A SUPPLEMENT TO EUROMONEY/JANUARY 1998: RUSSIA
During the early tremors in Asia’s financial markets, bankers and fund managers in Moscow stuck their heads in the sand, hoping against experience that the problems had nothing to do with Russia. When the tremors became an earthquake, the complacency in Moscow proved brittle indeed: equity and bond prices tumbled and another round of spiralling interest-rate rises seemed inevitable. Some investors in Moscow had their gains for the year halved, others barely broke even, some lost everything.
The vulnerability of Russia to a crisis in Asia did at least prove that, for better or worse, the country was integrated into the global economy. Asia’s travails raised the world price of capital. In response the authorities in Russia had to raise interest rates, which in turn shattered confidence in the equity market.
By the beginning of December some $5 billion had already haemorrhaged from the government securities’ (GKO) market. The outflow of money was partly stemmed by Central Bank of Russia regulations requiring foreigners investing in GKOs to enter into futures contracts. But once the mid-December deadline for converting roubles into dollars was reached the exodus of foreign money began again with renewed urgency.
“The crisis in Russia has nothing to do with fundamentals and everything to do with the flow of funds out of emerging markets,” says James Fenkner, head of research at CentreInvest in Moscow. The central bank has come under fire for its handling of the crisis. The bank had three options: raise interest rates to stem the flow of funds out the market and give a fairer approximation of risk to return; sell foreign exchange reserves to prop up the rouble; or allow the rouble to depreciate and find its natural value.
In what many saw as a stopgap measure the central bank raised its refinancing rate in November from 21% to 28%, less than half the increase expected in the market. Though foreign-exchange reserves are being steadily pared down, the government has ruled out a devaluation. President Boris Yeltsin and his ministers have pinned much of their credibility on the redenomination of the rouble from the beginning of this year, when three noughts will be lopped off the currency, pegging it at roughly six to the dollar.
But among financial pundits in Moscow the credibility of the monetary authorities is already in shreds. “The central bank should have raised rates sooner,” says Dirk Damrau, chief analyst at Renaissance Capital in Moscow. This would have preserved its reserves and buttressed confidence while at the same time slowing the outflow of money. “A hike in interest rates is unlikely to damage the real economy,” says Fenkner, “because so little money is being lent by banks to companies anyway.” But higher interest rates would reassure restive foreigners who are the main source of instability. “It’s frustrating to have your hands tied by the central bank, which is quite clearly incompetent,” says one bond trader.
Putting a figure on how much money has left the equity market is trickier because so much of the share turnover takes place offshore. By the end of November, the Moscow Times Index was nearly 40% below its August peak. The collapse in equities means new issues have been put on ice, while many local banks are struggling to service loans taken out to buy shares. “A lot of the smaller banks and securities firms have big proprietary books,” says Par Mellstrom, head of research at Brunswick. The crisis was similar to that in 1996, in the run-up to the presidential elections. However, the scale of the crisis is greater this time, says Mellstrom, because Russians have borrowed money to buy shares.
The impact on foreign investors is harder to assess. “Even by mid-December some investors were still showing a 50% return for the year,” says Victor Agroskin, vice-president of Moscow broker Rinaco Plus. “The blue chips – telcos and energos – have weathered the crisis reasonably well,” he says. “The worst-hit were the second-tier shares.” But other analysts believe that many of the investors who entered the market in 1997 have lost out badly.
The collapse of equity prices will deter old investors and attract new ones. “It was speculative and hedge funds that were driving the market, apart from telco and energo shares,” says Mellstrom. He believes that for the next two years the market will be driven by international pension and mutual funds, some of which dipped their toes into the Russian market during 1997. “Dedicated Russia funds will have trouble raising funds again and hedge funds will be more cautious in future,” he says. But, for the mainstream mutual and pension funds, Russia may seem enticing relative to the depressed markets of Asia. “On the margin, this could mean tens of billions of dollars,” says Anoatoli Petrov, an analyst at Credit Suisse First Boston in Moscow.
Others are less sanguine. “The markets could get worse before they get better,” says Alexander Merson, managing director of Alfa Capital. “In the short term if the rouble begins to look vulnerable, the government might begin to toy with regulations that could frighten foreign investors.” Rumours are circulating in Moscow that regulators may clamp down on foreign investors by forcing them to convert dollars into roubles before being allowed to trade. “With no dramatic change in the regulatory environment, the market might just turn flat,” says Merson. As an investment banker rather than a fund manager, Merson, has a different perspective on the recent turmoil. “Strategic investors looking at Russia as a long-term prospect are not too bothered by the crisis,” he says.
In the banking sector, the crisis might trigger the consolidation that is so badly needed. “No-one on the streets is hurt by high interest rates,” says an economist at a multilateral institution in Moscow. “In many ways its a blessing in disguise. In two years’ time when people have bought cars on borrowed money or taken out mortgages to buy houses, or businesses have borrowed to finance investment, a sharp rise in interest rates would have crucified them and possibly led to another recession. As things stand it might just purge the banking system of the T-bill shops who rarely behave like normal banks.”
Making hay while the sun shines is second nature to Russian banks. The gyrations of the rouble at the outset of reform and the subsequent sharp appreciation of the real exchange rate to beat down inflation brought a windfall on the forex markets. With the imposition of the rouble corridor, banks turned with equal vigour to the market for GKOs. The return on these securities reached 200% in the run-up to the June 1996 presidential elections. The funnelling of state pensions and wages through agent banks close to government also proved bountiful – payments were routinely delayed for months at a time by banks parking funds in GKOs. The government has lately clamped down on this practice.
But few Russian banks would be strong enough to survive were the investment climate to change for the worse. Rising GKO rates in the short term will hurt banks, because bills already held will fall in value.
“Banks will be hard hit by the fall in GKO prices when they mark their positions to market in the fourth quarter of 1997,” says Margot Jacobs, banking analyst at the United Financial Group in Moscow, partly owned by Banque Paribas. “But the first quarter of 1998 should be a good one because yields are bound to rise.” Equally crucial, says Jacobs, are commitments to currency futures contracts, many of which are off balance sheet. “Only the central bank knows what they are,” she says.
Most of the larger Russian banks, which form part of the EBRD/World Bank-sponsored Fidip programme, are well capitalized. “Capital adequacy isn’t the problem, liquidity is,” says Tam Basunia, partner in the banking group at Price Waterhouse in Moscow. “The bond markets have dried up as bankers wait for interest rates to go up.” The central bank has exacerbated matters by hiking deposit ratios, obliging banks to sell GKOs.
