Atlantic Council

Europe’s top banker says that while Central Europe "delivered reasonably well" on the great expectations the world had in the wake of the Cold War, "the job is not done" in the rest of the region, notably Russia, Ukraine, and the Balkans.

Jean Lemierre, president of The European Bank for Reconstruction and Development (ERBD), speaking at the Atlantic Council of the United States in what is expected to be his last public address as head of the EBRD, spoke mostly about Russia, which remains the pivotal state in the region.  From the Western perspective, Russia has caused "many frustrations."  The state is too influential in economic affairs, there has been too little progress in democratizing institutions, and it has been "difficult" on regional issues.

Western European leaders see the problem differently than their American counterparts, however.  The former have "little choice but to engage" Russia owing to a common border and energy dependence.  Russia is simply a "political reality" in Europe from which there is "no escape."

Moreover, the frustration in the West, especially the United States, with Russia is reciprocated.  The Russian people have a "very different reading on what happened in the 1990s" than Westerners.  While "we saw potential, they saw poverty and humiliation."  Further, they felt "cheated" out of their rightful place in world affairs.  They went from a world superpower to a failing state, where life expectancy, especially for males, is declining rapidly.

Russia is desperate for economic diversification, fearing its economy is too reliant on oil and gas exports.  They want foreign direct investment but only on a "fair basis."  Investors, especially in Europe and Japan, are "very enthusiastic about the region" but have concerns about "the role of the state."  Russia is not helping its cause by trying to maintain firm control over what it terms "strategic sectors" of the economy, especially oil, gas, aviation, and defense.

Despite the obvious problems, there are some positive signs in Russia, Lemierre believes.

First, there have been two elections, or, as he quipped, perhaps we should call them "selections."  While "continuity" was the "main theme," there does seem to be "a new tone."  There are signs of more openness, greater respect for the rule of law, and concern for social issues.

Second, we are finally seeing the emergence of a middle class, albeit a low income one.  These are "mostly managers rather than entrepreneurs."  Still, they are demanding social investment in education and health care, which should force the government to make vital reforms.

At the same time, however, there is enormous "fragility."  Demography is the chief concern.  Russia is rapidly "losing people."  A low birth rate is combined with the destructive behavior of males between 20 and 45 who are killing themselves with alcohol and accidents. The current population of 146 million could dwindle by a third in the next fifty years if some drastic changes do not arrest current trends. Immigration could offset these problems but the influx of regional guest workers is already causing significant social upheaval.

Additionally, Russia is now "open to the world" in a way it was not during the Soviet era. While this is desirable from the standpoint of economic growth and modernization, it is also quite "dangerous."  Russia and other regional actors are now much more vulnerable to downturns in the global economy, such as we’re seeing now with the banking and food crises.

Still, Russian leaders have "a genuine wish" to be part of the global system.  They are taking steps to become part of the World Trade Organization but they have many hurdles yet to overcome.

For the West’s part, we must find a way to be true to our principles, values and interests while also engaging Russia on terms that they can manage. This is the great challenge ahead.

Opening the question and answer session, Atlantic Council president and CEO Frederick Kempe asked Lemierre whether the job that the ERBD was created to do wasn’t essentially done and therefore it might be time to close its doors and declare success.

Lemierre answered, "Yes.  To an extent."

Indeed, he noted, the ERBD was already scheduled to end its operations in Central Europe by 2010 as those countries join the EU as full partners.  A fundamental principle of his institution, Lemierre declared, is that "We hate subsidy."  The ERBD refused to lend where private banks would do so and insists therefore on charging higher-than-market rates.  The idea is "shared risk," not handouts.

But there is, he believes, still much work to be done further East.  Russia, Ukraine, and the Balkans still need help.

Unfortunately, simply lending money is not enough in these cases.  Russia, for example, has huge cash reserves thanks to its energy reserves.  Rather, the problem is a deficit in skilled human capital, a need to adopt the values of free markets and democratization, and too much corruption.

This Global Leadership Series event made possible with the support of Troika Dialog.