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25 Feb, 2010 12:22

Andrey Kostin: The Russian banking sector and the global economy

It's been a tough couple of years for banks worldwide, with many held accountable for the global economic turmoil.

RT sat down with the president of one of Russia's largest banks, who believes the country's financial institutions are weathering the crisis well – and it's ready for new investments.

RT: How attractive do you think the UK is as an investment destination?

AK: “I think that discussions during today – the discussions started during the breakfast with the Prime Minister, and then the address of the prime minister – definitely one of the aims of the conference is to attract more international investors into Britain. But also of course, they discussed the possibility of British investment on our side. So I think Britain is continuing to be one of the interesting countries for this, but more and more the discussions here are about the emerging markets, and countries like Russia and China, so I think that’s also a very big interest at the moment for participants.”

RT: How useful do you think a conference like this is in promoting a country as an investment destination?

AK: “I think it’s important because now, particularly after the crisis, we have the very tough competition for investment. There’s probably less investment, we can expect, because of the deleveraging of the whole economy an economies, and that’s why again they are very important. Basically there are three major areas how the country can attract foreign investment. First there is the macroeconomic stability, macroeconomic policy, which includes low inflation, low interest rate, low budget deficit. Second there is the institutional infrastructure issue. It means the creation of the good infrastructure, and even the British prime minister today talked about the easy visa access, and better airport facilities, like the new construction at Heathrow and so on. And finally one of course is the competitive economy, particularly the innovative economy, the organization. I think that is the very top of the agenda not only for Russia but for Britain as well. And I think that’s the big discussion on this issue – how the creative economy can really become and engine for future development of the global economy.”

RT: Investing in infrastructure is something that Russia has been concentrating on for a while. Do you think that the Russian and UK economies are similar in that respect?

AK: “I think yes, and I think a lot that the two countries can complement each other. For example the Russian president singled out five priorities and they include many things like technology, like information, like medicine and pharmacy for example, and other areas. In all these areas Britain has a very strong potential. Skills, scientific research and development. So I think there could be a lot of synergy in trying to attract investors or companies from Britain, as well as probably participating in some branches which take place in Britain – Nanotechnology and some other branches as well.”

RT: And following on from this conference, will VTB be making a pledge to invest money into the UK?

AK: “We have already made the investment because we are already present here. We have our bank, VTB Capital, and I raised this question this morning asking the prime minister about the tax regime for bankers here, and how Britain can continue to be one of the leading financial centres, and I think the British government is very serious in focusing on this subject and this issue understanding that, I mean London now is probably number one financial centre in the world – at least for Russia and for European countries, and I think that there’s an effort should be done to protect this.”

RT: At the same time the UK does have deteriorating public finances. It’s got this 50% tax band, and a windfall tax on banker’s bonuses. That must affect your view of the UK’s financial system.

AK: “Well of course that’s affecting and that’s why we raised the concern because bankers, are not only not happy, but think that could create some problems for the development of the whole financial industry. But he Prime minister thinks that the taxes should be reasonable. Should on the one hand provide necessary growth for the budget income, on the other hand Britain is using, one has to say, using some special tax regime for the innovative economy, for new investment. I think that’s also a very interesting experience.”

RT: Traditionally there’s a small amount of media opposition to Russian investors into the UK. I am thinking of Aleksandr Lebedev and his purchase of the Evening Standard and Independent Newspapers. What can be done to overcome that do you think?

AK: “Well I think the crisis changed the situation a little bit because the need for investment became bigger, and western governments started to introduce a softer approach to investment, for example of sovereign funds. But it’s still the case. I think, I can’t say that Russian investors are 100% treated similar to other nations, so I think that there is room for improvement here as well.”

RT: How do you combat that though? Is it just by force of investment?