The real economy was stagnant before the Asian crisis hit. Bank lending rates have ratcheted at 30%-40% despite inflation having fallen in recent years, meaning most businesses cannot even finance their working-capital requirements. “There is no deposit base outside of Sberbank, so there is little commercial lending,” says Basunia. “Any lending that does take place tends to be short-term (never more than six months). Project financing or any other form of long-term investment by companies has yet to get off the ground.”
Part of the problem is the absence of proper bankruptcy legislation. More fundamentally, the mindset of Russian financiers must change if banks are to fuel a recovery of the Russian economy. “Before Russian banks start lending to companies on commercial terms, there will have to be a change in the Russian mentality, from short-term to long-term,” says Thomas Balestrery, chief analyst at Creditanstalt in Moscow.
Though all the larger banks will be squeezed in the last quarter, few will be driven out of business. All of the big commercial banks are under pressure from the central bank not to sell GKOs, which will prevent them buying new bills at higher interest rates. But the situation is not as bad as that before the presidential elections in June 1996 when interest rates on GKOs reached 200%. “Then every bank had loss-making positions,” says one analyst. “The central bank had to intervene to buy T-bills.”
This time round the two main indicators of the government’s resolve will be the budget and privatization. Russia’s most pressing problem is its budget deficit, running at 8.5% of GDP for the first three quarters of the year, 5.2% of which was spent servicing existing debt. But preying on the minds of ministers more than anything else is the issue of pay arrears. In early December, president Boris Yeltsin issued a veiled warning to his ministers that heads would roll if the $1.6 billion owed to state-sector workers was not cleared by the end of the year. A note of desperation was evident in the voice of first deputy prime minister Boris Nemtsov when he told local reporters in December that “without attracting money through the sale of stock in Russian companies, we will not fulfil the president’s order to pay off wage debts by the end of the year”.
A telling indicator of the state’s desperation for cash is the acknowledgement by the government that it is considering a second shares-for-loans auction – the much-reviled privatization method whereby many of the state’s most valuable assets were mortgaged on favourable terms to banks close to the government, so shoring up the public finances. Most of the loans were later defaulted on. Oil firm Rosneft may be the first to go on the hock in any new round of auctions. “To boost tax collection in the short term will be difficult,” says an analyst at Troika Dialog, “so they need to accelerate privatization somehow.”
Ivan Mazalov, oil and gas analyst at CentreInvest in Moscow, is scathing about the scheme. “In the past, the banks which held shares in trust used them to strip the company of assets and exploit it as they could never be certain that the state would sell the company to them in the end,” he says. “This was despite secret agreements that this would be the case.”
The IMF’s on-off disbursement of a $10 billion loan to Russia, spread over three years, hasn’t helped matters much. Resumption of payments would go a long way towards reassuring flighty foreign investors. According to central bank deputy chairman Sergei Alexashenko: “Russia will not be seeking a bail-out package from the IMF.” But many analysts reckon a standby credit of $5 billion to $10 billion will be needed if market confidence is to be bolstered.
There is genuine cause for optimism. The central bank has finally put a lid on inflation – it has fallen from over 800% to about 14% the past four years. Central bank governor Sergei Dubinin, browbeaten by the IMF, has shown the resolve sorely lacking in his forebears not to print money to finance the public deficit.
The money Russians have stashed under mattresses could conceivably replace the GKO market were it to move from the grey economy into the financial system. The steady trickle of capital being repatriated during the first nine months of 1997 might also begin to flow the other way as the economy stabilizes and confidence in Russia’s future returns.
Estimates of the amount of money siphoned out of Russia to offshore financial centres such as Cyprus range between $50 billion and $150 billion. The fact that Cyprus is the third-largest foreign investor in Ukraine is evidence that some of this money is already wending its way back home.
After two years of booming markets in Russia, the last two months of 1997 were traumatic, though many investors based overseas failed to grasp the scale of the collapse. The good times could roll again sooner than many expect – with a little help from the IMF.
Searching out the domestic investor
Over a year has passed since Pioneer, the aptly named US-based manager, launched the first PIFs (mutual funds) in Russia. For the optimistic it was the dawn of a new age in which Russia would become a shareholding democracy, with cash-stashed mattresses emptied and the ghosts of fraudulent pyramid schemes laid to rest. But despite US investment in a regulatory scheme and a specialized mutual-funds depository, the industry is struggling.
Lack of confidence is a critical factor. The collapse of the MMM pyramid scheme in 1994 severely stunted the development of domestic investment. Over a fifth of the population suffered losses in this or similar schemes. Small wonder that modest returns on deposits at state-controlled Sperbank seem attractive to the once-bitten small investors of Russia. It is estimated that Russians are sleeping on $20 billion of stashed savings. But domestic mutual funds have captured a paltry $35 million of this. Compare that with the $3.8 billion under management by offshore funds with CIS portfolios and it’s clear that the country’s cash-starved economy is missing out.
There is, however, hope for the future. For one thing, managers are in for the long haul. Certainly they are not making any money at the moment. The largest capitalization of any fund is $8 million, a far cry from the estimated $30 million break-even point. The delicate state of the mutual funds industry meant it was ill-prepared for the effects of the Asian crisis in the second half of 1997. Last year’s fashion for fixed-income funds had faded in the spring as GKO yields fell and booming equities became attractive. Few could have predicted the turmoil that wiped almost 40% off the value of Russian shares after last October.
Most of those who put their faith in equity funds have lost out. But out of the chaos come signs that the country is producing a more sophisticated breed of investor. Redemptions have increased as one would expect but “there were no panic redemptions after the October turmoil”, says Julia Zagachin, head of the First Specialized Depository. “People want to stay in and they see this as temporary market turmoil.” It’s an indication of the calibre of mutual fund investor. Better educated and less prone to over-reaction, these are not the people who threw savings at get-rich-quick pyramid schemes.
By far the largest presence on the domestic funds market is Credit Suisse, with $20 million spread over three funds. Whether or not the funds have been generously seeded with the banks’ own cash is not known, but Credit Suisse was turning heads for a glowing equity-fund performance until October’s crash. The company has shown no signs of dampened ardour. Credit Suisse knows the value of branding in Russia. Unlike its competitors, it’s counting on a comprehensive advertising campaign to win over investors.
