Belarusbank: Local hero to turn national champion

Graham Stack for business new europe

Belarusbank, the country’s state-owned no 1 commercial bank, sticks out like a steady rock amid the global storm. Deputy chairman Vladimir Novik tells bne how Belarusbank is flourishing despite the international crisis and increasing domestic competition.

The Belarus banking sector has attracted recent attention mostly due to high profile acquisitions by European institutions – with Austria’s Raiffeisen taking a controlling stake in Priorbank, and Germany’s Commerzbank looking set to buy Belinvestbank. But Vladimir Novik, deputy chairman of 100% state-owned Belarusbank, says he has no apprehensions about such competition. Belarusbank was, is and will remain Belarus’ biggest commercial bank.

“In 2007-2008, Belarusbank continued to hold leading positions in all spheres of the national banking system: The bank now accounts for 40% of the total assets of Belarusian banks, and holds 60% of total national private deposits,” he points out.

“The bank also accounts for 40% of loans to corporate clients and about 60% of retail business in Belarus. So as you can see,” says Novik, “the bank’s share of all basic banking activities is extremely high.”

Lender of first resort

Before the recent retail lending boom sweeping the region, Belarusbank’s main role was funding the industrial giants that powered the ‘Belarusian economic miracle’: GDP growth around 10% since 2003. 58% of its loan book still goes to corporate customers.

“The most impressive part, around 40%, of our clients belong to the oil and chemical industries,” says Novik. “We also deal with transport, mining, machine-building, telecommunications, pharmaceuticals, and food processing.”

Novik reels off a list of Belarusian household names, and potential future blue chips, who are its major clients. The list includes Belarusian Railway, Mozyr Oil Refinery, Belaruskali (potash mining and refining), Minsk Tractor Plant, Belshina (tire manufacturing), MAZ (heavy trucks), Polymir (chemical production), Belpochta (mail services), Beltelecom and Skidel and Gorodeya Sugar Refineries.

“Our top 50 corporate clients account for approximately 80% of our total resources from corporates. Most of them have annual sales of more than USD 1 billion,” he says.

Regarding retail, Belarus Bank originates from the Soviet savings bank system, and thus “inherited a solid clientele and a vast network of branches,” says Novik.

This network, he argues, gives the banks a huge advantage when it comes to attracting deposits.

“Alone since 31 December 2007 through 30 June 2008 retail deposits grew 16% to USD 3.6 bn. The bank is by far the largest retail operator in the country with roughly 60% of private client deposits.”

Ironically, this infrastructure inheritance from Soviet times has also helped the bank fund the retail credit and consunption boom of recent years.

Belarusbank now has more than 950,000 retail borrowers, and provides about two-third of all retail loans on the market. Retail loans grew by 47% in 2007 and 42% in 2006.

“Consumer loans are now the second largest product after housing loans in the retail portfolio with a 25.6% share. House purchase loans and car loans account for just above 14% each,” Novik says.

Rock steady amid the global storm

For the last three years the bank’s assets more than doubled: from $3,631m in 2005 to $9,807m in the first half of 2008. In June 2008, the share capital amounted to $770m. The bank boasts a capital adequacy ratio of 16.90% against a statutory minimum of 8%. Non-performing loans comprise a mere 0.78% of the total loans.

Customer deposits (corporate and individual) account for 79% of total funding. Funds of National Bank and other banks comprise 18%, while debt financing only comprises 3% of funds.

So while diversification of funding for banks across eastern Europe means increasing the share of deposits, for Belarusbank it means the opposite.

“Belarusbank’s lending still depends mainly on deposits attracted from the customers, but we are trying to diversify our funding structure to lower potential liquidity risks,” says Novik.

With Belarusbank funds comprising 41% of all national banking funds, it is no surprise that the cost of international financing is cheaper than for other Belarus borrowers.

In September 2007 the Bank attracted the largest syndicated loan, of $105m, ever issued to a Belarusian borrower.

