OREANDA-NEWS. On June 23, 2009 Noreen Doyle, former EBRD First Vice President, compared the rouble crisis of ’98 with the current turmoil, reported the press-centre of EBRD.

The causes of the ’98 crisis and the current situation are very different. Are there similarities as well?
Yes and no; but there are similarities in the causes too, as far as the region where the EBRD operates is concerned. One of the reasons for the ’98 crisis was that oil prices, after bouncing around quite happily at US 20 a barrel, plummeted and went as low as US 11 a barrel. Since Russia was a commodity supplier to the world, the coffers of the Central Bank just emptied.

Something similar is happening today: a sharp fall, rather than a long, slow decline. In the space of 18 months, oil has gone from around US 60 up to US 140 and then collapsed back down to near US\\$ 60. At US 60 Russia was having a great time, at US 140 they were coining money, but it’s tough coming back down to US 60. The difference is that this time the commodities are not a cause, but a symptom.

In the ’98 crisis, the Bank was vulnerable. What caused the vulnerability and how was it dealt with?
I remember it so vividly! It was 7am on 17 August ’98 (a Monday) and the phone rang in my kitchen – it was Stephen Kaempfer, then EBRD Treasurer, saying that Russia had defaulted on its debts and declared a moratorium. At the time, the EBRD not only had 25 per cent of its portfolio in Russia, but also more than EUR1 billion in B-loans committed and outstanding to participating banks, whom we had assured would never be subject to a moratorium.

Our vulnerability was that if Russia set a precedent like this, we would never get funding for a project again. We had only been going for seven years; the Bank didn’t have the credibility and backing that it has now.

We spent the next 48 hours with the Head of the Russia office and a senior lawyer camped out in the Central Bank, clutching copies of the treaty establishing the EBRD, showing them article 49, which stated that loans from the EBRD would never be subject to a moratorium.

Very far-sighted of the lawyers who drafted the treaty! At the end of the Wednesday, the Russian government issued a declaration that loans from the EBRD, including the portion from commercial banks, should not be subject to the moratorium, so we avoided the worst outcome. It was an anxiety-ridden three days, but we got it done.

The crisis was Russian, but it came on the back of the Asian crisis the year before. An interesting sidelight of the Asian crisis was that in the aftermath it became apparent that many people had put money into Asian countries that had no bankruptcy laws. So that was one of the first things the EBRD did: teams of lawyers went to show our different countries what bankruptcy laws should look like. It was clear that they wouldn’t get funding unless they could deal with the ‘dark side’.

The next thing we did was to look at the portfolio across all our countries and what we saw was remarkable – this is where there’s a real difference in comparison with today. The economies of central Europe – Poland, the Czech Republic, Hungary – and the Baltics, had totally turned away from Russia and had become West-facing.

With the exception of Latvia, even the banks in those countries had virtually no exposure to Russia, so the rouble crisis and its aftermath were largely confined to Russia and the CIS. The Baltics and central Europe got away more or less unscathed because their economies and industries were selling to the rest of the world, not Russia. Today that’s a drawback.

Did the EBRD suffer in the aftermath of the rouble crisis? Can we learn from our experience then?
Yes, we suffered. Not from the moratorium, but we suffered losses mainly on the banking portfolio. We thought we could safeguard against risk by selecting the top 10 banks and working with them, but when the whole banking system collapsed, the top 10 collapsed as well.

We put together a work-out team and we worked on the banking problems as best we could. There were huge cash flow problems across all sectors, particularly for foreign joint ventures making products that, with the depreciation of the rouble, became way too expensive for the people. So we made loans longer and repayments lower, adjusted terms when and where it was viable and eventually we got most of our money back.

The flip side is that we had a lot of small investments, through venture funds and equity participation, in purely domestic products being made for the domestic market. Because people couldn’t afford to buy imported goods, these companies did very well. Having a broad portfolio paid off.

We did our work-outs and restructuring in a clear-eyed, commercial way. We didn’t succumb to borrowers thinking: “You’re just an international financial institution, you should write the loan off and stop bothering us.” The discipline of a commercial restructuring is a very constructive learning process for a company; many of them will not have done anything like this before.

People are saying that nothing like this has ever happened before, but they say that about every crisis. What do you think?
Yes, they do say that and they’re right, because every crisis is a little bit different. During the rouble crisis, it was an advantage to be West-facing; now it’s a disadvantage and the blame is falling on the so-called ‘Anglo-Saxon’ model. It’s ironic that during the rouble crisis it was the US and the UK governments who took the hardest line against state intervention in the banks, yet this time they’ve taken huge equity stakes in their own financial sectors!

Is your approach to the current crisis different after your previous experience?
The previous experience (and I was in Houston for the oil crisis of the 80s as well!) has been very useful. You learn more about your business from dealing in a crisis. And you learn more about your clients. If you have seen a few crises, you know things are going to be very tough for a couple of years, but you have perspective; you know that cycles come and go. You also know that you have to do the right things, which are often the hard things, like letting people go. You need people with you who have the stomach for doing the right things too, however hard those things may be at the time.

Do you have one piece of advice that that you think particularly important?
This applies equally to banks and companies. If you have a strategy you believe in, stay with your strategy and adjust your tactics for the economic environment. Don’t do a 180° turn because the economy has performed this incredible contraction. It will turn around again in time. Keep your talented people and stay the course, you will get through it!

What do you value most in the EBRD?
Bright, dedicated people!

Noreen Doyle is now a non-executive director of Credit Suisse Group, Newmont Mining Corporation, Rexam PLC and QinetiQ plc.

By Nikki Braterman, Internal Communications Manager