Profile of Horst Koehler, published in European Business magazine

Horst Koehler (former EBRD president, now president of Germany), published in European Business magazine

If Horst Koehler had visited a fortune-teller last summer, it would have been a fascinating conversation. "I can see great opportunities for you!" she might begin. "You will travel to a foreign land, you will receive a great honour with power and influence!" And Herr Koehler would smile and nod. "But beware!" continues the psychic. "There will be terrible disasters, people will starve on the streets and buildings will be crushed to rubble!"

And so it has proved. Koehler took up his position as president of the European Bank for Reconstruction and Development in late August last year, just a few days after the collapse of the rouble as Russia defaulted on its GKO bond issue. Then, before he had properly placed his feet under the table, what does NATO go and do? Start pumping cruise missiles into another part of the EBRD's region of influence. All this should be enough to make a man tear his hair out.

The first thing you notice about Horst Koehler is that his hair is doing fine. Now 56, he has a pretty full head of dark brown hair sitting neatly above a quick, friendly face, trim figure and dapper dress sense. His office in London's EBRD headquarters is furnished in calm cream shades, adding to Koehler's own aura of reassurance.

His career has been characterised by tact and diplomacy, from his role as Helmut Kohl's 'sherpa', smoothing the way towards G7 summits, helping to re-schedule ex-Soviet debts and to draw up the terms of the Maastricht treaty when under-secretary of state at the German Finance Ministry, then on to heading the Sparkassen - the German Savings Banks Association - when he mediated between those clamouring for privatisation and those urging stability.

At the EBRD, Koehler's principle task is to deal with the thorny issue of Russia. Billions of dollars in aid and investment appear to have vanished over the past few years; the legal system is in tatters, tax collecting remains pitiful... Can the bank really justify its continued operations in the country?

"The bank remains committed to Russia," begins Koehler, pronouncing the word 'Russia' with a special emphasis, making it clear that this is a world power we are talking about, no mere Albania. "Russia has a great importance despite all the failures and difficulties and chaos which is ruling there," he continues. "We should not write it off because it has huge economic potential in the future, it is politically important. And without Russia we cannot expect that the transition for the whole region will go to a positive end."

This is a forthright statement of confidence in Russia's worth, but it is also pragmatism. As former first vice-president of the EBRD Ron Freeman points out: "If you turn away from Russia you may as well close down the EBRD." In reality, Koehler has little choice over the bank's commitment, however bad the situation should become. He can offer various sticks and carrots, such as the decision to drop new loans from last year's E2.4 billion to around E1.8 billion - with the prospect of a rise to E2.8 billion, depending on "the investment climate determined by our countries of operation," said Koehler at the EBRD's AGM in mid-April. That is to say, if you behave yourselves, you could be in for a bigger pay day.

Koehler brushes off any ideas of the bank playing a politically diplomatic role in the Kosovo crisis, saying that "We should be ambitious to prove that you can do business with Russia and talk about corporate governance and efficiency - that's our mandate, but we should not think we can use it as a lever to prevent Russia from doing something at a higher scale, say politically." Here, of course, Koehler is being diplomatic. As Ron Freeman, now co-chief executive for Europe at Salomon Smith Barney, says: "Russia must not tie up its foreign policy with Serbia. If it did so, the political masters of the EBRD...would take a time out."

So this policy is implicit, but Koehler cannot say it directly, because it falls outside the bank's strict mandate. What he can criticise is not only Russia's flaccid legal system and its oligarch's contempt for the law, but the ethical basis for Russians' actions in this transition period. "I think the moral question, that 'fortune obliges', should be also in the mind of the Russian people, whoever it is, particularly the oligarchs. And here I think they should reflect their position."

This is Koehler at his most damning, verging on despair at the spiral of self-defeating corruption which is wrecking the Russian economy. Yet in the next breath he is praising the 'majority' of reasonable, honest Russians who hold out great hope for the future. And he seeks, to an extent, to excuse some of Russia's excesses by reminding us that there is no historical depth of industrial experience in the country, in contrast to Poland and the Czech Republic, for example, where free market commerce was firmly established in the 19th century. "Our role should be encouraging and not destroying," says Koehler, employing his new catchphrase - 'positive contagion' - as he tries to explain what he would like to see happen throughout the region, with countries adopting best practice and learning from one another.

Working in Germany during that country's own unification, with the shift in the East from command to market economy, was educative for Koehler, though he stresses that the transition taking place in the region as a whole cannot be a copy of this original. "The money coming from West Germany was a temptation not to face reality," he says. A country like Poland, by contrast, has no such choice: "They have to do it themselves," he says.

"In Russia - and this is very important - we should not be naive or illusionary, so that our nice good faith is the guiding notion for us and nothing more. We have to look very closely to our partners and if we have enough evidence or suspicion that there is not good corporate governance then we should say 'no' to a business. We are no 'useful idiot'; we are responsible and accountable to our shareholders," says Koehler.

The shareholders are currently wary of shovelling good money after bad, after the bank announced a loss of E261.2 million for 1998, having set aside E553.1 million for bad and doubtful debts. The bank is now setting about restructuring some of its major assets and shifting the burden of its lending towards small and medium sized companies, at least in Russia, where these have shown better than average success rates in the past year. Koehler has also set out a new strategy plan covering the next three to five years, aiming to increase the bank's involvement in policy decisions with governments in investment sectors and look more closely at infrastructure schemes, equity investments and projects which promote a better investment climate.

These are the nuts and bolts. But perhaps what Koehler really brings to the mix, which may have been lacking before, is a more thorough understanding of the psychological impact of transition (or upheaval). "The transition to market oriented democracy allows the world to be a bit more peaceful and productive and to raise living standards, but we have to be patient," he says. "We shouldn't impose everything we have in mind from text books. The only sustainable solution is if countries have the feeling that [the transition] is going to be reconciled with their own thinking and culture and history. On this basis, it will work."