“And we also had a Eurobond issue planned, but current market turmoil prevents us from accessing the international bonds market. We will make an attempt to issue Eurobonds next year,” says Novik.

Incredible as it may sound, given current global financial mayhem, “in spite of the current financial crisis and lack of liquidity we are quite optimistic about a possible IPO.”

However, underscoring what a pioneering move this would be in Belarus, Novik says it is not just international market conditions, but also the need for domestic legislative amendments that are the main current hitch.

“Currently we have draft proposals of potential IPO arrangers from the leading financial institutions of the world,” Novik adds. “Belarusbank analysts are researching the market in order to identify windows of opportunity for an IPO. The bank will finish all pre-IPO formalities in 2009-2010 – but the final decision will, indeed, depend on the health of the market.”

Belarus Investment Agency to attract foreign investors

Graham Stack for business new europe (www.businessneweurope.eu)

The offices of the Belarus Investment Agency are small and on the outskirts of the Minsk, and a role call of 7 staff points to its embryonic status – but according to its head Oleg Zinoviev, it has a big future ahead of it.

And the first step will be its promotion to ministerial status and direct subordination to the prime minister as of January 2009.

“This status will allow us to become a fully-fledged single window for foreign investor, with powers to resolve any issues arising between foreign investors and government authorities where at national or local level,” says Zinoviev.

“Alone the fact that we will be awarded such a status and answer directly to the prime minister is testimony to the importance the government now places on attracting foreign direct investment.”

According to Zinoviev, the Belarus Investment Agency is modeled on ISPAT, the famous Investment Support and Promotion Agency of Turkey, likewise directly subordinated to the Turkish prime minister.

And if the offices are still modest, it is compensated for by a hectic itinerary through Europe and the former Soviet Union establishing contacts and putting the Belarus investment case.

Opening gambit

For many years Belarus and foreign investments entertained a mutual aversion. However, as of last year, all this has changed. In connection with Russia demanding a gradual shift to European gas prices, and also stopping duty-free oil exports to Belarus refineries, the risk of Belarus running a current account deficit suddenly emerged.

And in addition, rocketing domestic growth was outgrowing domestic, as well as new technologies and managerial capacities, to move on to the next level.

Zinoviev emphasizes the latter. “It is foreign technologies we need, and above all foreign managerial technologies. Too many of our directors still cling to the old ways.”

Zinoviev denies Belarus had ever been actively anti-FDI.

“Everyone knows we had a course aimed at primarily harnessing our internal resources, but there was never any different treatment for foreign investors than for domestic investors. And there isn’t now.”

The only really preferential treatment for foreign investors, he says, is a guarantee that existing regulations will continue to apply for five years to the investors.

FDI growing

It is undeniable that the volume of foreign investment is growing rapidly, albeit from a very low base.

FDI totaled $1.23bn in the first six months of 2008, approximately the same amount as for all 2007. FDI increased from 1.8bn dollars in 2005 to almost 4bn in 2006 and to 5.4bn in 2007, with 7bn dollars expected for this year. However, this sum is only 3.5% of fixed capital investment.

Russia accounts for 33.2% of all foreign investment, Switzerland for 20.2 %, the UK for 14.2% and Austria for 10.7%.

Zinoviev reels off happily what should make Belarus attractive for foreign investors.

Firstly, he says, Belarus combines rapid economic growth, averaging over 8% in recent years, with a high level of political stability and significantly lower corruption than in Ukraine or Russia. So investors can count on both profitability and sustainability of investment.

Secondly, Belarus geographical position at the watershed between the Black and the Baltic Seas and between Russian and Western Europe, and its cluster of road and railway connections, make it a strategic location for investors.

Thirdly, Belarus, which had one of the highest living standards in the USSR, with considerable investment in electronic and light industry made in the 1980s, has a plethora of technical universities and research institutes.

It is Zinoviev’s job to match up investment opportunities in Belarus with potental investors abroad, and to this effect a good deal of the time he is traveling.