Ironically, efforts by the Federal Securities Commission to instil confidence in the industry have added to its problems. The burden of dedicated registrars and auditors being forced on the fund managers is ultimately paid for by the investor. And the pound of flesh demanded by managers and the costs of initial investment and redemption, put many Russians off and make the low interest paid by banks more attractive. This summer the central bank began to grant licences to the country’s banks to set up their own rival PIF equivalents. Russia’s new OFBUs (general funds of banking management) are likely to give PIFs a run for investors’ money.
The Central Bank of Russia has not shown the same keeness as the Federal Securities Commission to ensure absolute accountability. That means the banks can offer OFBU services with lower overheads than PIFs. The banks are free of the restrictions on the PIFs, such as the requirement that they stick to liquid blue chips with moderate returns. Many expect the OFBUs to get their teeth into Russian futures and promissory notes. While not for the faint-hearted, these could tempt investors willing to risk everything for the promise of higher returns. – RL
New options for Russian investors
At the end of last year, just as investors were discovering how volatile Russian securities can be, a new range of exchange-traded derivatives was launched. But so far take-up of these hedging instruments has been slow. Theodore Kim reports
“We haven’t seen this much fun since the presidential elections in 1996,” remarks Robert Devane, head of fixed income at Troika Dialog, of the roller-coaster ride Russia’s government bond (GKO) market has given fixed-income investors in recent months. In most developed capital markets, such volatile price movements would be accompanied by huge volumes figures on derivatives exchanges – and healthy bonuses for traders. But in Russia there have been few exchange-traded products which investors could use to hedge against GKO and equity volatility – until last month.
With extraordinarily lucky timing, the Moscow Interbank Currency Exchange (Micex) launched brand new GKO futures and equity futures products just a few weeks before the turmoil starting in south-east Asia hit the Russian markets.
Micex was established in 1992 to handle currency transactions from the former Gosbank of the USSR and currency trading continues to account for most of its activity. Turnover on the exchange in 1997 exceeded $200 billion. While the most active area is in the spot US dollar/rouble market, 10 foreign currencies including the larger CIS currencies are also actively traded. The slowly developing liquidity and profits from currency trading have enabled Micex to branch out into trading corporate securities and regional debt before starting its first currency derivatives. Increasing foreign participation in the GKO market was accompanied by increasing volumes on one-month rouble/dollar currency futures.
The huge demand for Micex currency futures is a result of ministry of finance regulations stipulating that foreign investors must hold their GKO proceeds in a domestic rouble account before conversion into dollars and repatriation. This regulation was intended to promote rouble stability and prevent any unexpected overnight movement of capital out of Russia. Indeed, some analysts believe that this one-month delay period may have saved the rouble from perhaps a 5% fall in value in recent weeks.
The active members of Micex include such deep-pocketed foreign institutions as Credit Suisse First Boston, Chase Manhattan and Cargill. Credit quality has been a key factor in developing the exchange. Members can execute a trade by paying as little as 4% of the notional value of the contract. So far there has been no default by a member, even during the banking liquidity crisis and steep drop in security prices over the past two months.
The recently-introduced GKO product, officially referred to as a one-year treasury-bill future, is based on Micex’s new proprietary GKO index. The equity product, officially titled a Micex composite index future, is based on the new Micex composite index, a weighted average of the price of the five most actively traded Russian stocks: UES, Rostelekom, Mosenergo, Norilsk Nickel, and Lukoil. For both GKO and equity futures there are four contracts available, each worth approximately $2,000 in notional value. The contracts expire on the second Wednesday of each quarter in March, June, September, and December.
For its equity futures, Micex is now in direct competition with the futures and options product line traded on the RTS Index by OTOB, the Austrian futures and options exchange. OTOB recently added a Russian traded index product to its existing Czech, Polish and Hungarian products.
OTOB’s Russian product is based on the RTS index, but some observers see this commonly followed index as a poor guide to the price of Russian equities. While the RTS index has dropped on some days by as much as 10%, the true cash value of Russian equities has fallen by much more. Many of the statistics on which the RTS index is based offer numbers that might not actually reflect any cash trades. A seller really wanting to dump his holding would probably get a price much lower than the offer price displayed on the RTS screen.
“The RTS is an information service only,” explains Sergei Kharitonov, head of the futures and options division of Micex. “It was never meant to be a cash index. Some of the prices listed on the RTS will not change for a week. This is not because the value of the shares are unchanged. Instead, it is because there have been no reported transactions based on the screen-indicated price. The average spreads of the RTS can be huge. By comparison, the Micex equity index is based on real cash trades taking place on our system every minute of the trading session.”
But while Micex has 135 members, 60 of whom trade at least once a day, there has been only limited interest in the GKO and equity futures. Trading volume has averaged below 300 contracts a day for GKO futures and 1,000 contracts a day for the equity products. In comparison, trading on currency futures exceeds 70,000 contracts with an approximate notional value of $1,000 every day But Kharitonov believes that as investors become better informed about the new product lines volume and liquidity will increase.
One bottleneck that may be holding back an upsurge in volume is Russia’s tax law. At present, the tax authorities do not allow losses to be offset against gains made on speculative trading. In G7 tax systems, if a trader profits by $1 million, but loses $800,000, his tax would be based on the net gain of $200,000. In Russia, by contrast, the revenue authorities will asses a tax based only on the $1 million gain and simply ignore the $800,000 loss.
But tax regulations on derivatives are currently under review. Already, Russian tax law recognizes the concept of currency hedging; if a profit made on a currency hedge has offset a loss made on exposure to an underlying currency, taxable income will be assessed on the difference between the two.
The next step for Micex will be the launch of options on both its equity and GKO indexes. Already, it offers deliverable futures on UES and Lukoil. The upcoming options will be aimed at fund managers who wish to hedge their downside risk through the purchase of puts. While some derivatives trading desks in London have been offering to sell over-the-counter options, the market for these is so small that bid-offer spreads have been very wide. Micex hopes that with its screen-based exchange-traded system, with real time prices which it hopes will soon be available on Bloomberg and Reuters, it can eventually develop a far more cost-efficient options market. Micex’s ambitious plans for future expansion also include its recently-announced plans to construct a new $200 million headquarters. The 36-story building, in which Micex will occupy seven floors, will be the second-largest construction project in Moscow after the new $400 million Unexim building, which was recently announced by the bank. The project, like Unexim’s, is financed almost exclusively through domestic sources and is expected to be completed during the year 2000.
Regional borrowers reach out
Local government bonds offer better returns than sovereign debt and even than some corporate issues. But municipal bond investors need to be well informed – and ready to tackle some formidable obstacles
Volatility in rouble-denominated debt markets may continue for some time as a result of underlying concern about the currency’s instability. But as far as repayment capability is concerned, the balance sheets of several municipalities are getting stronger by the month. If an investor is willing to take rouble exposure and is only concerned about the extent of repayment risk, municipal securities may be just the ticket.
