Does the EBRD still finance freedom?

The investment climate was hardly auspicious when the head of the European Bank for Reconstruction and Development visited Ankara, the Turkish capital, late last year. The lira was under heavy pressure. Inflation was soaring. Opposition parties were warning that President Recep Tayyip Erdogan’s growing authoritarianism and erratic economic management were demolishing the living standards of ordinary Turks.

That did not deter Odile Renaud-Basso from paying a visit to Erdogan’s vast presidential palace or from announcing several hundred million euros’ worth of new lending for Turkish projects in the weeks after her trip. It crowned a record year that saw the bank plough €2bn into the country, securing Turkey’s place once again as its top recipient.

The EBRD, whose total new investments in 2021 topped €10bn, is unique among multilateral development banks in placing a drive towards multi-party democracy at the heart of its mandate. That critical principle — an inheritance from its 1990s origins operating in post-communist eastern Europe — is however under mounting strain.

The London-based lender is operating against a backdrop of anti-democratic backsliding and authoritarianism in a host of its client countries, including Turkey, Egypt, Belarus and Kazakhstan, where the regime in recent weeks has brutally suppressed widespread protests over poverty and corruption.

Odile Renaud-Basso, president of the European Bank for Reconstruction and Development
Odile Renaud-Basso, president of the European Bank for Reconstruction and Development, rejects the idea that the political dimension of the bank’s charter should be scrapped altogether © Arife Karakum/Anadolu Agency/Getty Images

Active in close to 40 countries across Europe, north Africa and Asia, the EBRD is set to begin lending in sub-Saharan Africa amid renewed questions over its commitment to a pro-democracy mandate that is embodied in Article 1 of its founding agreement. It has to balance that mission with the need to battle global crises including climate change and the pandemic.

The debate has resonances for a host of other multilateral development lenders as they engage with authoritarian powers around the world. Critics say that, rather than selectively turning a blind eye to its political mandate, the EBRD should either decide to scrap Article 1 or dramatically rethink its areas of operation.

“Its current lending practices are grossly out of line with its original mandate of working only with countries that are true democracies,” says Dani Rodrik, a professor of economics at Harvard’s Kennedy School. “There is a debate to be had on whether multilateral lending agencies should or should not have explicit political criteria.

“But the EBRD was founded with an explicit commitment to democracy,” he adds, “and there is little justification for the institution acting as if Article 1 simply does not exist.”

Tanks move into position as people attempt to stop them in Ankara, Turkey, in 2016
A 2016 coup attempt led to tensions between Turkey and European capitals © Burhan Ozbilici/AP

‘Certificate of health’

The EBRD, which has supported projects ranging from a multibillion-dollar gas pipeline network bringing energy from Azerbaijan to Europe to a microfinance initiative for female Egyptian entrepreneurs, launched its operations in Turkey in late 2008. It was its first foray beyond the borders of the former Iron Curtain.

The country was beloved by foreign investors but was suffering from a credit crunch as the global financial crisis gathered pace. Ankara’s hopes of joining the EU were still alive. Erdogan, then the country’s prime minister, was viewed by many in the west as a reformist — though sceptics warned that he was already showing signs of a strong authoritarian streak.

Thomas Mirow, the bank’s then-president, says that the move was driven partly by its desire to expand beyond its traditional borders and the need to hedge its large portfolio in Russia. But most important, he says, was the country itself. “Turkey at that time seemed to be on a path to democracy and was a quickly developing country that lacked capital investments and expertise, especially in the private sector,” says Mirow.

By the end of 2014, Turkey had overtaken Russia — where the EBRD had been forced to halt lending after Vladimir Putin’s invasion of Crimea in February of that year — as the largest recipient of EBRD funds. The bank has provided around €15bn to Turkish projects since 2008, backing schemes in energy, transport, agriculture, infrastructure and the banking sector, with a focus on green finance and the inclusion of women.

Three major projects

A partnership between Egyptian National Railways, the European Bank for Reconstruction and Development and Egypt’s National Council for Women aims to make the Egyptian rail network safer for female passengers


The EBRD’s stake in the Istanbul stock exchange, bought for an undisclosed sum in 2015. It was forced to sell it four years later when President Erdogan appointed a banker convicted of US sanctions evasion as its CEO


Financing package co-ordinated by the EBRD for the Bakad project in Kazakhstan, used for the construction of a 66km ring road around Almaty, the capital


Loan to the Egyptian government in 2018 to finance the rehabilitation of Cairo Metro Line 1

Gokalp Cak, co-founder of the Turkish logistics firm Netlog, says that the bank offers longer-term financing with better rates than the country’s domestic banks. It also serves as a kind of “certificate of health” for a company in the international markets. Netlog has received EBRD loans totalling €60m since 2014.

