Where to from here?
It is Thursday March 11 and the press conference to announce the EBRD's financial losses is about to start. Deputy vice president David Hexter, who has overall responsibility for financial institutions and who sat on the board of the now-defunct Russian bank Tokobank, is sitting next to the bank's vice president of finance Steven Kaempfer.
What happens next says as much about the EBRD's attitude towards the concept of public accountability as it does about the mistakes made in its Russian portfolio - Tokobank started to go wrong only three months after the EBRD invested in it.
Kaempfer, who joined EBRD from Credit Suisse at the start of the year, plays the big leader tasked with fielding awkward questions from the press about the bank's losses. Looking important and ministerial he faces down a coterie of journalists assembled in one of the bank's conference rooms. But as the meeting progresses it becomes less and less clear whether Kaempfer is answering the questions or whether he is he just a mouthpiece for Hexter, flamboyantly dressed in a purple shirt, who is sitting close by. As every question lands, Hexter scribbles furiously in a notebook, rips out the page and hands it to Kaempfer who glances at it and carries on talking. Under his breath Hexter offers Kaempfer helpful tips such as "give them this figure" or "we can't comment on that".
Hexter's willingess to answer questions - albeit by proxy - contrasted with his attitude to questions put directly by
Euromoney later. We requested separate interviews with both Hexter and Kaempfer but on the scheduled day a press officer calls up to say they would only do it together. The final interview gets underway 15 minutes late and Hexter doesn't appear for another 20 minutes. On this occasion the two men swap roles. Now Hexter is the big leader and Kaempfer is his minder, attempting to smooth Hexter's passage through difficult questions. Kaempfer starts off by taking it upon himself to ask Hexter the questions about Russia he was unable to answer prior to Hexter's arrival. Finally we put it to Hexter that due to the Russian problems he should have considered resigning. He suggests, bizarrely, that Kaempfer should answer the question on his behalf.
When pressed he says: "We were trying to exercise our mandate to work in Russia with good intent. The explosion that took place in the Russian financial system was clearly not the responsibility of the European bank."
No choice but to lend
He adds: "The difference between the private and the public sector is that the private sector has complete discretion over the markets it works in. I had no choice but to figure out to the best of my ability what to do in Russia. Any equity investment in Russia [in a bank] would have failed at this point in time. A lot of private sector investment failed."
Hexter says: I picked up in November and December of 1997 that things weren't looking very good and the last transaction we booked was a small equity investment in Inkombank which we did conscious at the time that there were serious conversations going on with a strategic investor. The actual amount [of the investment] was small. In fact the board had approved a sizeable loan to Inkombank of about $60 million which I took the decision in early 1998 not to sign because I was concerned about the general stresses and strains...The only other transaction processed in 1998 which was likewise not signed was a loan to SBS Agro also for $60 million. That did go before the board and was approved [in early 1998 for the reduced amount of $30 million] but around about May I realized the writing was on the wall."
He adds: "Outside of Russia we do not have a single late payment or past due interest on our loan book to banks." Outside Russia the EBRD has 114 loan operations with banks at an average size of €12.4 million and 62 equity investments. Hexter says the EBRD has earned €250 million in capital gains on equity in banks far greater than any specific provisions.
Maybe so but market observers say that the EBRD was among the last to recognize the parlous state of Russian banks and was still active long after everyone else knew the game was up. Tokobank in which the EBRD had a 9.6% stake and on whose board Hexter sat as a director until April 1998 collapsed even before August 17 when Russia declared a moratorium on its domestic debts. Tokobank is especially controversial because the EBRD had a put option on its shares (which it tried but failed to exercise) that western commercial bank lenders say they did not know about. They complain that the EBRD signalled to them its commitment to Tokobank by the equity purchase while all the time having an escape clause.
Then there is Inkombank. The EBRD paid $6.6 million for a 2.3% stake in the bank as late as early 1998. The bank was not what it seemed, having built up a vast derivatives portfolio the EBRD did not pick up. Hexter accepts that the huge derivative position - forward exchange contracts and options at end 1997 amounted to $45 billion, nine times the banks' assets and 100 times its capital - was not caught during due diligence.
"I cannot give you figures on Inkombank's financial status, as we need to respect confidentiality," says Hexter. "However, I would not refute the figures you have for Inkombank's FX forwards and options exposure for end 1997. These positions were concealed from us by management at the time of the small equity investment. The loan for €54 million that was approved in December 1997 was the loan that I subsequently took the decision not to sign. Although the bank's FX positions were not made available to us until around May, there was clearly a problem and I did not want to provide any commitment until we had been provided with genuine transparency over the bank's status. Kurt Geiger was appointed to Inkombank's Supervisory Council in May 1998."