EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT (EBRD)

	Website: http://www.ebrd.com/pages/homepage.shtml
	Keywords: energy, natural gas supply, investment

Originally introduced by French President François Mitterrand at a meeting of the European Parliament in Strasbourg on October 25, 1989, the Agreement Establishing the European Bank for Reconstruction and Development was to help administer the transition towards open market-oriented economies and to promote private and entrepreneurial initiative in the Central and Eastern European countries committed to and applying the principles of multiparty democracy, pluralism and market economics.[1]  This founding treaty was a coordinated response among European allies to the prolonged Cold War and subsequent collapse of the Soviet Union, which left the communist Eastern Bloc with many economic challenges. The agreement was adopted on May 29, 1990 and entered into force on March 28, 1991. Operations began April of that year.[2]

The EBRD has a corporate governance structure including: a Board of Governors, Board of Directors, President, several appointed Vice Presidential posts, and other officers and staff.  Signatories to the 1989 treaty included 40 states, the Commission of the European Communities, and the European Investment Bank; to-date this has expanded to include 63 total shareholders.[3] For two decades the EBRD has grown its operations, now reaching into Central Asia. It boasts that it is the “the world’s only transition bank”[4] and “largest single investor”[5] across Eurasia as it extends capitalism and democracy. The EBRD’s multibillion-dollar portfolio, generated primarily byway of direct financing and consultative services, spans 29 states in a variety of sectors including agribusiness, nuclear safety, and transportation.

Recent Development: Funding Nabucco, Europe’s pipeline to the East

The EBRD is proving to be an important third party actor in securitizing European energy trade. Europe, and in particular the European Union (EU), is seeking new trade alliances to mitigate associated risks which the EBRD is supporting. The Nabucco Gas Pipeline is one such project being undertaken by the EBRD for the purpose of sustaining natural gas importation to Europe.

Action by the EBRD is in line with EU’s perceived vulnerability due to significant reliance on a single supplier for this proverbial natural gas lifeblood: Russia. If Russia impedes the natural gas supply it could impact the whole of Europe. Consequences throughout Europe could be homes without heat and infrastructure inoperable. Such a breakdown could be precipitated by depleted natural reserves, high production and transportation costs, geopolitical conflicts, and terrorism— threats proven real today.

Undergirding Nabucco is not simply reliance on Russia, rather gripping economic interdependency between the two parties. 7.9% of all EU import and export transactions are completed with Russia. 9.6% of all imports are Russian goods and services. In turn, the EU is vital to Russian trade, accounting for 47.6% of all imports and exports. Even Russia’s next most favorable trade partners do not come close to matching this total annual trade: China and Ukraine account for 8.8% and 4.6% respectively.[6]  In terms of energy specifically, the EU annually receives around 30% of its natural gas supply from Russia.[7]

This interdependency has become deleterious for Europe when, for example, in the winters of 2006 and 2008 Russia did go so far as to impede westbound exports of natural gas amid consternation regarding regulatory agreements and price negotiations. Central to this was an international commercial dispute between Russian state-controlled Gazprom and Ukrainian state-controlled Naftogaz.  Russia’s strategic measures to challenge Ukraine consequently harmed EU member-states, especially Poland, Slovakia, Hungary, Bulgaria, and Romania.[8] As of January 2009 a bilateral agreement was negotiated between Gazprom and Naftogaz, ergo Russia and Ukraine respectively.

Conflict between Russia and transit states such as Ukraine continues to confound EU concern about energy insecurity and gives Europe more reason to reconfigure relations with its suppliers and routes. Nabucco is one of many pipelines under development between European buyers and African and Asian suppliers. On July 13, 2009— the same year Russia and Ukraine resolved the “gas wars”— Austria, Bulgaria, Hungary, Romania, and Turkey signed The Intergovernmental Agreement.[9] Not only did this treaty bind the states to a common commercial purpose, but also signified their mutual consent to avoid the Russian issue. 

This concerted effort will allow EU buyers to diversify suppliers and significantly reduce natural gas imports from Russia; thus, hopefully mitigating future threats of disruption. The new potential suppliers are Azerbaijan, Egypt, Iran, Iraq, Kazakhstan, and Turkmenistan. Transport of the natural gas through Nabucco will originate in eastern Turkey, move through Bulgaria, Romania, Hungary, and arrive in eastern Austria.[10] Nabucco will effectively circumnavigate Russia and allow Europe to benefit from a multilateral assurance.

The EBRD is helping EU members by investing in Nabucco. On September 6, 2010 the EBRD committed to the project by signing a mandate letter with the European Investment Bank, International Finance Corporation, and shareholders of the Nabucco Gas Pipeline International GmbH. The EBRD alone plans to invest upwards of €1.2 billion.[11] Total projected investment for Nabucco is set at €7.9 billion.[12] The EBRD’s financial commitment is significant given that its total annual power- and energy-related investments are reportedly €18.5 billion.[13] Therefore the EBRD has become institutionally integral to supporting EU interests.

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The interconnectedness of the cast of characters involved in the activities of Nabucco is of interest due to the conflicting interests that are arising.  Cyclically, the construction of the pipeline has become an interstate issue between Russia and Russia. If one subscribes to the view that the “gas wars” encouraged the construction of Nabucco, then the project was encouraged by Russia. It began as an issue primarily between the companies Gazprom and Naftogaz. This effectively made the issue between two sovereign states due to the state-ownership status of each company. Stoppage of natural gas not only punished Naftogaz and Ukraine but also ultimately member-states of the EU. Nabucco then expanded to become an issue between Russia and the EU, which is an intergovernmental or rather supranational institution. Since Nabucco will serve as remedy for EU member-states’ reliance on Russian natural gas, the issue is now between Russia and Nabucco investors. Additionally, because EU member-states and Turkey signed the Intergovernmental Agreement to begin the project, Nabucco is not even an original EBRD venture. But as a current investor, the EBRD is challenging Russian economic interests. Interestingly, Russia is a shareholder of the EBRD and is therefore part contributor to Nabucco.

The EBRD is upholding the core principles upon which it was founded through its involvement with Nabucco. The project is consistent with the EBRD’s goal of developing Central and Eastern Europe; however, it rebuffs Russian interests and withdrawals from a mutually significant economic partnership. While the EBRD calls for the diversification of the Russian economy — even openly strategizing about it in documents and statements during recent years [14] — forcibly de-integrating European energy may not be wise. Diversification of energy trade, particularly natural gas, may be beneficial for suppliers and buyers via Nabucco but may choke Russia at least in the short-term. It may be challenging for observers to believe that the EBRD is acting in the best interest of all of its shareholders and more importantly regional stability across Eurasia. It is questionable as to whether the EBRD will realistically help to curtail threats to European energy security by receiving natural gas from these new suppliers. Redirecting to the Caspian can isolate Russia and confuse alliances. Just like the Russian issue, Azerbaijan, Egypt, Iran, Iraq, Kazakhstan, and Turkmenistan all have political-governmental challenges that may well challenge contractual obligations and effect supply shipments. The EBRD should avoid a creeping divide between Russian and Western interests exemplified by the Nabucco project. As an international financial institution the EBRD is not responsible for diplomatic relations among states but should avoid a posture eerily reminiscent of the Cold War and antithetical to its 21st century purpose.

Valarie Russell
Graduate Student, School of International Affairs
The Pennsylvania State University

October 2010