GKO yields fell steadily for most of last year so many investors, particularly yield-hungry Russian domestic funds, have been transferring their attention to the obscure market for municipal debt. “On repayment ability alone, several municipal issuers, particularly Moscow and Nizhny Novgorod, are far stronger than even the central government,” says a Moscow-based regional analyst. “But this is a hard story to sell – the popular conception is that the central government has the deepest pockets of any public entity in Russia. This may be true, but they also have the biggest budget demands, an insufficient system of tax collection and a long list of unpaid bills.”
Russia is divided into 89 separate administrative regions, loosely referred to as municipalities by foreign investors. Some of them are major cities, such as Moscow and St Petersburg. Several of the non-urban oblasts, krais and okrugs are nearly the size of a small country such as Switzerland. All have popularly elected governors who in theory have the right to negotiate their own financing in the capital markets. Some regions even have the authority to negotiate with foreign governments.
The municipal bond market has developed steadily over the past year as regions have sought to raise financing independently of the central government by creating a domestic regional bond market and, in four cases so far, issuing securities externally. Another reason for the development of regional debt is the steady decrease in the issue of veksels (very short-dated promissory notes).
The largest municipal bond market is for the GGKOs issued by St Petersburg. The total market of over $500 million is expected to decline gradually since the city intends to replace its rouble-debt financing with cheaper external borrowing in dollars. According to a report released by Moscow broker Rinaco Plus, the success of the St Petersburg GGKO market largely springs from the fact that a trading infrastructure similar to that of the Moscow Interbank Currency Exchange (Micex) has been created. In fact, St Petersburg is only the second Russian city to have an operating derivatives exchange – the St Petersburg Futures Exchange.
The strongest region by far is the city of Moscow, presided over by the powerful mayor, Yuri Luzhkov, who acts more as a corporate chief executive officer than a public official. Moscow’s financial wellbeing is not surprising given the rapid growth of business in the capital. Further, a disproportionately large percentage of national GDP is produced in the Moscow region. It is estimated that outside oil and gas 90% of Russia’s foreign direct investment is made there.
Moscow has nearly $300 million in rouble-denominated notes in circulation. And even though the city is highly cautious about increasing its debt burden, this is likely to grow to $400 million this year. The city has ambitious plans to use its cost-effective debt-raising ability to provide funding for developing projects on a joint-venture basis with other regions. Moscow will raise financing by issuing its own paper and then lend on to other regions in the expectation of substantial returns.
After Moscow’s next $500 million Eurobond issue, managed by Credit Suisse First Boston and ING Barings, which has been postponed because of adverse market conditions, the city intends increasingly to tap the domestic rouble market. How far this intention will be fulfilled, given spiralling rouble interest rates, is uncertain. Yet there is substantial potential for new issues. So far, just 20% of the total limit for debt, both external and internal, set by the City duma (legislature) has been tapped.
Luzhkov has a well-known aversion to issuing debt in order to pay day-to-day bills. His stance may seem surprising given his hard-line communist background. His view, repeatedly expressed by city officials, is that new bonds should only be issued when the proceeds can be invested in projects that will generate a return that far outweighs the interest payments.
Moscow is a significant net contributor to the federal budget – 29% of total central government tax revenues are in fact raised by the city and paid over to the finance ministry. The city’s total revenues are slightly under $10 billion, making it Russia’s third-largest cash generator, behind the central government and natural-gas producer Gazprom. And these revenues are in cash. By contrast the official sales figures of most Russian corporate debt issuers are based primarily on the value of production delivered. But the non-payment crisis means that only a small proportion of reported sales are ever paid for in real money. All these factors indicate that Moscow debt should, on a credit basis alone, trade at lower levels than central government bonds (GKOs). Yet Moscow debt can yield between 50 and 300 basis points more.
For an investor looking to grab a brand-new debut issue, there are opportunities scattered across Russia. The next new issue will probably be the Rostov municipal authority’s placement of $170 million of rouble-denominated bonds on Micex. Given Rostov’s status as a net recipient of central government funding, it is not permitted by the finance ministry to issue Eurobonds. The smallest new issue will come from Omsk, which has just authorized a new issue valued at $34 million of one-year rouble coupon bonds.
Despite the attractiveness of many municipal issues there are still daunting obstacles for foreign investors interested in the more obscure ones. Federal law currently requires non-resident investors to hold regional securities in what is known as a T account, from which it is not possible to repatriate profits in dollars. While it may be possible to repatriate profits on long-dated securities – those that mature in 1999 – this paper involves greatly increased risk. Further, dealing in regional bonds involves a whole series of complications, such as relying on less-than-creditworthy depositories to hold the bonds, tiny local banks to transfer funds and increased counterparty risk. And while there is a reasonably tight bid-offer spread in the debt instruments of St Petersburg, Moscow and Orenburg, the other municipal markets are characterized by poor liquidity. In fact, days can pass without a single trade.
The tried and trusted method for dealing with market obstacles is to place funds with a well-connected local broker. Any gains in market price are credited to the account of the foreigner who pays all costs and suffers any losses. The broker then negotiates through its own connections all matters related to custody, ownership and currency restrictions, as well as redemption on maturity.
The complexity of rouble-denominated debt markets makes them suitable only for entrepreneurial and well-informed investors. “Each and every one of these instruments – whether municipal bonds, agro bonds, or veksels – has a unique story behind it and each has its own credit level,” explains Stephen Jennings, chief investment officer of Renaissance Capital. “As investors become more and more knowledgeable about the credit quality of each instrument, we will see the yield curves adjust accordingly.”
