By Jurgen Rigterink, First Vice President, European Bank for Reconstruction and Development (EBRD)
When Russian troops marched into Ukraine in 2022, they brought with them not only tanks, helicopters and guns but also the deadliest weapon known to the world of finance: uncertainty.
Ukraine has always been a very important country to the European Bank for Reconstruction and Development (EBRD), which was set up a generation ago to help the formerly communist countries of Eastern Europe develop market economies. As Ukraine’s largest institutional investor, we have had a long-term relationship with the country for more than 30 years. Ukraine is right at the heart of the geography of our countries of operation. We are mandated to support the development of its economy, and we regard this as critical. So, we made a strategic decision soon after the Russian invasion that we would increase our investments in Ukraine, taking and managing higher levels of risk. We determined to lead the international financial institution (IFI) community by taking the highest level of exposure among them on our own balance sheet in that high-risk financial and security environment.
Since 2022, there have been many achievements of which we are proud. By October 2024, we had deployed €5 billion in wartime Ukraine, with support from donors. We also secured shareholder approval for a €4-billion capital increase to support future wartime financing at current levels, with the potential to lend more during post-war reconstruction.
Not only has the EBRD made major financing available in wartime to state-owned enterprises, such as railway, electricity-transmission and gas companies, to keep the trains running and the lights and heating on, but we have also supported Ukraine’s private sector and been part of some spectacular investments initiated by visionary private investors from abroad. The most recent was a telecom (telecommunications) merger in October, which has brought US$435 million to Ukraine—its biggest private foreign direct investment (FDI) in wartime.
Yet none of this has been easy. Lending in a war zone is highly unusual for the EBRD, and the amount of uncertainty with which we are dealing is unprecedented. There are many different paths that the war could take. And which path it does take might affect the ability of the Ukrainian economy to operate and its banks to function and, ultimately, also impact the EBRD’s position, bringing the potential for losses in the country.
All of this raises the question: How can a Triple-A-rated bank like the EBRD, which works by the principle of sound banking, cope with so much uncertainty and carry on lending in a war zone?
The Uncertainties
We do not yet know how long the war will last, nor the extent of the full damage, the outcome or what reconstruction will cost, although we do know that the latter will have a significant impact on public finances. The latest estimate by the World Bank, European Commission (EC) and United Nations (UN) suggests US$486 billion, which is equivalent to 272 percent of Ukraine’s 2023 gross domestic product (GDP).
Uncertainty complicates the job of assessing the risk of investing—the starting point of banking—in Ukraine, especially over the long term. Since our commitment as an institution is for the long term and because we need to take a risk view over a longer-term horizon, our sovereign-risk assessment emphasises long-term public-debt sustainability.
Usually, for a proper assessment of debt sustainability, we need not only macro projections but also assumptions about fiscal policy. While baseline scenarios for any debt-sustainability exercise in any country need to be taken with a pinch of salt, what is unusual about the Ukrainian wartime context is the speed and extent to which the parameters can shift. If agricultural exports cannot leave Ukraine because the Black Sea is blocked or attacks on the energy system bring long power outages, these changes will have sudden, large-scale implications for financing. The longer the war lasts, the more uncertainty and the higher the risk to our balance sheet.
Financing projections reflecting the current level of Ukraine’s external support are also potentially unstable. If, for instance, the political environment changed in some of our shareholder countries and support for Ukraine waned, a question mark about the future financing of the country’s budget deficit could emerge.
Ukraine’s banking system has so far risen admirably to the challenge. But the many forbearance measures currently available to local banks to stimulate wartime investments—which are essentially subsidies—mean that we cannot fully know how healthy the banking system will look once the war and subsidies end.
Even once the war is over, the EBRD’s research has shown that more uncertainty will be the only certainty. Our recent overview of the impacts of wars and post-war recoveries over the last two centuries demonstrated that these recoveries vary widely. In 29 percent of cases, GDP per capita returned to the trend levels observed in comparator countries without wars within five years, but in almost half, it remained below those levels 25 years later.
The Ways Through: Modelling, Donors and Capital Increase
Our operational method for managing the various types of risk we take in Ukraine is based on staying agile and modelling the risks of all the scenarios that we think are realistic or possible. We analyse the situations of the Ukrainian economy and public finances through the prism of these different scenarios and then come up with an estimate of what this means for us at the EBRD.
Such models are part of our risk assessments. They were also part of our negotiations with our shareholders for a €4-billion capital increase in 2022 and 2023—in itself a way of counteracting the uncertainty of war since capital acts as a shock absorber, cushioning the impacts of unexpected losses or stresses in the economy that cannot yet be fully estimated.
The EBRD’s paid-in capital increase also signals a development in our approach to financing Ukraine.
