Ukraine has lost more than half its pre-war energy generation capacity due to infrastructure being damaged or destroyed by Russian missiles.
Damage to Ukraine’s transmission system and power substations has also affected the country’s ability to transmit and distribute electricity.
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The destruction has forced Ukrainian enterprises to build power generation capacities for their businesses – but it is hard to lend money when the facilities are at risk of being destroyed by a missile, and banks are afraid clients won’t pay if it happens.
To alleviate the problem, the European Bank for Reconstruction and Development (EBRD), has stepped in to help. The EBRD is launching a €700 million portfolio risk-sharing program with Ukrainian banks – The Energy Security Support Facility.
The EBRD is also planning another project – creating war insurance for inland cargo in Ukraine.
Kyiv Post asked Francis Malige, the Managing Director and Head of the Financial Institutions Group at the EBRD, how it will work.
The European Bank of Reconstruction and Development is launching a new portfolio risk-sharing program with Ukrainian banks – the Energy Security Support Facility. What are its volumes and design?
The EBRD’s new program will support Ukrainian partner financial banks in on-lending to both households and SMEs. They will get an opportunity to buy capacity to generate electricity, including solar panels and generators.
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The first piece of information is the size. This is a program that is €700 million, done through a few Ukrainian partner banks. We've already approved the €150 million transaction with Ukrgazbank, which is to be signed on Sept. 11, in London.
The second transaction is €175 million. We expect to sign it with Privatbank.
We came up with the initiative when we realized that there was a strategy by Russia to target the energy infrastructure of Ukraine. And, unfortunately, a strategy that has met some results – Russia has been able to destroy a large chunk of Ukrainian energy production capacity.
Rebuilding such a capacity is very long and impractical. We will do that in a different way probably after the war. But this is an emergency facility aiming to help Ukraine create a distributed energy production capacity because it’s solving local needs. It’s also much more difficult to target. If you have a thousand production sites for energy in Ukraine, it makes it much more difficult to destroy all of them.
It also came as a demand from clients. Last time I was in Kyiv in April – I would like to come more often – and we had conversations with partner banks. They said they needed financing because they had clients that want to set up methanizers [which convert CO2 to methane that can be used as fuel or can be used for electricity generation by burning as a fuel], solar plants, small scale power production to supplement the ability of the Ukrainian grid to supply energy to them.
We devised this facility on the basis of the well-tested unfunded portfolio guarantees for banks that we have rolled out since the large-scale war began in 2022. These offer dedicated technical support both for banks and also for clients who seek funding for loans and in some cases investment incentives.
EBRD is going to sign an agreement with the bank, then the bank provides funding to small and medium-sized companies, municipalities, even state-owned companies – all of them are eligible.
Have other designs of the program been considered during its development?
When we speak to our clients, we realize that they have plenty of liquidity. They have plenty of money. What they do not necessarily have is the risk-taking capacity.
When banks lend money to you, it’s about funds, but they also take the risk that you will not pay them back.
Banks have a lot of liquidity. People have been very good at keeping their deposits in the banking sector and so on. What banks are more reserved about is taking the risk of Ukrainian clients. Especially when banks have foreign shareholders – [the EBRD program] helps them to be able to tell their shareholders, look, I’m taking these risks together with my partners at EBRD, and that plays a big role in convincing the management teams, the shareholders and the headquarters, that this is a risk worth taking.
This is why we have developed these risk-sharing tools, these guarantees, since the large-scale invasion. By now we have supported about €2.5 billion of financing through financial institutions in Ukraine, through the trade finance program and such guarantees.
Will other banks join the Energy Security Support Facility, if it is known so far?
We will disclose further participants in the program once we’re ready to do so. We talk about transactions once they are ready to sign.
Again, we are demand-driven. We’ve put together a €700 million envelope and have now signed around €325 million out of it. There’s space left.
What matters is how successful it is going to be. If we see that banks sign these facilities and then fail to implement them, and the market is not there, then we will change our mind.
If, however, there’s a lot of demand, we can always look at increasing the amounts available in order to make sure that we provide more capacity to the Ukrainian market. It’s really a question of working together to make sure there is more distributed energy capacity in Ukraine in this time of need.
Ukrainian banks tend to combine different financing programs with the most popular concessional lending in Ukraine, the “5-7-9 percent” program. Will the risk-sharing in the Energy Security Support Facility be combined with the “5-7-9 percent” loans?
We don’t have a policy of not being combined with other programs. So to the extent it makes sense, we always want our partner banks to have skin in the game. We want the bank to be taking some risk. But beyond that, we are going to look at this on a case-by-case basis.
Is there some kind of an obligation for future projects to have war risk insurance?
There is no obligation for future projects to have war risk insurance. Also because war risk insurance for fixed assets is currently not available in Ukraine, or in a limited capacity.
Is the EBRD thinking about other potential new programs for Ukraine? EBRD already launched programs in niches of climate action, SMEs, municipalities – perhaps you’re thinking about other industries?