The emergence of Turkey as the bank’s number one investment destination — a distinction it has held in six of the past eight years — has coincided with a sharp decline in human rights and the rule of law as Erdogan, who became president in 2014, has jailed opponents and sought to stifle free speech. The economy has lurched from crisis to crisis as the Turkish leader has meddled in the work of the country’s central bank.

Daron Acemoglu, an economist at the Massachusetts Institute of Technology, argues that international lenders — including not only the EBRD but also other government-owned banks — deserve some of the blame for the state of his country.

“Turkey’s institutions have come to a dangerous point, in part because bad macroeconomic policies have been propped up by outside funding pouring into the country for more than a decade,” he says. “I think all financial institutions around the world, and especially the EBRD, the IMF, and the World Bank, should have much tighter standards on when and how to lend to authoritarian leaders.”

Bristling at criticism of its work in Turkey and other, even more oppressive, regimes, the EBRD argues that it supports private sector projects, rather than public ones, wherever possible. “Our activity in Turkey is mainly driven and focused on the private sector,” Renaud-Basso, said in an interview with the Financial Times during a visit to the country in November.

Its support for decarbonisation and push for projects that prioritise the inclusion of women means that the EBRD is contributing not only to economic development, she argues, but also a “more inclusive society”. Almost 90 per cent of the bank’s €7.2bn active portfolio in Turkey was in the private sector at the end of last year.

But the bank has also continued to work with the Turkish state. The week after Renaud-Basso’s visit, it announced that it would lend €150m to the government to build a high-speed train line.

A visitor is reflected while crossing the trading floor at the Borsa Istanbul stock exchange in Istanbul
The European Bank for Reconstruction and Development bought a stake in Borsa Istanbul, the country’s stock exchange, in 2015, but backed out four years later © Ismail Ferdous/Bloomberg

The bank has largely steered clear of the so-called “gang of five” group of companies with close links to Erdogan and his ruling party. But some of its regular partners are infrastructure and energy companies whose reliance on public contracts force them to remain on good terms with the state.

It has also faced questions about its definitions. Projects categorised as private sector include €1bn of financing for a programme of giant “city hospitals” that were built under public-private partnership arrangements with Turkey’s health ministry.

The same private sector label was applied to the EBRD’s ill-fated decision to buy a stake in Borsa Istanbul, the country’s stock exchange, in 2015. At the time, the lender hailed the deal as a symbol of its support for Turkey’s “comprehensive capital market reform programme”. It was forced to rapidly offload its stake in 2019 after Erdogan announced that its new chief executive would be a Turkish banker who had just served time in a Philadelphia jail for evading US sanctions on Iran.

The episode shows the risks of working in a country where even nominally independent initiatives are often highly politicised, says Erik Meyersson, a Swedish economist and vocal critic of the EBRD. “The fact that [Erdogan] can do that is a sign of how politically risky it is to do these kinds of big investments in Turkey.”

Bar chart of Shareholders (%) showing EU countries remain the largest shareholders in the EBRD

Transition towards democracy

At its founding in 1991, the EBRD — which is owned by 71 countries including the US, the UK, Germany, France and Russia, plus the EU and the European Investment Bank (EIB) — was the embodiment of the optimism that accompanied the fall of the Iron Curtain.

Initially the bank promoted the development of the private sector in post-communist countries, involving itself in banking systems reform, price liberalisation and stronger property rights.

The EBRD’s mandate specifies that the bank can operate in central and eastern European countries which are proceeding in their transition towards market-oriented economies, and are “committed to and applying the principles of multi-party democracy, pluralism and market economics”. 

This explicit pro-democracy mandate distinguishes the lender from counterparts such as the World Bank. It reflects a belief that high levels of economic development are closely allied with the transition towards democracy. This notion is, however, increasingly questioned — not least because the economic strength of China, an EBRD shareholder, has come at a time when the ruling Communist party has only hardened its control of society.

An opposition supporter holds a historical flag of Belarus in front of law enforcement officers during a rally in Minsk to demand the resignation of president Alexander Lukashenko after the disputed presidential election of 2020
An opposition supporter holds a historical flag of Belarus in front of law enforcement officers during a rally in Minsk to demand the resignation of president Alexander Lukashenko after the disputed presidential election of 2020 © Tut.By/Reuters

“When the EBRD was set up in the early 1990s it was ‘end of history’ time and people thought there was only one way that countries would develop — which was towards democracy, capitalism and what else — nirvana. So it seemed a no-brainer to put Article 1 in,” says Thomas Wieser, a former EU official who chaired a 2019 EU review into Europe’s development lenders.

Today, however, Article 1 appears “pretty dormant,” says Wieser. “The EBRD has been doing business with manifestly undemocratic governments for the last 10 or 15 years despite this element of their mandate. There is an element of hypocrisy in it.”

