39. The Big Interview: Matteo Patrone on Reconstruction and Development in Ukraine
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Hello and welcome to the Battleground Ukraine interview with me, Patrick Bishop, and Saul David.

This week, we've been talking to Matteo Petrone. He's the managing director for Eastern Europe and the caucuses for the European Bank for Reconstruction and Development. Now, the EBRD was set up after the collapse of communism to bring former communist countries into Western markets and in the process to promote democratic institutions. He's

He's just come back from Lviv on a brief tour, looking at the EBRD's operations there. They're going to be absolutely central in maintaining the economy of Ukraine at this moment, but also looking forward central to reconstruction plans. This is what he told us.

Matteo, welcome to the podcast. You've just come back from Lviv. Can you tell us your impression of the mood there and how people are coping? Well, if I have to judge from the interactions we have with the many companies we have met, we have mainly met private sector companies and obviously Lviv administration. But if I have to judge from the interaction we had from the companies we met, people are incredibly determined to participate.

see the end of the conflict and not being derailed in their plans to grow their companies, expand them and ensure that the real economy of the country continues thriving, notwithstanding the current situation. But then you go and visit medical facilities, the Hospital Lviv,

And you realize that the human cost of what is happening is huge. And that makes you wonder even more how the resilience of the Ukrainian people in the current circumstances can be supported by stakeholders like us and other partners of Ukraine in the international community. I noticed that you visited Unbroken, which is a sort of holistic organization.

a caring center for victims casualties of the conflict not just physical casualties but also mental casualties can you tell us something about their work and what you saw there there are a number of actually of these initiatives and broken is is one of them and is a very well-functioning one and clearly there is a strong wish by the elvive administration

to ensure that the casualties of the conflict, both military and civil, are taken care of. And indeed there is a holistic approach to that and we visited both the prosthetic centre, the rehabilitation centre, but also the post-trauma stress centre. But what I think is to be considered also is the fact that other initiatives are taking place, for instance Superhumans,

which is a sort of PPP between a number of entrepreneurs. This initiative is led by one of the most prominent entrepreneurs in the country, Andrei Stamnitzer, and in cooperation with the Minister of Health Care. And they have the same sort of approach, very realistic to the resolution and mitigation of issues related to amputation and casualties of the conflict.

The fact that there is a proliferation of this initiative is a very sobering reminder of the need for having facilities of this sort. There is an obvious reason why they are being set up in VIV, but going forward there will be need for more of that throughout the country, unfortunately. Mateusz, I noticed that the EBRD has spent years

or at least invested $1.7 billion. And that was just in 2022 in Ukraine. Can you give us a sense of what sort of projects, you've spoken about a few in Lviv, but countrywide, what this money is being spent on?

Yes, with pleasure. So just to give you a bit of background to that, the BRD has invested overall in Ukraine over about 30 years of activities there, more than 18 billion euros in more than 500 projects. In the three years before the conflict, we invested 3 billion euros and we entered into the conflict period with a portfolio of over 4 billion euros.

And we had a plan for 2022 to continue investing in about 1 billion euro and in a number of projects in the private sector, in the public sector. And obviously on the 24th of February, everything changed. And we took the view that we had to make sure we could support the real economy in the country for a number of reasons. The main two are the fact that

we needed the economy to keep going to sustain the social cost of the conflict, the immediate social cost of the conflict, but also prospectively the better shape the economy would enter into the reconstruction phase, the lesser the cost of the reconstruction phase itself.

So with that in mind, we pledge to invest 3 billion euros in the country in 2022 and 2023. And as you mentioned, we end 2022 with a deployment of 1.7 billion euros, plus another 200 million euros deployed alongside by our partner financial institutions. And we have focused on five areas, really. So supporting trade, both imports and exports.

mainly imports of fuel and exports of foodstuff.

supporting energy security and we have supported Naftogaz, the gas company, to buy gas to cope with the winter and Ukrainergo with a package of over half a billion euros for liquidity initially and then also for emergency repairs after the beginning of the intense shelling of civilian infrastructure by the Russian Federation.