If we see that there is a specific need, especially to a certain category of clients, we will look into it.
Last time when I was in Kyiv, we signed another memorandum with the central bank and with a few more banks to facilitate re-adaptation of war veterans into the economy and to provide for our partner banks to provide financing to veterans as entrepreneurs.
We are working on a war risk insurance for inland cargo. It is a different type of war risk insurance.
This initiative is not available yet. But we know it’s targeted to cover inland cargo. So there is some capacity available for sea cargo, to take grain out of the Black Sea ports and bring them to an export market. The Lloyds market facilitates one of these schemes.
But we identified that inland cargo is not sufficiently covered – trains, trucks, that sort of thing. And therefore we are working on that product. We’ll be back with more information when it becomes available.
From 2015 to 2018, you have been a managing director leading the EBRD’s operations in Ukraine, Belarus, Moldova, Armenia, Azerbaijan, and Georgia. And these years were historic since during this time there was a so-called bank cleanup. Almost 100 banks were cleaned from the Ukrainian banking system.
I want to ask you as an outsider. From your perspective, how has Ukraine’s banking sector changed since the end of the cleanup?
This cleanup period was very important for the Ukrainian banking sector. In 2013, the banking sector was dominated by what can be described as pocket banks.
Industrial groups would have their own bank and use them to finance themselves. That has changed tremendously now. So, there is a sound and safe banking sector in Ukraine.
Now, since then, I think the banking sector has grown even stronger, and the reaction of the banks to the large-scale invasion has been extraordinary, frankly. Banks remained open, every single day. Yes, of course, some branches closer to the military action had to be temporarily or permanently closed. Some branches were destroyed. Some people were killed, unfortunately, but the banking sector as a whole was able to resist the invasion in a way that probably would not have been as possible 10 years before. And so, I think the banking sector of Ukraine is now certainly in much better health than in 2013. If you look at the numbers, there’s one thing that I’d like to highlight. Banks are profitable, continue to work well, are solid.
The one thing that I’d like to see more of is more lending. If you compare the total loans of the banks to the total amount of deposits that they received from the population and corporates of Ukraine, you’re at relatively low numbers. Some banks are as low as 20 percent or even less. So for each five hryvnia of deposits that you get in the bank, you only lend back one. And the rest goes to the government, essentially. So it’s not lost to the war effort.
But the function of banks is to finance the real economy as well. And, taking into account the elevated risks, taking into account the fact that there are fewer investment projects now in the Ukrainian economy than there were before, I still would love to see more lending from Ukrainian banks into the economy of Ukraine.
My sources in the banking sector told me there is a low appetite because there are few investment projects. Enterprises and entrepreneurs are simply afraid to create new investment projects because, for example, warehouses can be destroyed by missiles. And we have had several cases when Russian missiles hit, for example, the publishing factory of Factor Druk, which is one of the biggest Ukraine publishing enterprises, or there were strikes on Ukraine’s largest construction mall, Epicentr, and Ukraine’s popular military clothes retailer, M-TAC. But is there a way to boost lending in these circumstances?
It’s difficult to generalize. Of course, you have a risk that you’re going to be hit by a military action. At the same time, Ukraine is a very large country and a lot of the country has not seen any military action. If you’re an entrepreneur in Ukraine, you have needs. So it’s never black and white. Banks have every right to be prudent in their lending policies.
But entrepreneurs have projects. Perhaps, there are fewer projects than before the war, more of them are in some regions than others. If you’re close to the front line, it’s a completely different story.
But the reason we have developed and deployed this risk-sharing product is to encourage banks to maintain risk appetite for Ukrainian risk, not to simply buy government bonds and finance the government.
The government needs all of the support it can get to finance the war. But, at the same time, financing the real economy is also extremely important. A real economy that functions means jobs, means an interest for those who are not at the frontline to stay in the country and to work, and it also means tax revenue for the government.
So then let me ask a provocative question. Are the banks in Ukraine simply too lazy to find investment projects that are worth lending for?
I wouldn’t say so. The accusation of banks being lazy is a worldwide accusation. It exists in peacetime. It exists in wartime. It exists in Europe. It exists in Asia. It exists everywhere.
Any entrepreneur seeking finance is going to tell you two things: banks are lazy and they are too expensive.
I don’t want to enter into that philosophical debate. What we are trying to do and what we’re aiming to do is to facilitate risk-taking on the part of banks. And that’s through creating the proper incentives, the resharing, the technical assistance, in some cases, as we have for this energy support facility, some incentives that the banks can then market. And making sure that we have a fair, sound, and competitive banking sector in Ukraine.
So when I speak to Ukrainian bankers, yes, of course, there’s a heightened awareness of the level of risk, but there’s also a desire to continue serving your clients as best you can. Because when this war is over, you want to not have lost all of your clients. Life will go on. The economy will resume.
Reconstruction of Ukraine will be a big topic, and, I think if you take the risks now, you will be the winner later.
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