The head of the EBRD in Moldova, Dimitri Gvindadze, is hopeful about the prospects of resolving the challenges accumulated in the Moldovan banking sector. He pins significant hopes on the recent positive changes at the national bank of Moldova.

Below you can read the full interview given by Mr. Gvindadze to the financial magazine Profit.

Profit: Mr Gvindadze, you took over the post of Head of the EBRD in Moldova about half a year ago. What have been your first impressions of Moldova? What has surprised and what has disappointed you so far? What are the prospects?

D.G.: This is not my first time in Moldova. I've been visiting Moldova frequently since 2014 as the
EBRD's lead economist for the eastern Europe and Caucasus region and I've been following developments in Moldova closely, including economic and financial sector trends. Now that I am permanently based in Chisinau, I can say there are many things Moldova could do. Moldova is very centrally located and close to the EU – the biggest and the richest market in the world. It can attract a lot of investment and it can anchor itself more firmly to the pan-European and inter-regional value
added chains in manufacturing and services. Many countries in central and eastern Europe have benefited from this in the past, Moldova can do the same now. To accomplish this, Moldova will need to develop a distinct value proposition for investors. Such a value proposition must be based on three pillars: macro stability, financial stability and sound business climate. If you progress on all three fronts simultaneously you can position yourself as the regional economic platform for businesses
willing to produce in Moldova to supply the domestic market and to export to the broader neighborhood. You have examples of this happening, say, in Balti, where for example, Draexlmaier and Gebauer employ hundreds of locals and anchor Moldova to global manufacturing chains. Only a few days ago, I attended the opening of a factory by the Italian cable maker La Triveneta Cavi. The EBRD played a role in supporting this investment in Moldova, the company's very first investment outside
Italy. Implementation of the aforementioned "regional economic platform" vision can multiply such examples. It will require continuous structural reforms, reforms in the administration of justice. Moldova's demographic trends - driven by external and local factors - represent a challenge, including for potential foreign investors in Moldova who sometimes can't find suitable local workforce. The best thing which can foster long-term growth and reverse these demographic trends is a strong positive reformist momentum reverberating domestically and internationally, putting Moldova firmly and irrevocably on international investors' radars and boosting confidence of domestic lenders, consumers, depositors and investors. I see efforts to move in this direction; plus I am an optimist by nature. Imagine - Moldova's gross domestic product (GDP) per capita in 2016 is expected at close to US$ 2000. Compare this to US$ 10000 in the neighboring Romania, and to much higher levels of GDP per capita in the European Union. Being part of an affluent neighborhood may generate a good economic upside.

Profit: What three major tasks has the EBRD headquarters in London assigned to you during your mandate? How difficult would it be to achieve them?

D.G.: The EBRD's active portfolio in Moldova is close to half a billion euros. In recent years, the
EBRD's annual business investment has been close to 100 million euros in the public and private sectors. In 2016 we are targeting up to 100 million euros, but the final figure will depend on the number and on the level of preparedness of bankable transactions which are themselves the function of economic and financial dynamics in the country. So the logic here is really circular. We will continue to work with the public sector. The EBRD has been requested by the government of Moldova to finance construction of a new natural gas trunk pipeline, which will bring gas to Moldova's capital, Chisinau, from Romania. There will be other public and private sector projects; they are under preparation
and expected to be signed by the end of this year. We will continue to focus as much as possible on the private sector because this is at the core of the EBRD's mandate and this is where jobs are being created. Volumes of our assistance in the banking sector will depend on the number of investee banks: the larger the number of transparent and well managed commercial banks, the larger the volume of funding we shall be able to deploy through such banks.

Profit: Are there a lot of applications for funding in the EBRD portfolio from the private sector?

D.G.: We constantly discuss our products and priorities with the private sector. We reach out to entrepreneurs, including foreign investors, individually and through various business associations in Moldova. We can provide loans for transparent, well managed and bankable businesses, that is, we invest and lend to companies which create value and whose corporate strategy and vision are sustainable in the long term. When providing loans, we seek to make sure that our funding is
additional, meaning that it doesn't crowd out funding from private sources. Put simply, where we see that a given project can be easily implemented through commercial banks we don't compete with such commercial lenders. In many cases, the EBRD's participation can provide comfort to investors, including international investors. And it can also help to crowd in funding from commercial sources. On top of the lending, we also run the so-called Advice for Small Business (ASB) programme, which helps smaller companies through technical assistance and capacity building. Each year, ASB helps dozens of Moldovan companies. Our aim is to help such companies enhance efficiency, grow and employ, and to eventually benefit from our lending windows.