And in the infrastructure sector, we have supported the railway company, UcraZali-Snitsa, with a liquidity line to support immediate operations, operational expenditures, and the city of Vip itself.

And then there's the entire chapter of food security, where we have supported companies in the private sector, either directly through loans to these companies or via loans to banks that would then on-land to companies or to cover partially the risk of banks. And that is where we have these multiplier effects and the 200 million euros that I mentioned as an addition to our 1.7 billion.

And finally, we started focusing support on, let's say, non-agricultural companies, on pharmaceutical companies, because at the beginning of the conflict, we thought that was the most pressing urgent sector. But then we widened our scope to pharmaceuticals.

bolstering the resilience of the private sector in general. And we invested in heavy industries, for instance, steel, but also telecom companies, real estate. We even invested in the fourth private equity fund of one of the

most active private equity asset managers in the country. So is the economy still functioning then in a meaningful sense? Are they exporting goods? You mentioned agricultural products, but finished goods as well. Is that still ticking along despite the terrible conditions they're operating under? Yes, it is. Of course, if you consider that the GDP has contracted by 30%, things are not rosy.

However, the economy keeps going and as you say, if you like, it's sticking along. There are a number of companies that are managing well. There are other companies that have even grown, particularly in the western part of the country. And there are companies that are not missing the opportunity of a terrible crisis to reform themselves and to expand abroad, to buy other companies abroad. One of the

Transactions we have closed this year is for the pharmaceutical company that has bought a subsidiary in Central Asia to diversify its production activities. But there are also foreign investors that are willing to double down in Ukraine. One of the transactions we are working on currently is to support a foreign investor that is already present in the country that is willing to expand its production facilities there.

Or there are local investors, local entrepreneurs that indeed are expanding their production facilities both abroad and in the country itself. No, I think the image people have of Ukraine before the war began is not an entirely positive one in the sense that I think there was a feeling that there was ingrained corruption there.

A kind of quasi-Russian set up with oligarchs running the show. You must be satisfied to some degree that the reforms that Zelensky promised have actually begun and presumably are going to continue into the post-war era. Is that an accurate assessment of how you see things?

I think that after Maidan, Ukraine has engaged in a reform agenda and a reform path which has brought very significant positive results. It has not been by any stretch of imagination a linear trajectory. We have a number of blunders in the anti-corruption fight, in the corporate governance area,

But overall, the reform of the economic ecosystem of Ukraine has been a positive one over the last eight to nine years now. And the reduction of space of corruption has happened. The reform of the banking system has happened. There are a number of areas where things have progressed well. What the conflict has brought to surface is...

the willingness of the leadership to continue on that reform agenda. But most importantly, in my view, is the importance of the civil society in the country, which has been thriving in the history of the 30 years history of the country. We wouldn't have had

the Orange Revolution and then Maidan without the civil society that Ukraine has. I'm convinced that after the end of this conflict, the civil society will be the guardian of folder reform and strengthening of the democratic institutions in Ukraine. Well, that was all very interesting. Join us in part two when we'll hear the rest of the interview with Matteo Petroni. You may get a little excited when you shop at Burlington.

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Welcome back to our interview with Matteo Petrone of the European Bank for Reconstruction and Development. This is what he told us in the second part of the interview. Is it possible, Matteo, to begin the process of reconstruction before the war ends? We're getting a lot of questions on the podcast. You know, understandably, people are concerned about what's going to happen to Ukraine after the war. But is this a process that has actually already begun, at least as far as the EBRD is concerned?

