EBRD Pioneer Sees Investment Need

As the departing head of the Russian office of the European Bank for Reconstruction and Development takes his leave of Russia, he said he is amazed by the economy's historic transformation but disappointed the long-awaited flood of foreign investment still hasn't arrived.


"It is disappointing that foreign direct investment is so low," Lou Naumovski said last week as his colleagues prepared a good-bye party for him in the bank's lobby. Naumovski this month ceded his Moscow post to Neil Parison and moved to London to become senior banker for the EBRD's Russia Team.


"There was always a sense that we were about to turn the corner and get massive investment inflow like Asia in the late '80s," he said.


Despite a rise in foreign investors' appetite for Russian risk before the recent market slide, direct foreign investment will amount to a mere $4 billion in 1997, Naumovski said. The city of Shanghai, in comparison, netted $15 billion in foreign investment this year.


Russia in recent weeks has received promises of big investment from foreign oil majors, but the biggest investor in Russia's private sector to date remains the EBRD.


The EBRD, founded in 1991 to aid the transition of Russia and Eastern Europe to market economies, has committed to Russian enterprises 3.1 billion ecu ($3.5 billion) since 1992.


Under Naumovski's direction, the bank began investing in Russian enterprises when no one else would, setting the pace for foreign lenders and a standard of transparency and fiscal responsibility for its debtors.


"For me, there's a tremendous amount of personal satisfaction in being here since the beginning," he said.


The EBRD's strategy is to support local banks and enterprises by channeling loans through Russian banks to companies at interest rates lower than those available locally. Its projects range from cofinancing the construction of factories for Baskin-Robbins and Cadbury's to financing the modernization of Russia's Oskol steel mill.


Naumovski, a former diplomat and trade commissioner for Canada, has witnessed a revolution in corporate finance in his tenure at the bank. "Five years ago, Russian companies didn't know what a business plan was," he said. "Now they are able, with the help of advisers, to provide detailed information on themselves in the form of a prospectus in order to issue Eurobonds or American or Global Depository Receipts."


"One of the turning points was Vympelcom," Naumovski noted, referring to the cellular communications operator that raised $66 million when it became the first Russian company to list shares on the New York Stock Exchange.


Still, while companies rush to raise money quickly through ADRs and Eurobonds, few have taken what Naumovski called the "tough medicine" of assuming a medium or long-term loan. It takes a company of some foresight to recognize the benefits of such an obligation, which requires more financial disclosure than does a debt or equity issue.


"A company learns how to deal with banks, its people learn how to use the systems and software involved. It enforces discipline on the whole organization," Naumovski said.


Also missing is Russian banks' willingness to lend money over long periods. Only 2 percent to 3 percent of lending in Russia is for terms of more than one year, said Parison, Russia's new EBRD chief and former head of corporate finance at Coopers & Lybrand, Moscow.


Under its new chief, EBRD's Russia office will "continue to move on the crest of the wave of riskiness," Parison said. The bank's goals in the coming years include financing more projects in the manufacturing sector, developing more projects in Russia's regions, and buying equity in a company as a way to provide it with development funds.