The EBRD argues that Belarus shows that there is merit to the idea that supporting private enterprise can deliver democratic dividends. Private sector workers played an important role in protests that erupted against president Alexander Lukashenko in 2020 — even if those uprisings were brutally crushed in the wake of his heavily contested election victory. In November the bank extended a halt on new public lending in Belarus, introduced in September 2020, to include the private sector.

Acemoglu accepts that providing finance to private business is different to directly funding an authoritarian government. But he says that “the devil is in the detail” when it comes to selecting companies with sufficient distance from the government.

The bank, which approves deals on a project-by-project basis, says that it only works with entities that pass its “stringent” due diligence process.

Under Sir Suma Chakrabarti, the previous EBRD president, the bank sought to institute a more systematic approach to Article 1, as it adopted its “more for more, less for less” policy, scaling up investment in countries that are making strides in democratic and economic reforms and winding down in those that are going backwards.

That strategy was employed in Belarus after Lukashenko’s violent response to the demonstrations, and in Uzbekistan, where tentative reforms were rewarded with the resumption of EBRD lending to the country in 2017 after a decade-long pause.

Supporters of ousted Egyptian president Mohamed Morsi hold posters of him as they protest in Nasr City, Cairo, in 2013. The EBRD is operating against a backdrop of anti-democratic backsliding and authoritarianism in a host of its client countries, including Egypt © Hussein Malla/AP

Yet critics say it is hard to square “more for more and less for less” with operations in Turkey as well as in Egypt, where it continued scaling up after the repressive government of president Abdel Fattah al-Sisi came to power in a 2013 coup. “It feels like it really doesn’t apply its political mandate to these two countries,” says Fidanka Bacheva-McGrath of the campaign group CEE Bankwatch, which monitors financial institutions in central and eastern Europe.

The EIB, which is owned solely by EU member states and previously held the title of Turkey’s single biggest multilateral lender, began winding down its operations in the country in the wake of a 2016 coup attempt that led to mounting tensions with European capitals. It halted operations altogether in 2019 as EU states sought to punish Ankara for its “illegal” drilling for gas in the waters around Cyprus.

At least in Turkey, unlike Egypt or Kazakhstan, there is a vigorous political opposition, despite the president’s efforts to stifle it. The shock victory of anti-Erdogan candidates in 2019 local elections means that the country’s two biggest cities, Istanbul and Ankara, are now run by the opposition.

“We’re as open to dealing with the opposition,” says Renaud-Basso, “as we are with other people.”

Yet Istanbul has not been awarded any new funding since Ekrem Imamoglu, the city’s mayor, took control, despite extensive talks with the bank. “So far we don’t see any real progress,” says an Istanbul municipal official. “It’s just talk.”

Riot police officers stand ready to stop demonstrators in Almaty, Kazakhstan, earlier this month. The regime brutally suppressed widespread protests over poverty and corruption
Riot police officers stand ready to stop demonstrators in Almaty, Kazakhstan, earlier this month. The regime brutally suppressed widespread protests over poverty and corruption © Vladimir Tretyakov/NUR.KZ/AP

A ‘less for less’ strategy

The unresolved question is whether the EBRD’s singular mandate represents an albatross that it should disregard in the interests of wider economic development, or a calling card that should be embraced by a wider range of public sector lenders as democratic values come under threat around the world.

Renaud-Basso rejects the idea that the political dimension of the bank’s charter should be scrapped altogether. There is never any discussion among shareholders about changing it or removing it, she says. “It’s an important component of our mandate, and we take that seriously.” She adds that the “less for less” strategy “allows us to adjust in situations like Belarus, and to really reduce [our work to] the minimum” if need be.

Mirow, the former EBRD president, agrees that the bank’s focus on boosting free market economics and promoting green transitions “still makes a lot of sense and probably is better than many other things you could do”.

Bar chart of EBRD investment, 2021 (€m) showing Turkey was the top destination for EBRD funding in 2021

It does mean that the EBRD is held to very different standards from many other development banks. The World Bank’s development banking wing, for example, is required in its governing statutes not to take a position on the internal political affairs of client countries. This, points out Scott Morris, a senior fellow at the Center for Global Development, leaves the institution, which has more than $300bn of assets under its management, free to lend to all manner of authoritarian regimes.

Some experts question whether development lenders should be focusing their support on democracies given the magnitude of global crises such as the pandemic and climate change. And lenders such as the World Bank still have the capacity to effect positive change to public sectors via granular standards applied at a project level — for example “safeguards” on the environment and the treatment of local communities, argues Morris.

This is “probably the best we can do”, given the wide array of objectives that these institutions need to pursue, he says. As for the EBRD, he argues it would be better off simply scrapping its Article 1 commitment. “It’s just a lie that sits there,” he adds.

Additional reporting by James Shotter in Warsaw

Candice Cearley

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