Perhaps it's time to add the European Bank for Reconstruction and Development to that list of things that, like houseguests and fish, can overstay their welcome. The bank now strays so far from its original remit that it risks spoiling the legacy of its earlier successes. The EBRD should quit while ahead, declare victory and be privatized.
At its pinnacle, the EBRD was a triumph of financial statecraft. Established in 1990 with funding from the U.S., the EU and other governments, it provided financing to companies in postcommunist Central and Eastern Europe at a time when the private sector shunned them. The EBRD was also specifically tasked with using finance as a tool to promote market-oriented economics, multiparty democracy and pluralism. For the most part, it worked. As recently as last year, the bank's Board of Governors found that the EBRD "exceeded all strategic projections and targets" -- all while turning a healthy profit, more than $3.25 billion last year. The EBRD was that rare bird that did well while doing good.
When the Baltics and Central and Eastern European countries ascended to full membership in the EU, with ample private capital available to them, the EBRD shifted its primary focus eastward to Russia and other parts of the former Soviet Union. That made sense at the time, as these countries still lacked access to the kind of capital that the EBRD could provide. That's not the case anymore. Today, major banks, funds and private-equity players from around the world are virtually tripping over each other to deploy capital in these markets. The EBRD's investments are increasingly competitive with the very private investors they are, by charter, supposed to "support but not crowd out."
What's more, the bank's activities today look dubious from a policy standpoint. Russia, which increasingly thumbs its nose at the U.S. and Europe, now accounts for almost one-half of all EBRD board-approved investments. Commitments in Russia last year alone reached $2.6 billion, and just this week the bank's regional director announced that EBRD investment in Russia would reach $10 billion this year. With a significant chunk of the EBRD's funds now directed toward financing for companies controlled by the Russian state, Kremlin-friendly oligarchs and large public companies such as Lukoil, it is increasingly difficult to see how these investments are consistent with the bank's goal of furthering pluralism, multiparty democracy or market economics.
Russia doesn't need the money -- at least, not from the EBRD. It's not just private capital that's pouring into Russia and its neighbors. Even the EBRD's multilateral peers, the European Investment Bank and the Asian Development Bank, have recently expanded their mandates to include increased focus and funding for virtually all of the EBRD's remaining territory.
And Russia itself is increasingly wealthy, boasting more than $440 billion in foreign reserves, including over $110 billion allocated to its sovereign wealth funds. This summer, Russia even announced the creation of its own $10 billion Russian Development Bank to invest in the same types of projects as the EBRD itself.
If there's not a lack of investment capital, the EBRD still might absolve itself by pointing to its success in pursuing its policy mandate. But, as Willem Buiter, the EBRD's former chief economist, recently noted, the bank is increasingly active in markets characterized by "the spread of corrupt, crony and clan capitalism and to various degrees authoritarianism." Mr. Buiter noted that the bank's "democratic credentials are becoming more tarnished year by year" and that the EBRD will have to choose whether to continue to deploy capital to these countries or lower its standards of promoting compliance with its broader mandate.
As it provides financing to companies and projects controlled by the Kremlin or Kremlin-friendly oligarchs, the EBRD can no longer make the argument that it is promoting democracy, pluralism or good governance. At least not with a straight face. EBRD President Jean Lemierre seemed to tacitly admit that the bank's mission has changed, when he asked "what's the big deal?" about funding opportunities controlled by the state or held in highly concentrated government friendly hands.
The EBRD now does business on terms that differ significantly from those intended by its founders. Oligarchs and other partners get not only financing but the "blessing" of the EBRD, to which they can point when governments, democracy advocates and others raise questions about their bona fides. The EBRD, in return, receives fees and income from these transactions.
We don't begrudge the EBRD its right to capitalize on its contacts and expertise, to do deals, and to make profits. But deals and profits for their own sake are the mandate of the private sector, not the EBRD. If its policy mission is increasingly compromised, then the bank should congratulate itself on a job well done and be sold to the highest bidder. Remember that $3.25 billion profit? Not a penny was returned to shareholder governments, which could redeploy those funds where they are really needed.
There is no precedent for winding down or selling a multilateral development bank. The EBRD would be a great place to start, as it was created for a particular purpose which has, by all accounts, been achieved. This raises the larger question of how to ensure that future well-intentioned institutions do not overstay their welcomes by taking on bureaucratic lives of their own. The privatization of the EBRD could provide a template for a graceful exit for other development banks once their missions are likewise accomplished.