enterprises (smes) just like Alta-Profile.

Teteryuk has plenty of company. The EBRD currently helps banks make about 50,000 loans to smes a year, and it wants to support 100,000 new loans a year by 2002. To date, the bank has launched small business financing programs in 10 countries aside from Russia, including Ukraine and Albania, and plans are in the works for programs in 10 others within a year. Says Elizabeth Wallace, the EBRD's head of small-business lending: "It changes lives and it changes the local economy."

Changing lives and economies in post-communist Europe is the reason the EBRD opened for business almost ten years ago, funded by 40 countries, the European Community and the European Investment Bank. Lately, the EBRD has begun to focus on small business finance as part of its mission to bankroll projects that can foster market-oriented economies across the region. The bank has also said that by 2003 it intends to increase its equity investments, take a greater role in helping to run the companies that receive its funding and allocate a higher proportion of its resources to the eastern part of the 26-country region in its purview — a geographical remit that stretches from Poland to the Bering Sea. The bank's attempts to chart a new course for itself in its second decade will be overseen by a new chief: former French Treasury director Jean Lemierre took the helm last July, succeeding Horst Köhler, who left to head the International Monetary Fund.

Lemierre faces a daunting task. "Let us ask the cruel question," says Roger Alford, senior research associate at the London School of Economics. "What exactly is the role of the EBRD?" An equally tough question is how it should operate. The EBRD can often appear risk-averse, bloated and slow-moving. And it is hampered by a cumbersome internal bureaucratic culture and a series of schizophrenic mandates. "There are too many opposing interests," says Jiri Huebner, a former director of the EBRD's Czech and Slovak team and now head of Strategic Investment Services, a consulting firm for companies operating in Central Europe. "Too many policies, too lofty objectives ... and not enough deals."

The EBRD faces a central conundrum: the for-profit bank's charter demands that it both do good and do well — forcing it to walk a fine line between selecting high-risk projects to further market-oriented development in the region while playing it safe financially. "The contradiction is there," acknowledges Lemierre, seated on a couch in his office overlooking the City of London, "but it's the business we have to do."

The EBRD's biggest immediate challenge is deciding where to conduct that business. The transition from socialism to market-based capitalism has been remarkably uneven in the former Soviet bloc. For post-communist Europe as a whole, the financial requirements are mammoth: to close the income gap between the EBRD countries and the rich nations of the Organization for Economic Cooperation and Development, the EBRD says total annual investment in its region would have to rise from less than $200 billion today to more than $500 billion by 2010.

Although the EBRD is the largest single investor in Eastern Europe over the past nine years, such sums dwarf the bank's current commitments of about $9.5 billion. And while the bank expects economic growth in 2000 in all 26 of its countries of operation, past events are as likely to influence its investing as any guarded optimism about the future. In 1998, the EBRD was hit by the financial crisis in Russia. Along with some of its other investments, its stakes in the commercial banks Tokobank and Inkombank were wiped out, and it was forced to declare a loss of $226 million. In 1999, shaken and gun-shy, the EBRD steered only 10% of its annual commitments toward Russia while placing 42% in the so-called advanced countries such as Poland and the Czech Republic that are on their way to European Union membership.

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