Funding Ukraine weapons would put EU lending arm on 'wrong track', outgoing chief warns

FILE PHOTO: The Ukraine Recovery Conference in London

By Rodrigo Campos

NEW YORK (Reuters) - The head of the European Investment Bank (EIB) has warned his soon-to-be-announced successor that bowing to pressure from some EU capitals to fund weapons for Ukraine would put the bank on the "wrong track". Werner Hoyer will step down from the EU's powerful lending arm at the end of December after 12 years turning the EIB into one of the world's largest providers of climate finance.

Its balance sheet runs over a half trillion euros and its next head, tipped to be either Spain's Finance Minister Nadia Calvino or Denmark's EU competition chief Margrethe Vestager, will face a raft of challenges.

The EIB will be expected to play a key role in the rebuild effort in Ukraine. Some politicians though, including from France and Germany, have raised the idea it provide defense industry funding to also help Ukraine on the battlefield.

The EU has bankrolled weapons to Ukraine to the tune of billions of dollars. But Hoyer said the EIB's involvement would be a fundamental change that could harm its image and credibility.

"Some of our partners in the capital markets, they have now inhaled, internalized, ESG thinking," Hoyer told Reuters in an interview, referring to environmental, social and corporate governance issues.

"If we use their money to buy ammunition, we're on the wrong track," he added. "It will be controversial. I don't envy my successor."

Back in 2014, after the annexation of Crimea by Russia, the EIB stopped funding projects in Russia and redirected the money toward Georgia, Moldova and Ukraine.

Hoyer's replacement - the full shortlist consists of five candidates - will also lead the EIB's influential role in Europe's transition towards a more digitized, net-zero-carbon economy.

"It's fascinating and encouraging, after 12 years, what kind of level of candidate is being presented for my succession," Hoyer said. "We have five countries presenting excellent candidates. It's quite amazing. I'm proud of that."

NEW BEGINNING

Hoyer also singled out a renewed relationship between the EIB and Latin America, calling it a "new beginning" and pointing to recent high-level meetings in Colombia and Spain.

The EIB is also part of a fresh European push to curb deforestation in the Amazon. In May, it opened its first office in Brazil. It is a top issuer of "green" and "sustainable" bonds.

Hoyer, who was in a high-level global climate group selected by UN Secretary General Antonio Guterres, said there had to be more advantages to the countries where it lends.

"We are still stuck sometimes in an old donor-recipient thinking, and don't really ask the question 'what's in it for the developing country?'"

On Wednesday, Bolivian president Luis Arce said he was open to working with European companies as he taps the world's largest lithium reserves - but wants industrialization alongside the metal's extraction.

One sore spot of climate finance is it imposes caps on resource extraction upon developing countries, something the now-developed economies did not face.

Hoyer said this divide could be bridged if climate, innovation and development were thought of as "one package" while there needed to be something like a quality-check system to prevent "greenwashing" where supposed environmental benefits of projects are dubious.

"It works only if the investors, who entrust us their money by purchasing green bonds, can be reassured."

(Reporting by Rodrigo Campos in New York, additional reporting by Marc Jones in London; Editing by Alex Richardson)