Profit: Chisinau hopes very much that the IMF will approve a new three-year 179 million dollar deal with Moldova at a meeting in Washington in October. How has the lack of an accord with the IMF impacted the EBRD's cooperation with Moldova? How soon after the deal with the IMF is signed would the EBRD be ready to fully resume financing for Moldova?

D.G.: The IMF programme is very important for Moldova. It's not just about 179 million dollars, but
about the signal that a new programme with the fund will send – that the government is on track for implementing reforms. Macroeconomic stability is one of the main conditions precedent to private investment, so the expected multiplier effect can be positive and large. Existence of the IMF programme will also pave the way for budget support from the EU and the World Bank.
Speaking of the EBRD, the signing of each project in Moldova is preceded by our in-house analysis of
Moldova's macroeconomic resilience and economic prospects. Anything that can strengthen such resilience – and the IMF programme is the best means to do so – can boost our pipeline in Moldova in both the public and the private sectors. As I mentioned above, we are committed to working as much as possible in the private sector, supporting local and foreign investors.
Macroeconomic stability can boost such investments.

Profit: The EBRD is a demand-driven institution. Have the Moldovan authorities put forward
any new demands recently?

D.G.: On the public sector side, our project pipeline is the product of permanent dialogue and coordination with the authorities. We also coordinate our work among major international development partners operating in Moldova. As far as our private sector operations are concerned, we talk directly with market participants.

Profit: Speaking about the Ungheni-Chisinau gas pipeline, is it realistic to implement such a difficult project by 2020 as the authorities have been saying?
D.G.: Later this year the EBRD's board of directors will discuss a 41 million euro loan to implement
this project which has a total cost of approximately 90 million euros. The remaining funds would be provided by the European Investment Bank which is considering a separate loan, and the EU, which has made a commitment to co-finance the project on a grant basis. Success will depend on the commitment by the authorities to implement it according to the schedule – the more resources will be deployed the better are the chances that this project will be prepared and implemented on time.

Profit: Some experts are sceptical about the ability to meet the schedule when it comes to this project. They cite as an example the reconstruction, with the EBRD's financial support, of the Chisinau-Ungheni highway, which looks like a much easier project to implement but, nevertheless, the deadline has been extended several times.

D.G.: The EBRD has financed road projects in various countries of operations and it has always applied the same procurement rules and guidelines. In some countries the pace of implementation is faster
than in others. So this is country specific. As for the delays on the reconstruction of the Chisinau-Ungheni road, financed by the EBRD, EIB and the EU, our assessment is that the implementation delays are caused by a combination of capacity constraints exacerbated by frequent staff changes among the main project stakeholders and local controlling agencies, delayed land allocation, design-related matters and a cumbersome process of state verifications. This has affected the timely implementation of the contracts. But we now see that the pace of construction has picked up.
We very much hope that the project will be completed as soon as possible and thousands of Moldovans will be able to use a modern and European-standard road.

Profit: Currently, the EBRD is working with only two out of Moldova's 11 banks: Mobiasbanca and ProCredit bank. You chose these banks because they have a fully transparent shareholding structure. Yet, the two banks cover only 20 per cent of the banking sector's assets. How bad is this for the banking sector and for the end-users of bank products?

D.G.: Indeed, today we can deploy our loans only through these two banks, which means that the number of end-beneficiaries of our products is restricted. We very much hope that the situation in the banking sector will improve soon, including within the three biggest banks which are under special supervision by the central bank. We see the positive efforts on the side of the authorities, and we are ready to help. Where there is the will there is the way.
When it comes to our cooperation with Moldova's commercial banks, we look at the following factors:
transparency and quality of the shareholding, sound corporate governance, adequate risk management
culture and compliance with strict anti-money laundering standards. By enforcing full transparency of
shareholding, fostering sound corporate governance and making sure that investors into the banking sector are "fit and proper", the authorities can provide a significant boost to the modernisation of the banking sector, to increasing access to credit, to increasing demand for credit.

Profit: Speaking about the bank fraud, how does it look from the outside? As an experienced economist and as a former finance minister of Georgia, what are, in your opinion, the chances that this money will be recovered? Is this technically possible?

