EBRD to double lending to Ukraine after agreeing €4bn capital increase

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European Bank for Reconstruction and Development shareholders have agreed a €4bn capital increase that will allow it to double lending to Ukraine, boosting the war-torn country’s economic revival plans.

The EBRD is already the largest institutional lender to Ukraine’s corporate sector and has issued about €3.7bn in loans since Russia’s full-scale invasion started in February last year, already double from annual prewar levels of €1bn.

Much of it has been allocated to emergency funding to help prop up Ukraine’s critical infrastructure, including the energy grid, which has been pounded by Russian missiles and drones, and to build rail hubs to facilitate exports to the EU.

The capital increase, to be announced by the EBRD on Tuesday, will enable it to raise annual lending to Kyiv to €3bn once reconstruction is fully under way, EBRD president Odile Renaud-Basso told the Financial Times. Ukraine will at that point account for a fifth of the bank’s total lending portfolio.

“This is a critical time for Ukraine. The Russian authorities are betting that support for it from the international community is running out of steam. But our capital increase, massively backed by our shareholders, is a sign that this support will not waver,” said Renaud-Basso.

With no end to the war in sight, Ukraine allies have turned their attention away from long-term reconstruction to sustaining Ukraine’s economy during the conflict, said Renaud-Basso. “Everybody’s focusing on what needs to be done now in either the short and medium terms.”

The EBRD, whose shareholders include EU states, the UK and US, does not provide budgetary support to governments so the capital increase will not help plug Ukraine’s shortfall stemming from the failure of the US Congress and the EU to approve aid packages worth $60bn and €50bn respectively.

But Renaud-Basso said it was essential that there was “regularity and predictability” in foreign aid payments to Ukraine so that it could pay wages and pensions, enabling it to maintain domestic demand.

“The cost of not supporting [Ukraine] is going to be higher than supporting it,” she added.

IMF managing director Kristalina Georgieva told the Financial Times last week that Ukraine only had a few months before it would be forced to make a drastic “adjustment” in its management of the economy.

The EBRD finances state-owned enterprises such as Ukraine’s electricity grid operator Ukrenergo and the national railway Ukrzaliznytsia, which would require funding from the government otherwise.

It also supports Ukrainian business through risk-sharing schemes with banks and funding for small and medium-sized companies. Sustaining economic growth would boost Kyiv’s tax revenues and ultimately make it less dependent on foreign aid which was a “weakness”, said Renaud-Basso.

Renaud-Basso hailed the “amazing” resilience of Ukraine’s private sector. After slumping by nearly a third in 2022, the economy is set to expand 4.5 per cent despite Russian attacks on the power network and logistics.

The EBRD chief said the lender’s focus on the “real economy” complemented the “budget support received by Ukraine provided by IMF and in the EU and hopefully the US”.

Ukraine had shown it was capable of carrying out economic and governance reforms in wartime, she said. The EBRD combines lending with policy advice. Its priority was updating Ukraine’s corporate governance laws for SOEs, requiring independent boards and expert directors.

Administrative capacity in finance, project design and project management was a major challenge for Ukraine, although it was a “bigger problem” in ministries than in reformed SOEs such as Ukrenergo.

Renaud-Basso also defended the EBRD’s decision to begin lending operations in sub-Saharan Africa — well beyond its original European remit — at a time of significant financing needs in Ukraine.

There would be only a “very progressive phasing” of lending to the region, starting with six countries in 2025, she said.

“What we’ve seen with the war in Ukraine is that many countries are impacted and need financing.”