AK: “I think so, but, you know, my opinion is also that any investment abroad should be very reasonable, very well judged, because it is a different territory, it’s a kind of environment, and I mean, you really should be very selective to, to see whether it bring a synergy to your business, in Russia for example. Because for most of the Russian companies, Russia is the main focus of their businesses, and we saw in the past that Russian companies acquired some companies abroad – in America in Europe – and now they are selling them. But I think f course there’s room for more acquisitions in the west and I think we are going to see in the future. Because the role of emerging market economies, the role of the Russian economy will be growing. Everybody agrees with this. And the companies will become bigger and bigger, and they will become more global than now, and definitely they will need to expand their business beyond the national borders. I think Britain represents one of the possibilities.”

RT: Is VTB even in a position to invest? You are going to report a net loss for 2009

AK: “Yes of course, I think that the loss is mainly based on growth of our provisions, and we very much expect that this year will be quite different really. We can compensate whatever losses we have last year. So we have very high capital adequacy as a result of the additional capitalization last year. So we are quite in a position to do this. But we will be very selective, we still rely on the organic growth as our major driving force in our development. We will also be seeing if and when some good chances and opportunities in business we will be making decisions on this as well.”

RT: And what figures are you expecting for 2010?

AK: “I think they are already mentioned by our Chief Financial Officer. We expect something around $2 billion net profit for this year – maybe slightly less, but around this figure.”

RT: You recently started investor meetings in the US, and there’s some talk of a billion dollar five year bond issue. How realistic do you think that is?

AK: “We have to see. Our team is now traveling in the United States for a roadshow, and the market is very much volatile now. We are coordinating our policy with the government, because the government is also planning a sovereign bond issue. But we shall see. We are not ready to borrow at any price, so it very much depends on the market now.”

RT: The refinancing rate falling to 8.5% on Wednesday. Do you think it will fall any further, and will VTB be able to offer lower rates than that?

AK: “Definitely our rate depends on the rate of the Central Bank, so I think the lower we have the interest rate from the Central Bank then the lower in general will be the funding for the less expensive funding for our clients. I think the answer is yes. I think we are looking for a lower interest rate economy. But it very much depends on the success of the government in fighting inflation. There’s some concern that the quick economic growth that Russia might expect, this and next year particularly, could bring inflation up. But I should say that the Russian government is quite, I would say, conservative in a good sense about our budgetary policy, and I think that our expenditures of the government are very much limited in line with the government targets. So my personal opinion is that inflation will be under control in Russia for the next years and that will allow our Central Bank to lower even further, the interest rate.”

RT: What’s the bonus culture like at VTB, and how far are you willing to go to fall into line with international norms?

AK: “You know in Russia, bonuses could never be compared with the level of bonuses in the west. So I don’t think it is really a very serious issue, and I don’t think the Russian government takes this as the number one enemy in the economy today. But we are now working together with the government and the Central Bank on drafting some kind of programme to use shares as a long term motivation. And definitely I think that they should be more transparent, this system, but it’s important in banking and in any other industry, to have the proper remuneration and to have the proper mechanism for this, for bonuses. But again they are not playing as important a role as in the west and particularly investment banks. It is not a key issue for the Russian banking industry.”

RT: And what is the key issue for the Russian banking industry?

AK: “Well I think competitiveness and the issue of capitalization in general, that’s quite an issue. I think there will be banks like VTB or Sberbank which resolved this issue last year, but there still could be a problem for some Russian banks. Particularly if you take into account the effect of the non performing loans, which are probably not as high as many expect, but still exert some pressure on the capital base of the Russian banking sector.”

RT: You mentioned non performing loans, which you predict could rise to ten percent. What’s happening in the real economy to make that happen?

AK: “Well, I think it’s vice versa. If things go worse in the real economy then the banks will be badly affected but we see now the signs of stabilization in the real economy and we expect, personally our analysts expect the growth of around 5% at least, GDP during this year. So that provides quite a reasonable basis for banks in increasing our loans again and to limit the amount of NPL’s overall.”