Some analysts reckon that for the immediate future the healthy return on municipal debt make it a better short-term play on Russia than equities. While a continued rebound in equity prices will depend on more and more fund managers moving into equities, investors will get a healthy return on municipal instruments provided the region doesn’t default and the rouble remains stable. “Russian equities, at least over the short term, may be characterized by rapid price swings and illiquidity,” says a Moscow-based rouble-debt trader. “For a short-term speculator even if you get your timing right in taking an equity position, you still might not be able to find a buyer when you want to cash in. By contrast, you can probably pick up some of these regional instruments now at a rock-bottom cost. The profit will simply depend on the rouble rate and the issuer making payment. The central bank is standing behind the rouble, and a lot of these regions, looking to get a good credit rating to tap the Euromarkets this year, will stand behind their bonds – but who will stand behind the equity market?”
| Russian regional and municipal debt markets | ||||
| Issuer | Instrument | Maturity | Size* | Traded |
| Astakhan | coupon bearer bonds | 1+2 years | 40 | local OTC |
| Chelyabinsk | OKOs | 182 days+1 year | 200 | local bourse |
| Irkutsk | ODOs | 3+6 months | 780 | local bourse |
| Leningrad oblast | electronic discount bills | 6 months to 2 years | 500 | local bourse |
| Moscow City | MKOs | 6+12 months | 1,800 | local bourse |
| Moscow oblast | electronic coupon bonds | 6+8 months | 1,000 | Micex |
| Novosibirsk | KODOs | 6 months | 200 | local bourse |
| Omsk | electronic coupon registered bonds | 6 months | 150 | local OTC |
| Orenburg | OGKOs | 6 to 8 months | 400 | Spicex |
| St Petersburg City | GGKOs | 3 month to 3 years | 3,000 | Spicex |
| Sakha | coupon bearer bonds | 6 months | 866 | local OTC |
| Sverdolsk | OKOs | 1 year | 300 | local bourse |
| Tatarstan(1) | RKOs | 18 months to 2 years | 700 | Micex |
| Tatarstan(2) | electronic discount registered bills | 8 to 12 months | 590 | local bourse |
| Volgograd | VODOs | 5 to 18 months | 300 | local OTC |
| Source: Renaissance Capital | *Billions of roubles in instruments outstanding | |||
Russia’s power governors
While observers of Russian politics focus on the circus at the centre, one of the important developments of 1997 was the election of new governors in over 50 provinces. They chose the leaders that suited them – a young liberal for western-leaning St Petersburg, a conservative agrarian for the farmlands of Oryol, nuts-and-bolts moderates for the Volga industrial heartland. Craig Mellow introduces the men investors will have to deal with as the regions usurp Moscow’s power
Alexander Yakovlev, St Petersburg
The “northern capital’s” first governor was Anatoly Sobchak – a golden-tongued intellectual who set an admirable tone for Russia’s most liberal city but could be short on administrative follow-through. Alexander Yakovlev, his deputy, promised less talk and more action, and narrowly beat him in a bitterly contested run-off.
The new governor patched the gaping fiscal hole Sobchak left him, largely by doubling utility charges. Such austerity won him friends among international investors, who swallowed St Petersburg’s $300 million Eurobond issue last summer, though it also brought old ladies into the streets.
Real-estate and tourist development have also revived as Yakovlev renegotiates rotten deals inherited from the city’s last Communist rulers. St Petersburg continues to lead Moscow in industrial investment projects. Scarcely a week goes by without some new venture being announced, to build anything from buses to cellular telephones.
The looming challenge for Yakovlev is St Petersburg’s port, Russia’s most important since the loss of the Baltic states. Much-needed rehabilitation is bogged down in squabbles with neighbouring Leningrad oblast. Lightening up his cold-fish personality is also a must for the governor if he is going to win the next election.
Ivan Sklyarov, Nizhny-Novgorod
Ivan Sklyarov’s ideological niche is similar to Yakovlev’s. He sold competent moderation to an electorate exhausted by the fiery reforming of his predecessor, Boris Nemtsov. He handily beat both a communist and a Nemtsov acolyte in a three-way race.
Sklyarov was not long in delivering for his constituents. In October he unveiled an ambitious joint venture between Nizhny-Novgorod’s leading employer, vehicle-maker GAZ, and Fiat. The Italian firm pledged to make 150,000 cars a year in Nizhny, sourcing 70% of the content locally.
A former closed city, Nizhny is full of troubled military-industrial enterprises. But investors will focus next on the Norsi oil-refining complex, one of Russia’s biggest. Plans to privatize Norsi were scuttled lately when the only interested buyer, Lukoil, backed away.
Konstantin Titov, Samara
Samara oblast, straddling the central reaches of the Volga, is Russia’s Michigan. Much of the economy depends on the monstrous AvtoVAZ factory, which still churns out 700,000 Lada cars a year for the captive Russian market. The other key industry is oil-refining.
Konstantin Titov, a rock-jawed but flexible politician in the Yeltsin mould, showed his cool nerve early on by quietening down Samara’s large refinery, where two directors in a row were murdered in 1993-94. He also kept his proletarian constituents from re-embracing communism. Winning big in a swing oblast like Samara was a key element of Yeltsin’s 1996 landslide.
Titov will need his nerve at VAZ, a rotton borough of debt and inefficiency in dire need of strategic partnership with a foreign vehicle-maker. Titov has stepped cautiously forward as a go-between for this difficult process. If he orchestrates it smoothly, he could end up on the short list to succeed Yeltsin. But Titov could serve the country and himself better by putting Samara’s house in order first.
Yegor Stroyev, Oryol
Yegor Stroyev is a veteran Communist who never disavowed his long climb from village agronomist to the party’s central committee. He is right at home in Oryol, an overwhelmingly rural oblast in central Russia’s “red belt”. He rejects a quick transition to private agriculture as the pipe dream of Moscow economists. But he sticks up for independent farmers’ rights, while urging a “gentle” reform on the collective farms. Somehow, he also manages to pay salaries and pensions on time.
Oryolians are plainly pleased. They re-elected Stroyev last October with 95% of the vote. One of his own entourage had to run against him to make the election legal. Stroyev gets plenty of respect in Moscow, too, enough to be elected speaker of the Federal Assembly, the upper house of the legislature. While the post is largely ceremonial, it gets Stroyev’s reasonable opposition a hearing.
Mintimar Shaimiev, Tatarstan
Tatarstan was once tipped to be the next Chechnya – another largely Muslim autonomous republic with historical grievances against Moscow, bent on bloody mutiny. But Mintimar Shaimiev spurned bloody mutiny and won control of Tatarstan’s resources – its oil – at the negotiating table.
A former Communist party boss, Shaimiev runs a tight administrative ship. Tatneft is not Russia’s biggest oil company but it may be the best managed. The Tatarstan government has also repossessed the KamAZ truck factory for tax debt. KamAZ, with its traditional market dominance, should be a winner if its management can be improved.
In the long run, Shaimiev may like things too much his own way. Russian businesspeople tend to see Tatarstan, and neighbouring Bashkortostan, as semi-foreign ground, and set up operations where they are more welcome.