Early in the war, when the EBRD committed to making up to €3 billion available to Ukraine by the end of 2023 (a target it later beat, deploying €3.8 billion by the end of 2023), the stretching of its risk appetite and risk-taking capacity was made possible only by the generosity of donor nations, which agreed to share risk on a 50:50 basis. To date, we have mobilised €2.5 billion of donor support, with the United States, Norway and the Netherlands as our biggest donors. To continue in this way beyond 2023 would, however, have severely limited the bank’s capacity to add exposure to Ukraine to its existing balance sheet and invest further in Ukraine. The capital increase was sought to enable the EBRD to continue to support the real economy and livelihoods in Ukraine at current levels of around €1.5 billion a year, despite this exceptionally high-risk environment, and then to play its full part in the reconstruction of a prosperous country with still higher investments.
The act of providing additional loss-absorbing capacity (LAC) by way of capital, as well as grants and guarantees, is clear evidence of shareholder commitment to the bank’s continued role in supporting Ukraine.
This has given comfort to credit-rating agencies. As Standard & Poor’s (S&P) commented, “We regard the capital increase as necessary to support the EBRD’s activities and investments in Ukraine during wartime and in the future post-war period for the country’s reconstruction. We believe the shareholders’ capital increase will allow EBRD to take up riskier lending positions in Ukraine, as expected by shareholders. We further regard the capital increase will increase operational agility by reducing reliance on direct risk-sharing resources (grants and guarantees) from shareholders and donors.”
By relying less on donors, then, the EBRD will take even more risk on its own balance sheet. And to manage that extra risk, modelling multiple scenarios will become even more important, enabling us to manage our balance sheet effectively no matter which scenario becomes reality.
Making EBRD Lending Work Effectively: Veterans and Governance
With this new paradigm in place, the EBRD is already working on making its lending as effective as possible—because the more resilient the economy remains now, the less costly reconstruction will be later.
The bank’s unique mandate and strengths—including its combination of investment and policy advice as well as focus on private-sector development—equip it especially well to tackle issues ranging from supporting Ukraine in its move towards European Union (EU) membership by improving its legal systems and governance to boosting the country’s workforce, or “human capital”, by working to support the reintegration of war veterans and the displaced into workplaces.
The war has chipped away at Ukraine’s skilled workforce, with several million people living abroad or internally displaced and hundreds of thousands more serving in the armed forces. A key element in boosting economic resilience is attracting more people to return and re-enter the country’s much-reduced workforce.
The EBRD’s financing for Ukraine has prioritised a human component from the start—focusing explicitly on restoring people’s livelihoods and improving their lives despite the Russian aggression. We have established clear objectives promoting what we call “human capital resilience and recovery” as part of our core operating model.
In April, together with the National Bank of Ukraine (NBU), we launched a charter with a view to boosting human-capital resilience in Ukraine by supporting banks to work together to make the financial sector more accessible to war veterans, both as customers and employees. The charter scales up work that the EBRD has done with client companies to enhance human-capital resilience throughout the war.
Alongside the charter, the EBRD also launched its own Veterans Reintegration Programme, with the signing of guarantee facilities with two major Ukrainian banks to unlock a total of €250 million of new financing for Ukraine’s private sector. These were the first two signings in the sector to include a commitment to develop a veteran-reintegration programme for the lenders and their clients.
Good governance is equally important for Ukraine’s economic future, and we are working closely with the authorities on aligning Ukrainian systems with those of the European Union. There have been significant advances—notably the passage of a law on the governance of state-owned enterprises last spring, with support from the EBRD. But it will be important, especially when the vast amounts of money needed for reconstruction begin to flow into the country, to ensure that these funds are channelled properly. It will be in both our and Ukraine’s interests that the governance surrounding the reconstruction loans from IFIs is managed well.
The Guiding Principle: Prudence
Even when operating in a war zone, the EBRD remains committed to sound banking principles. We continue to take a prudent approach to our risk exposures in Ukraine and structure our projects to mitigate possible risks.
We are conservative with our lending in Ukraine. To take one example from our work with financial institutions, we have developed a product called a portfolio risk share, whereby we guarantee a pool of sub-loans issued by Ukrainian banks. We have structured it in close cooperation with the Ukrainian banks involved by agreeing on strict lending criteria for their on-lending to Ukrainian clients. This approach—being selective whilst accommodating the specific wartime needs of our clients, especially on the sovereign front—is important in preserving our Triple-A rating.
As well as being important for Ukraine, it is also important for the rest of the more than 35 economies across three continents where the EBRD works. We aim to build the strongest portfolio possible with the lowest level of nonperforming loans (NPLs) across our countries of operation. We have to make sure that our portfolio, even in challenging countries such as Ukraine, is solid. Our ability to manage that diversity across our regions is one of the reasons we can continue to invest in Ukraine.