May 13 (Bloomberg) -- The European Bank for Reconstruction and Development will use Ukrainian investments to help the ex-Soviet republic recover as riots and bloodshed threaten to split the nation, said the lender’s president, Suma Chakrabarti.
The London-based EBRD, which has a portfolio of holdings worth 4.7 billion euros ($6.5 billion) directed mainly toward Ukrainian private business, will complement a $17-billion aid package from the International Monetary Fund approved this month. Foreign aid will help the country pay its debts as the government undertakes unpopular measures, such as the phasing out of natural-gas subsidies.
“Ukraine’s situation is very, very difficult,” Chakrabarti said in a Kiev interview yesterday. “The EBRD has committed to a really large scaling-up in Ukraine. There is a huge economic slowdown and we need to help Ukraine get back on its feet economically.”
The economy, which may shrink 5 percent this year, has been shattered by deadly street clashes, Russia’s annexation of its Crimean peninsula and separatist attacks in the eastern industrial heartland. Pro-Russian armed rebels in the Donetsk region submitted a request to join Russia as Ukraine’s eastern neighbor amasses troops near the border, threatening to further disrupt business.
The EBRD said in March that it may invest about 1 billion euros a year in the next few years, raising Ukrainian financing from the 550 million euros to 750 million euros earlier earmarked for 2014.
“Our support will be across the country,” Chakrabarti said. “We would hope that political stability can re-emerge in the east, so it is possible to invest there as we have done in the past.”
The banking and energy industries are “priorities,” Chakrabarti said. “There is the whole issue of how the banking sector parts with its links to the corruption problems and politics of this country,” he said. “A huge cleanup is required. There will have to be consolidation.”
The U.S and the European Union imposed sanctions on Russia and accuse President Vladimir Putin of stoking unrest that’s threatening to rip Ukraine apart in the run-up to a May 25 presidential election.
“The Russian economy is in severe trouble,” Chakrabarti said. “The Russian economy has been slowing even before the problems in this region.”
The EBRD needs to continue investing into Russia regardless of sanctions imposed by the U.S. and its allies, he said.
The Russian economy is reeling from a capital outflow of $50.6 billion in the first quarter alone, compared with $63 billion last year. That means Russia’s $2 trillion economy is already in a recession, according to the IMF. The lender cut the country’s economic forecast for the second time in less than a month last week, predicting full-year growth will slow to 0.2 percent from 1.3 percent last year.
“The point which I have been making to the EU and to the G-7, the EBRD is all about reform,” Chakrabarti said. “ In Russia, we have been focusing very much on trying to help reform Russia. And that is why we are doing much more in poor areas. We are a good channel for western values into Russia.”
Russia’s economic deterioration is having knock-on effect in central Asia countries such as Kyrgyzstan and Armenia because they “are very dependent on remittances from workers in Russia and those remittances are going down very quickly,” Chakrabarti said.