Aman Tuleev, Kemerovo
The central Siberian coal-mining region known as Kuzbass (formally Kemerovo oblast) has been among the hardest-hit by market reform. Bankrupt mines have spawned perpetual strikes and demonstrations. Aman Tuleev rose to prominence as rabble-rouser in chief becoming chairman of the oblast legislature, but after the presidential elections he deftly switched sides, serving for a year as minister for relations with CIS countries.
But folks in the Kuzbass did not forget Tuleev. Yeltsin’s appointed governor, Mikhail Kislyuk, made himself wretchedly unpopular by building airports and cathedrals while miners went hungry. When he was forced to resign last autumn, Tuleev came home and won the governorship all-but unopposed. Plenty of miracles were promised on the way, of course. Now the people’s hero faces reality.
Yevgeny Nazdratenko, Vladivostok
Yevgeny Nazdratenko is the least admired of Russia’s mayors. With Asian trade booming, the Pacific coast ought to be one of the country’s best-off districts. Instead it is a basket case of power brown-outs, uncollected trash and workers’ hunger strikes. Federal money constantly goes astray under Nazdratenko’s jurisdiction.
Nazdratenko is an ingenious survivor, however, diverting the population with rants against Muscovite domination, and against returning a few kilometres of disputed earth to neighbouring China. Yeltsin gave special powers to the regional boss of the Federal Security Service (the successor to the KGB), hoping finally to get the goods on Nazdratenko. But the governor has left the secret policeman flat-footed. These games are entertaining enough, but a great shame nonetheless.
Reclaiming the lost city
Winter comes early to the Urals. By late November the daytime temperature in Yekaterinburg is minus 13 celsius. One might expect an equally severe economic climate in this city of 1.3 million, Russia’s fifth largest, which was carefully constructed for the needs of a vanished empire. Sverdlovsk, as the Communists called Yekaterinburg, was the USSR’s fourth-ranking brain centre, after Moscow, St Petersburg and the Akademgorodok at Novosibirsk. Some of its dozens of institutes solved problems for the Urals heavy industrial belt, where rich mineral deposits engendered monoculture towns with names like Asbest and Upper Forge. But the most elite thinkers served the Communists’ most exalted aim, building nuclear weapons and the apparatus to deliver them. Soviet citizens themselves needed special clearance to set foot in Sverdlovsk.
Post-Soviet reality invaded Yekaterinburg swiftly and brutally. Legitimate ways to earn a living all but vanished for a few years and gangsters seized hold of the metals trade. Many of those wise guys are dead now, though, and the city is rapidly coming back to life. “The small-business growth here is unbelievably rapid,” exclaims Gregory Sandstrum. He heads the Urals office of the Washington-supported US Russia Investment Fund which lends money to businesses including two pharmacies, a macaroni factory, a dry cleaners, a computer wholesaler, a medical equipment leasing company, and two dozen other start-ups.
The economy’s buoyancy is partly linked to the Urals’ metals giants, which for all their problems have continued to produce and export. But culture and education are probably more important. Yekaterinburg’s scientific intelligentsia never bought the Communist nostalgia which continues to gull Russia’s agrarian south. Sverdlovsk oblast’s governor is Eduard Rossell, a veteran centrist who manages to keep his bureaucrats more focused on mending streets than harassing entrepreneurs. “I dreamed we would have 10,000 small businesses,” Rossell commented recently. “Now we have 20,000.”
Rossell has had chequered relations with his predecessor at the Sverdlovsk state house, Boris Yeltsin. The latest sign of the constant friction between feisty Yekaterinburg and overbearing Moscow is in the banking sector. Moscow powerhouses SBS/Agro, Unexim Bank and Menatep have bought out Yekaterinburg banks, which seems only to have made local business people rally around the surviving independents.
Rossell backed Yeltsin when it counted, though, pulling a 77% majority for the chief oblast-wide in the 1996 election. And early talk of a Urals autonomous republic has faded as both centre and hinterland address the more serious business of making a living. – CM
Life stirs at Uralmash
Restructured by a pioneer investment capitalist, this metal-bashing giant is now part of a budding industrial renaissance. Last year it even turned in a small profit
Last October, the Urals Heavy Machine-Building Factory, commonly known as Uralmash, found out just what it is worth. Through a private placement, international investors paid $37 million for a 26% “blocking share” in the plant. This measly sum was a bitter pill to the one-time “flagship of Soviet industry”. But that Uralmash fetched anything at all was also a triumph. The heroes were a management team which stopped believing in fairy tales years before most of their counterparts, and a low-key Moscow investor who started buying Uralmash with vouchers in 1994, then worked to rebuild the property rather than milk it.
It will be a long time, if ever, before Russian industry makes world-beating products for export. But western equity investors have started to realize what consumer goods companies learnt years ago – that the former Soviet Union is a market, too, and a more vibrant one than dour official statistics indicate. Oil is still extracted in Russia, most of it with Uralmash drilling rigs. Steel is still fabricated, much of it on Uralmash presses. Steady demand from these blue-chip customers could soon make that $37 million look like quite a bargain.
An air of Soviet grime and disorder stubbornly clings to Uralmash’s 35-hectare complex in Yekaterinburg. Parts of monstrous industrial machines lie haphazardly about, collecting litter while they await assembly and shipment. Men work without hard-hats despite various deadly objects swinging above their heads. Nostalgia for the good old days runs deep even among the one worker in three who have kept their jobs. “The mood is better after three years of stable production,” says production director Vladimir Telepnev. “But not as good as it once was.”
Yet Uralmash’s present is quite an improvement over its recent past. This was the quintessential Soviet factory in all ways but one – almost all its production went to civilian uses, a great stroke of luck for life after Communism. Kremlin propaganda lauded Uralmash as the “factory of factories”, the mother lode of machine tools which nurtured industrial progress throughout the socialist bloc. Performance was measured in tons of raw metal digested a year. The USSR’s last prime minister, Nikolai Ryzhkov, was drafted from Uralmash’s general director’s chair.
Then reality hit. Uralmash’s production contracted seven-fold between 1988 and 1995. At its nadir, Kakha Bendukidze, head of Moscow investment company Bioprocess, bought into Uralmash in 1994. Bioprocess and its sister organization Nipek had already made some quietly shrewd acquisitions in western Siberia, among smaller enterprises linked to the region’s oil giants. Still, the financial world had barely heard of them before they carried off 22% of Uralmash at one of the few voucher auctions open to all comers.
