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Ukraine Crisis Weighs on East Europe as EBRD Meets

EBRD President Suma Chakrabarti
European Bank for Reconstruction & Development President Suma Chakrabarti repeated a pledge on May 12 to raise Ukrainian investments and warned against isolating Russia. Photographer: Jason Alden/Bloomberg

Russia, the biggest recipient of European Bank for Reconstruction and Development cash, may choke off eastern Europe’s recovery should sanctions meant to end the bloody standoff in Ukraine send it into recession.

The London-based EBRD, which invests about 9 billion euros ($14 billion) a year from Mongolia to Morocco, is touting investment strategies 25 years after the Iron Curtain fell at its annual meeting today in Warsaw even as a crisis in Ukraine become more tense.

Eastern Europe is recovering after a debt-crisis roiled the euro region and western European banks curbed financing amid tighter capital rules. The rebound is at peril as Russia, the region’s largest economy and its main energy supplier, is punished by the European Union and the U.S. for President Vladimir Putin’s actions in neighboring Ukraine.

“The negative impact is likely to be felt in the near term, even if there are no further sanctions imposed on Russia,” Lilit Gevorgyan, a senior economist at IHS Global Insight in London, said by e-mail. “Russia has been an important investor in central and eastern Europe, especially in the energy sector. Capital flight from Russia means that these investment volumes will fall.”

The EBRD, set up in 1991 to foster the transition of eastern Europe’s former communist countries to market economy, is meeting as the risk of Ukraine splintering exacerbates the standoff between Russia, the U.S. and the European Union. The lender’s president, Suma Chakrabarti, repeated a pledge on May 12 to raise Ukrainian investments and warned against isolating Russia.

Crimean Annexation

The U.S. and its allies accuse Russia of fomenting unrest in the eastern regions of its neighbor to rationalize a new land grab after annexing the Crimean peninsula.

“These are very detrimental events for the world, Europe and our part of the world,” Polish central bank President Marek Belka told reporters during the meeting. “They are destabilizing the political and economic situation in our region in the long term. I don’t want to sound alarm bells, but there is absolutely no reason to underestimate the negative impact of what’s happening in Ukraine on the economy.”

Gross domestic product in the 30 east European and central Asian economies will grow at an average 1.3 percent this year, compared with the lender’s January prediction of 2.8 percent. The countries will expand 1.9 percent next year, the bank said in a report today. An escalation threatens to completely kill off growth, it warned.

Energy Sanctions

A fresh round of sanctions being considered by the U.S. that would target the energy industry would deepen the impact, Gevorgyan said. Countries facing the biggest risk include Bulgaria, Lithuania and Serbia, which are the most dependent on Russian gas supplies, she said.

“The recovery has been anemic,” Chakrabarti said in London last week. “One of the reasons is the fallout from the Russian-Ukrainian situation.”

The euro region’s rebound also isn’t happening at the speed previously seen and economic overhauls in eastern Europe have stalled, resulting in loss of competitiveness on a global scale, Chakrabarti said.

The standoff has also hit the ruble, which has been the second-worst performer this year among 24 emerging-market currencies tracked by Bloomberg, declining 5.3 percent against the dollar.

Weakening Hryvnia

The Ukrainian hryvnia has lost 31 percent after the central bank abandoned its defense of the currency. Financial markets have been less affected elsewhere in European emerging markets, with the zloty falling 1.1 percent and the forint down 2.6 percent against the U.S. currency.

“Our annual meeting is taking place against a background of severe, and dangerous political tensions,” Chakrabarti told shareholders. “We should work to support reformers everywhere. Successful, inclusive and integrated market economies are a foundation for democracy, pluralism and -- I believe -- moderation.”

The EBRD is increasing its investments in Ukraine to help the country “get back on its feet,” Chakrabarti said in a May 12 interview in Kiev.

The lender, which has a portfolio of holdings worth 4.7 billion euros ($6.5 billion) in Ukraine, 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.

Russian Commitment

The EBRD will have lent 500 million euros in Ukraine by June, the bank said.

Even with sanctions from the U.S. and the EU, both of which are EBRD shareholders, and more being considered by the Group of Seven nations, the lender has maintained the flow of funds to Russia.

“There’s recognition among all our shareholders that the EBRD has been a force for good in Russia,” Chakrabarti said May 9. “Their reformers all argue that the EBRD is at the heart of why reform has happened.

The G-7 nations understand that the EBRD ‘‘helps reformists in Russia and tries to build the very private sector, the very middle-class that will underpin democracy in Russia,’’ he said.

The EBRD’s shareholders are also due to debate whether to approve Cyprus’s request to receive financing through 2020 and whether to admit Libya as a shareholder, opening the door for the country to become a recipient of funds.

Balkan Activities

The EU, an EBRD shareholder, pledged support for countries on its borders as it prepares to invite Albania for membership talks, sign association and free trade agreements with Moldova and Georgia next month and considering one with Kosovo, EU Enlargement Commissioner Stefan Fule said today at the EBRD meeting. Investment needs in the Balkans are significant, he said.

He also said that the EU won’t accept the annexation of Crimea by Russia. ‘‘The EU is committed to Ukraine’s unity, sovereignty, independence and territorial integrity,” Fule said.

The bank has devoted about 86 billion euros to the region in equity investment and development loans since it was established in 1991.

The EBRD, owned by 64 countries, the EU and the European Investment Bank, was created to invest in former communist countries from the Balkans to central Asia to help them transform their economies. The bank expanded its geographical scope to include nascent democracies in North Africa and the Middle East in 2011.

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