Well, to some extent, indeed, that is something that has begun. And most of what we have done in 2022, and by the way, we had a strong support of bilateral donors because we couldn't take the entire risk of this 1.7 billion in our balance sheet. So we had the support of the US, Canada, the UK, Germany, France.

the netherlands norway etc but most of what we had done was provision of liquidity but we also have started financing for instance emergency repairs as i mentioned for ukrainago and one trend that we are seeing going forward in 2023 is that our pipeline is building up more as a

as an opportunity to finance investments than operational expenditures. I think the area of reconstruction is a very grey one in that sense. There's probably not going to be a discontinuity point.

First of all, because the economy needs infrastructure now. We cannot wait for the peace to happen in order to have new auto transformers or new electricity generation capacity or a functioning railway system. And secondly, because we don't know what kind of form peace would take. It could contain conflict. It could be a

a temporary or a truce. It could be actually a peace treaty. We really don't know and we cannot wait for that in order to consider financing new investments in the country.

What parameters do you set on your reconstruction activities? Is it just simply a matter of physically building back or are you also looking at social issues like employment, the trauma caused by war? Is that a big component in your plan? It is a big part. The issue of human capital is really front and centre of what we're trying to do in the country already now.

And the sheer fact that we are investing in companies and the real economy addresses somehow the issue of human capital. And we are also having very constructive discussions and provision of technical assistance. We have a strong partnership with the Ministry of Economy, the Ministry of Digital Transformation and the Ministry of Education in addressing what we call labour market resilience. It translates in supporting

both the public sector and the private sector in absorption of the labour and internally displaced people and people that have been deeply affected by the war. The way we approach the issue of reconstruction or recovery of the Ukrainian economy is indeed an inclusive one, whereby we are going to focus our effort in supporting those companies that are

able to absorb workforce, both internally and absorb all those refugees that had to leave the country now that are willing to come back to Ukraine. So that is very much at the center of our activity. But we take the economic perspective of that. We don't do social programs for people affected by the conflict, so.

Well, last question for me, Matteo. We're a history podcast, so we always try and bring in some historical perspective. This seems to me to be a very unusual, if not unique, situation. Nonetheless, there are kind of models in the 20th century that one can perhaps make a comparison with. I'm thinking of the Marshall Plan, for example. Is there anything that you look at that you think has some significance or relevance to the problems that you're facing at the moment?

Well, definitely the Marshall Plan is one of those things that we have been looking at. From our perspective, because we are really by mandate a bank that focuses on financing private sector investments, we are really looking at how, particularly in perspective during the reconstruction phase, we can attract private sector investors in the country.

As you know, there are a number of possible estimates on how much the reconstruction phase will cost. There is an estimate done by the World Bank in September of $350 billion. Actually, the Ukrainian authorities indicated before that $750 billion. Some people believe that we are beyond the $1 trillion.

All of these will not be achieved without a very strong role of the private sector.

And for that to happen, you need to create an ecosystem that actually is attractive for the private sector to come to the country. Somehow the Marshall Plan was focusing on these aspects as well. And this is actually where we're going to focus our activities, including when we invest in public sector infrastructure or in supporting public sector state-owned enterprises.

The way we are approaching those files is improving the governance of those companies, commercializing those companies, engage in, of course, not now, but prospectively in pre-privatization processes in order to create a level playing field that would make the business environment of Ukraine attractive for, in particular, for foreign investors, but also

an environment where local entrepreneurs would thrive. And there we have the issue of the oligarchization of the economy. You mentioned the oligarchs were running the show. Indeed, that was the case. And I think people like us and other institutions like ours

need to play a role to ensure that this is not going to be the case going forward. One last question for me, Matteo, I won't keep you long. Just really a question about Russia, the bank's relationship with Russia, the Russian authorities, and how the last year, and indeed, I know you've been involved in, as you say, in Ukraine for a long time before that, but how in particular has the full scale invasion of Ukraine affected that relationship?