Bendukidze paid around $500,000 for this stake, making his profit to date on Uralmash around 6,500%. He is not the sort to brag about it, however. During a rare public appearance at a Dow Jones conference in Moscow, the Georgian-born raider promised that none of his properties would turn a profit for a decade. His investment-banking handlers at the Russian-owned firm CentreInvest taught him to sound fiercer before the two-week global roadshow for the private placement. But in Yekaterinburg they got the point: he was not there to take the money and run. “One thing everybody perceives about Kakha,” says James Baillieu, CentreInvest’s chief of corporate finance, “is that this is a man who knows his company backwards.”
Few Russian financiers inspire such trust. Russia’s voucher privatization programme fell short of expectations with many early voucher funds run by shysters. This first wave was succeeded by a group of acquisitive Moscow power bankers. They ooze pretension, hunt big game among Russia’s hard-currency spewing oil and minerals empires and devote considerable resources to influencing the intricate flow of Kremlin politics. Yet the jury is decidedly out on their skills as turnaround managers and most Russians don’t consider them trustworthy.
But Bendukidze, a biochemist by profession, remains the inspired amateur. While the banks spend big money on going uptown, Bioprocess has stuck to its bare-bones headquarters on an industrial back street.
Uralmash’s management is also far from run of the mill. By and large, Russian industrial directors have behaved poorly during the six years of market reform. No matter how deep their arrears to workers and suppliers, few bosses have deprived themselves of new cars and dachas, or plush fact-finding missions abroad. But at Uralmash the convulsions of the early 1990s brought to power Viktor Korovin, a shop-floor engineer who was only 39 when he vaulted to the position of general director. When Bioprocess bought its first chunk of the enterprise, Korovin shrugged, gave them two seats on the board, and went back to work. Bendukidze now owns Uralmash outright, and Korovin is still working. “Most of the conflicts at other enterprises are based on greed,” says Andrei Lutsenko, Uralmash’s director of shareholder relations. “We have avoided them thanks to wisdom on both sides.”
Bendukidze and Korovin’s greatest achievement so far has been ending mass production at Uralmash. All equipment is now made to order. Factory placards that once exhorted workers to lift the Leninist banner now remind them: All Orders Are By Contract. On Time and Top Quality. Uralmash has remoulded its byzantine Soviet management structure into five product-related divisions. The tiny service which in former times made sure products got on the right railway wagons is gradually developing into a marketing department. Uralmash’s head count is down to 19,000, from 55,000 in its bloated heyday. The fruits of all this hard work are modest but honest. The company made a $1 million profit last year on sales of $194 million.
Uralmash has one key factor in its favour: market share with Russia’s strategic industries, especially oil. For these companies, switching suppliers is a herculean endeavour, costing tens of millions of dollars which Russian companies do not have. Uralmash is literally dug in. Encouragingly, the oil equipment division’s share of company sales rose from 17% to 25% last year.
CentreInvest began to “tell Uralmash’s story” last spring, leading up to a listing on Russia’s over-the-counter market in July. The stock doubled from $4 to $8 over the summer. More impressive still, it has crept up to $9 in the bleak period since. Before the Russian market went south, CentreInvest and Flemings, which came on board to lend international heft, planned to follow the Uralmash private placement with an early 1998 ADR. Now they seem less sure. The plant itself, Lutsenko says, still counts on raising $100 million from capital markets. This should meet about half its short-term retooling needs.
“This is a unique enterprise,” raves Yekaterina Kubasova, the CentreInvest staffer who nursed the Uralmash deal in its infancy. Fortunately for Russia, she is not entirely right. One of Russia’s key industries, food processing, has been rebounding aggressively for the past two years. Stores are filled with attractive new domestically-made products, decreasing the country’s food imports by 20% since their peak in 1995. Now heavy manufacturing may be starting to follow suit. Uralmash’s counterpart in St Petersburg, the Kirov Factory, was long thought a lost cause. Suddenly production is surging, and the plant’s shares hot.
If bedrock industries like Uralmash are buoyed by Russia’s hidden strengths, they are also captives of its many weaknesses. For example, Uralmash has tried to put together world-class machines from the substandard metal offered by its traditional suppliers. “We have to retest all the metal we get from them ourselves,” says production chief Telepnev. “Only 30% can be used for parts which will be under high stress.”
Uralmash cannot switch suppliers because, like its customers in turn, it has no cash. It does most of its business by barter, linking its fortunes to the many enterprises which are reforming less energetically. “Our number-one business priority is not increasing sales, but getting all our existing customers to pay with money,” explains Dmitry Sannikov, representative of what Uralmash still calls its protocol department.
Nonetheless, Uralmash proves that things are not always as bad as they are supposed to be in Russian industry. When the country comes back into speculative fashion, as surely it will, wise investors will be looking beyond raw materials.
Russia’s sleeping giant
It takes 75% of Russian household deposits, lends at spreads of up to 20% and makes greater profits than Merrill Lynch. Ronan Lyons probes Sberbank, one of Russia’s least well known major institutions
Russia’s Sberbank has all the hallmarks of the central planner’s vilest creation. It has 34,000 branches in every nook of the world’s largest country by area; a management from the nomenklatura old guard, more likely to hold the Order of Lenin than an MBA; and a loan portfolio that would make any half-prudent banker weep. Yet it made profits of $2.7 billion in 1996 – more than Merrill Lynch.
Sberbank was the Soviet Union’s only savings bank for 70-odd years. Founded by Tsar Nicholas I in 1841 it was nationalized by the Bolsheviks in 1917 and became the vehicle for the forced savings of communist times – people saved because there were so few goods to buy. After 1991, it became a haven for small savers as the only Russian financial institution to carry a government guarantee on its deposits. Depositors darting for cover during bouts of hyperinflation or the periodic nosedives of the rouble usually head for Sberbank (over 75% of all household deposits are held by it). With gross assets of over $33 billion, the bank dwarfs any of its rivals. Even Unexim Bank is six times smaller.
But Sberbank’s massive profits owe more to the chronic mismanagement of Russia’s public finances than its dominance of retail banking. Sberbank is the biggest single investor in Russian sovereign bonds (GKOs), accounting for about 40% of total capitalization. Tellingly, it is the single-biggest buyer of Bloomberg screens in Russia.
In the first nine months of 1997, foreign investors took a keen interest in Sberbank’s shares, despite the obstacles to buying bank stocks in Russia. “Everyone was ignoring the banking sector because of perennial fears of a liquidity crisis,” says Bill Browder, managing director at Hermitage Capital Management. “I went to discuss the sector with a junior official at the ministry of finance and realized what a sound investment opportunity Sberbank was. The bank’s market capitalization was $150 million at the time, even though its profits for the first six months of the year were about $750 million. The risk was easy to assess – all it really does is take deposits and lend to the government. On top of that its sheer size created barriers to competition.”
