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November 2001

Funds want the cash under the mattress





       
Putin: reform is
gathering credibility
Confidence in Russian banks is returning and funds are springing up to try to draw billions of dollars stuffed under Russian mattresses into the financial system.
Russia's stock market has recently been the best-performing in the world and robust economic growth remains relatively insulated from an impending global slowdown.
Russians hold anything between $40 billion and $60 billion in cash dollars, a sum that has had Russian bankers salivating for years, but the population's justified distrust of the banking system has meant that repeated attempts to coax this money into the daylight have failed.
As Putin's drive to reform Russia Inc continues and gathers credibility, changes to the financial sector are picking up momentum and banks are having another go at getting ordinary Russians to invest their hard-won savings. At the same time, banks are setting up funds aimed at foreign investors.
The government kicked off the first serious attempt to reform the ailing banking sector with a meeting between the Central Bank of Russia (CBR) and the cabinet, which has been implementing the reforms.
A reconstruction of the banking sector is the first really complicated reform the Kremlin has attempted. Several versions have been floated by interest groups since August, when it first became clear that banking reform was on the agenda, but a consensus has come quickly.
"A few weeks ago I was still pessimistic, but recently I have had to become more upbeat," says Kim Iskyan, a banking analyst with Renaissance Capital, who has long been critical of the banking sector. He refuses to use the term "banks" when referring to Russia, referring to them as "bank-like institutions".
Optimism has been reinforced by CBR chairman Viktor Gerashchenko's decision to stand down when his contract expired in October 2002. Gerashchenko has been widely blamed for the sorry state of the banking sector.
It is early days but it appears the goal of reforms is to cut the number of banks from 1,300 to a more manageable 200 to 300. At the same time, regulation will be toughened and more legislation, such as a deposit insurance scheme slated for discussion this autumn, will be put in place.
On the back of strong economic growth, confidence in the banking sector has already been growing and private deposits at banks are rising. In July, for the first time since the 1998 financial crisis, rouble deposits began to grow faster than hard currency deposits as savings grew 10% in the first half of the year.
The banking reforms are only part of wider reforms to the financial sector. For all its faults, Putin's reform programme has been thought through. Russia already has banks, but it still misses modern financial services: insurance, mutual funds and pension funds. But all these things are on the agenda.
A bill on mutual funds passed its second reading in June, its goal being to reduce investor risk. The legislation will go some way towards reassuring retail investors that mutual funds are more than just financial pyramid schemes. Russians are still smarting from pyramid schemes such as the notorious MMM, which ripped off thousands of investors in the early 1990s.
Pension reforms have been disappointing so far, but the Duma is to have another stab at them. Under current plans the state pension fund will be allowed to invest up to 2% of the $5 billion to $6 billion in mutual funds. The insurance sector is also growing fast. Mandatory car insurance is in the works, which analysts estimate will bring in $1billion a year in premiums that will need to be invested.
Banking reforms will accelerate a process that had already begun on the back of growing prosperity. Over the past nine months a large number of new funds have been set up as average Russians begin to look for investment opportunities.
Mutual funds - known as PIFs in Russian - were rapidly growing in popularity before the crisis, when more than 100 were operating. But following the devaluation of the rouble and the collapse of the stock market in 1998 only a handful survived. Now PIFs are reappearing.
According to the stock market watchdog, the Federal Securities Commission, the number of funds has risen from seven in 1996 to 46 by July this year. The total amount of money under management has risen from Rb249 million in 1998 to Rb6.6 billion ($226 million) this January. At the same time the average retail investment into mutual funds has risen from Rb26,000 in 1998 to Rb300,000 now, according to the FSC.
By the start of this year the two leading PIFs had turned in good growth. Ilya Muromets PIF returned the biggest profits, up 70% year on year. And the Pioneer-Pervy trust came in second with a 57% rise.
Russian broker/dealer Troika Dialog has been a leader in the PIF business and added a third about a year ago. In all Troika has six mutual funds.
In August Troika and Van Eck Global, a firm that specializes in emerging markets mutual funds, launched an Eastern European equity fund.
Troika seeded the open-ended fund with $1 million, three-quarters of which is invested in Russian equities. The fund is aimed at US retail investors who want some exposure to the Russia, and the partners are beginning to market it in the US.
The political and corporate environment in eastern Europe, particularly in Russia, is stabilizing, and stock valuations remain attractive, even when compared with other emerging markets. Timothy McCarthy, Troika's chief investment officer, said in a statement: "We strongly believe the market upside is high, especially over the long term."
The Russian market was one of the world's best performers during the first half of 2001, with the benchmark RTS Index rising by half for the period, although the RTS has fallen back following the terrorist attacks on the US in September.
       
Bill Browder
Retail investment in PIFs will boom but the average Russian is still wary and McCarthy says they are expecting growth to be slow. In the meantime leading funds are looking to larger investors for work.
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