So the relationship with Russia has changed already after the annexation of Crimea. We stopped investing in Russia since then and we have started winding down our portfolio there. To give you a sense, in 2013 our portfolio in Russia was about 8 billion dollars or euros now and at the end of last year was about 800 million, so a factor of 90% reduction.

And we took immediately after the 24th of February 2022 a very strong stance against the aggression. And our governors, our shareholders then decided to activate the article of our bylaws that foresees that neither Russia nor Belarus may access our financial support any further.

And therefore, we are not active in Russia anymore. We are not active in Belarus anymore. We closed our offices. We evacuated our teams from there. All the ones that didn't want to be evacuated left the bank. Right. And Matteo, thanks so much for that. It was absolutely fascinating. All very interesting. I was pretty stunned by that number that he came up with for one estimate of how much this is all going to cost at the end. One trillion euros. Where's that going to come from?

Yeah, but it's interesting, isn't it, Patrick? He pointed out that, of course, certain amounts are going to come, are going to be publicly funded, but the majority is going to have to come from private finance, which is why the EBRD's work is so vital. I mean, the figure I was stunned by was 18 billion euros has already been spent by the bank in Ukraine, admittedly, over the last 30 years. So that's pretty much since the end of the Cold War, as you mentioned at the beginning, Patrick. But

But they were really beginning to ramp up operations. And even during 2022, when conditions are obviously pretty tricky, you know, they'd spent 1.7 billion euros, the equivalent roughly to dollars on a wide array of projects, which we now see are absolutely vital, not just keeping the Ukrainian economy running, but also preparing for the future.

Yeah, it does speak again about the resilience of the Ukrainian people, doesn't it? I mean, astonishing to think that in the midst of all this, that some companies not just surviving, they're actually expanding their operations. And I think it does bode well for the future. Also interesting that they actually took a pretty strong line with Russia from the outset. As long ago as 2014, they basically closed down operations, closed down the operations.

which is in stark contrast to what an awful lot of other companies in the West and banks and all the rest of it really waited till the last minute and beyond before they waved farewell to their very lucrative relationship with Russia.

It's also very encouraging, I think, Patrick, when we take the slightly longer view, as Matteo was explaining since 2014, to realise that these reforms that have been going on in the Ukrainian government, in their banking system, in their economy more generally, are actually genuine, not ideal. Blunders were made, as he put it.

But generally speaking, they're heading in the right direction. And the current government, as Matteo points out, has a vested interest now into keeping those reforms genuine and sustainable because they ultimately want to join the EU.

Yeah, it's very much carrot and stick, isn't it? And I was impressed at the extent to which the EBRD takes the long view and doesn't sort of basically link financial aid to immaculate behavior on the part of the recipient of the aid. I'm thinking particularly of places like Hungary and Serbia, which do get quite a lot of EBRD dosh.

yet have not been actually particularly positive in this conflict. They've either sat on the fence or leaned well over the fence towards Moscow. But that hasn't caused the money to dry up. I think the argument is, okay, you know, they're on a long road towards membership of the EU. Well, Hungary's already in it, but in the case of Serbia, they want to join the EU. And rough treatment by saying, okay, unless you behave yourselves,

you're not getting any more money is probably not the way to go. It may seem a little kind of soft-hearted from our perspective, but probably in the long term, the bank knows what it's doing, as it's proved in Ukraine, and that is the right approach.

Yeah, I think we'll be looking back as historians, Patrick, in 20 or 30 years' time and saying, you know, some good did come out of this war for Ukraine. It speeded up a process. Maybe it was a road it was going down anyway, but it speeded up that process into bringing it into the fraternity of Western nations. And, you know, you and I both believe, I think, and we're not ideologues by any stretch of the imagination, but we both believe that the Ukrainian people, the majority of the Ukrainian people, apart from the diehards,

who want to be attached to Russia will be better off as a result of that. Well, on that positive note, we'll finish there. Do join us on Friday for an update on news, our analysis of it, and answers to the many questions we've been getting from our listeners. Goodbye.