Sberbank proved to be one of the star performers of the Moscow bull run, with its share price peaking at $323 in August 1997. “At $20 a share, investors were buying a branch for $5,000,” says James Fenkner, director of research at CentreInvest Group in Moscow. “You couldn’t buy a sign for a western bank for that.”
As the market crashed in the last quarter of 1997, so did Sberbank shares – they fell below $200 at the beginning of December. But most analysts predict a steady recovery. By the middle of next year interest rates could be down to around 15%. Meanwhile Sberbank has rates of 28% locked in for two to three years, while it continues to pay between 8% and 9% to depositors.
“The interest in Sberbank was beginning to spill over into other banks,” says Thomas Balestrery, head of research at Creditanstalt in Moscow, “until the Asian crisis struck.” Investors have since retrenched into Sberbank or have left the bank stocks market altogether in search of safer resting places.
But international lenders are still sniffing around Sberbank. Rating agency IBCA recently awarded it the highest credit rating yet for a Russian bank: B on short-term debt and BB+ on long-term debt. In November Sberbank clinched a $200 million loan with a syndicate of international banks at the lowest interest rate ever for a Russian bank – Libor plus 2%. The one-year loan was arranged by West Merchant Bank and NatWest Markets.
Sberbank’s greatest asset is its size. One of the great problems of Russia’s financial system is distribution – how to get the estimated $20 billion to $50 billion hoarded by individuals in cash into the banking system. Sberbank is ideally placed to spearhead development. “If there ever is a domestic fund base in Russia, it will be through Sberbank,” says Fenkner. “When Sberbank realizes its potential, it could provide a cushion for the flows of hot money currently buffeting the Russian economy.”
Andrei Arofikin, an analyst at Credit Suisse First Boston in Moscow, predicts a steady growth in income for Sberbank from retail products such as pensions and insurance policies. The bank’s pension fund is already the country’s third-largest in terms of participants, though it remains insignificant in absolute value. Sberbank is also the ideal vehicle for distributing mutual funds. Credit Suisse First Boston recently teamed up with Most Bank to establish a mutual fund – taking 1% to 2% commission. Sberbank would probably opt to set up and run its own funds. “We are open to joint ventures,” says a spokesman for the bank, “but we will do it on our own terms.” Meanwhile, the liberalization of the housing market will mean that house payments rise threefold without any new houses being built. Russia’s embryonic mortgage market is already dominated by Sberbank. Though most home loans are for tenors of two to three years some banks have recently gone as far as 10 years.
The worry is that Sberbank will not develop aggressively as long as the Central Bank of Russia owns 50% plus one of the voting shares. A draft law on the ownership of Sberbank was recently submitted to the Duma, the lower house of parliament. Under the law the central bank would have to maintain its majority stake in the bank. However, Sberbank is negotiating with it for 5% of its share capital to be sold officially to foreigners. Though the exact definition of foreign ownership remains at the discretion of Sberbank’s supervisory board, according to a bank spokesman: “The board has no intention of broadening the definition to include ownership of shares by foreigners through legal Russian entities.” Foreigners who bought shares in Russian banks through local vehicle companies may have pushed total foreign ownership of Sberbank to around 15% before the market crashed.
One of the main short-term risks of investing in Sberbank is that the central bank will use its controlling interest as a tool of government policy. Fenkner highlights the moral hazards of the bank’s controlling interest. “During this past crisis,” he says, “Sberbank has been stuffed with GKOs on which the return doesn’t match the risk.” In the longer term, Sberbank must look to rationalize its sprawling retail network. But restructuring and rationalization don’t spring readily to mind among Russian managers – Sberbank’s are no exception. For this reason, experienced Russia hands pay little attention to companies’ cost bases. “It will be a long while before most Russian companies take a due interest in cost control,” says Balestrery. “In the meantime investors will focus on revenues. Sberbank is a case in point.”
In corporate banking, Sberbank faces stiff competition from the Moscow-based commercial banks that established themselves largely by servicing corporate accounts. By comparison with these – Russia’s banking “gazelles” – Sberbank is sorely lacking in commitment, expertise and flexibility. However, its retail coverage outweighs concerns over corporate banking credentials for some clients, such as electricity utility UES.
For now, though, most of the bank’s commercial lending is to shareholders – a practice that has had calamitous consequences in other former eastern-bloc countries, most notably the Czech Republic.
Credit-analysis skills are rudimentary, especially in the regional Sberbanks, most of which are bedevilled by bad loans from the early reform years. “When savings banks look for corporate clients they usually get the worst ones,” says Par Mellstrom, head of research at Moscow-based brokerage Brunswick.
In 1996 Sberbank set up an investment-banking division and began trading equities, taking small positions on its own account. “In the future,” says the bank spokesman, “the bank plans to expand into securities underwriting and distribution, corporate finance and brokerage services.”
Statements like these will only attract investors if the resources are made available to implement them. But what became of the $2.7 billion in profits for 1996 can only be guessed at. Only a tiny fraction was paid out in dividends – preference shares yielded a 12% return and common shares 6%. The rest went to the central bank and the finance ministry, which gets half the central bank’s profits.
The spectacle of the central bank building lavish new marble and brass offices in Moscow city centre will do little to assuage the sceptics. For its part, Sberbank is reputed to be spending $260 million on its new headquarters. Less clear is the extent to which the bank is investing its profits in integrating its vast branch network or in diversifying into new lines of business.
The central bank shows no sign of loosening its grip on Sberbank. Andrei Kazmin moved in 1995 from the central bank, where he was deputy chairman, to take on the chairmanship of Sberbank. Most see him as a stooge of central bank chairman Sergei Dubinin. Indeed Kazmin’s appointment was motivated largely by a desire to consolidate the control of the central bank over Sberbank after attempts by the previous incumbent, Oleg Yashin, to shifts some of the bank’s resources away from GKOs.
Any sluggishness on the part of Sberbank’s managers will quickly be exploited by rivals. Its main rival is the privately owned SBS Agro (known as Stolichny Savings Bank before its takeover by Agroprombank in 1996), with total deposits of $1.8 billion and 1,207 branches. SBS already has advanced IT systems and a regional spread that is more efficient and more compact than Sberbank’s.
Sberbank’s huge and unwieldy branch network is both its greatest blessing and its gravest burden. Whether or it can unlock the potential of this network is largely in the hands of Russia’s central bankers.