D.G.: I am not a forensic expert and cannot say whether the money can be recovered or not. I hope it
will. This is a question for the Moldovan authorities. All those who took part in this fraud must be brought to justice. The task ahead is to prevent this from happening again through strict supervision, independence and empowerment of the regulator and full transparency of the shareholder structure. It is incumbent upon the political leadership to create the space for the National Bank of Moldova to exercise its mandate in full. I now see the effort to progress along these lines, and this effort must be assisted by all stakeholders, including Moldova's international development partners.

Profit: What could Moldova learn from Georgia's experience in the banking sector and what
could Georgia learn from Moldova?
D.G.: Georgia's two leading commercial banks – TBC Bank and the Bank of Georgia– are now premium listed on the London Stock Exchange. Such premium listing entails stringent financial disclosure, transparency and corporate governance standards, and offers significant development opportunities, increased liquidity of the stock and investor base expansion. Quality foreign shareholders are represented in Georgia's other banks. This became possible thanks to
several organising principles and factors: (i) transparent beneficial ownership, no related party lending and no conflict of interest; (ii) a level playing field and intense competition; (iii) private ownership and no stateowned or development banks engaged in directed and subsidised lending or in other quasi-fiscal operations; (iv) independence of the central bank and operational autonomy of its financial sector supervision arm, with such independence supported by the political leadership; (v) banks kept at bay from politics and required to have sound corporate governance; (vi) a stable macroeconomic context, commitment to economic openness and a sound legal environment.
In implementing these principles, Georgia didn't reinvent the wheel. It simply followed best practice.
Moldova needs to do the same. You have many skillful financial sector professionals, some of them living abroad, and you now have a solid central bank team. It's time to aim high in the banking sector and to bid farewell to the troubled past. 

Profit: Many Moldovan producers complain that they lack the funds to modernise and improve the quality of their goods to be able to export them to the EU.

D.G.: Modernization and quality improvement cannot be accomplished overnight; it is an incremental process. It can be fostered by improvements in the business climate which will reduce operational risks, broaden access to finance, boost domestic competition and investment and attract investors with adequate know-how to produce locally and export, including in the direction of the European Union. Many programmes by international development partners are aimed at helping local companies develop their value proposition, to upgrade their standards. The EBRD works with the European Union to help companies to become energy and resource efficient, to benefit from opportunities offered by the DCFTA. Ultimately, however, nothing can replace the drive, energy and innovation inherent in the private sector.

Profit: There are different views about a possible privatization of the remaining major state-owned companies such as Moldtelecom, the Moldovan Railways Company, Air Moldova, REDNORD and RED NORD Vest. What would your advice be? Should these companies be privatized, when and under what conditions?

D.G.: The authorities should make the following decisions: whether to privatize or not, the privatization methods, and timelines. Whether enterprises are public or private, they must be managed commercially. I believe the state must devolve as much as is feasible to the private sector. Corporatization of state-owned enterprises is the important priority. In places where the state-owned enterprise sector is large and opaque, it creates various quasi-fiscal and other risks, misallocates resources and disrupts the level playing field for the private sector.

Profit: The EBRD is a major shareholder in the Moldovan bank Victoriabank. Over the past few years, the bank's main shareholders have been at odds over a number of issues, including the approval of a new board. There were many reasons that led to this situation. How does the future of this bank look now?

D.G.: The EBRD has a long history with Victoriabank. This bank now accounts for 17 per cent of
Moldova's banking system assets. Earlier in 2016, the EBRD increased its shareholding in Victoriabank from 15.0 per cent to 27.5 per cent. This is our investment into the future of Moldova's banking sector. The banking sector reform represents the litmus test for the authorities' ability to transform Moldova. Victoriabank's transformation is the essential litmus test to anything else in the financial sector. So this is really important and we want to succeed. We note with pleasure that Victoriabank's supervisory board has been recently relaunched and this will help to restart corporate governance after many months of frustration. Without going into too many details, let me say that I am cautiously
optimistic about the prospects of breaking the deadlock and charting the way forward for Victoriabank.

Profit: Is the Moldovan banking sector still attractive for foreign investors? Could they be interested in purchasing, for instance, the 40% of shares of Moldova's largest bank Moldova-Agroindbank when these are put up for sale?

D.G.: MAIB is Moldova's largest systemic bank amounting to close to one-quarter of the sector's assets. MAIB has a rich tradition and a significant country-wide footprint. It is a good bank, and I very much hope it will succeed in attracting a good investor. This is important for MAIB's future. Yes, Moldova's banking sector can and shall be attractive to foreign investors, provided one addresses all challenges which have been faced by this sector in the past. This will require technocratic acumen and, above all, strong political will. It's time to think big and aim high.