The Belarus Investment Agency is tasked with turnkey provision of investment projects, from drawing up investment proposals and finding an investor to facilitating all bureaucratic and infrastructural measures in Belarus on behalf of the investor.

Zinoviev and his colleagues say their work was recently made a whole lot easier by the publication of the World Bank’s ‘Ease of Doing Business’ survey.

Belarus officials had been actively collaborating with World Bank staff to implement measures to boost Belarus’ lowly ranking. Those efforts paid off – with Belarus leaping from place 110 in the world ranking to place 85, leapfrogging Russia and Ukraine, the fourth highest climber of the year.

One point that World Bank officials says Belarus still has to work on is tax legislation.

“It is by far the most complicated I have ever seen, with 42 taxes meaning that huge administrative efforts are needed for compliance,” agrees Helmut Duhs, CEO of Telekom Austria-owned Velcom, Belarus’ second largest mobile operator told bne. “And it’s not just the number of taxes: taken together, Belarus has the highest tax rates in region,” he added.

However Zinoviev points out that the tax burden is being decreased from year to year, and many ‘taxes’ are in fact merely local dues. “It’s not much different from what you find anywhere else,” he argues.

The ‘Ease of Doing Business Ranking’ World Bank ranking serves Belarus as a target – with the goal being to enter the top 25 in the within the next three years. And the president’s office has set government officials targets for attracting FDI.

Opposition figures decry President Aleksandr Lukashenko’s swerve towards foreign investment as mere opportunism and unlikely to last. Zinoviev, however, points out that all the main normative acts improving the investment climate come direct from the president’s office.

“These are not government resolutions or local administrative acts,” says Zinoviev. “They are presidential decrees. So they won’t change. All the main decisions to open up for foreign investors have been presidential decisions, signed by the president. This is simply the strategic course he has chosen.”

INTERVIEW: Veles Capital banks on veksel revival

Graham Stack for business newe europe (www.businessneweurope.eu)

In the demonetized 1990s in Russia, bills of exchange, or veksel, played the role of a surrogate currency. Ten years on, amid another financial crisis and liquidity crunch, veksel could be in for a revival.

Veles Capital CEO and co-owner Aleksei Gnedovsky vividly recalls the August 1998 financial meltdown. “It was apocalyptic. It was really frightening back then: Moscow was a mean city, and there were people being shot left, right and centre. And when everything collapsed, most of our clients came and said: ‘Give us our money back’,” he relates. “We paid what we could, and were left with nothing. We could simply have shut up shop. But instead we kept going, cut salaries and workforce, took on consulting work. And within 6 months, things started to pick up again.”

This time round, in 2008, the crisis in Russia has been less “Tarantino-esque.” But for second-tier investment banks doing a lot of proprietary trading like Veles, the stock market collapse of September-October 2008 has been devastating. “But we’re going to keep on working this time as well,” assures Gnedovsky

Of course, as well as a sickening crunch, the financial crisis, like its predecessor in 1998, has created opportunities for the alert and brave. And a survivor like Gnedovsky – whose office bristles with samurai swords and hunting weapons – prefers to talk of these. “In 1998, after the collapse, we switched our focus to supporting M&A deals. And we’re doing the same now.”

Like most second-tier investment banks, Veles Capital focuses on mid-cap companies for business. The current crisis has sparked a wave of M&A in the mid-cap segment that is deprived of access to state funds flowing to larger structures. Veles Capital has responded swiftly by launching a new department supporting M&A deals in the mid-cap development and land development segment – one of the sectors most shaken up by the crisis, and with huge potential for consolidation. “At the present moment, we have a solid portfolio of closed deals and we’re going to continue expanding in this segment,” says Gnedovsky.

Excel at veksel

Veles Capital’s other iron in the fire is its longstanding leading position on Russia’s bills of exchange, or veksel, market.

In the crisis-stricken nasty 1990s, explains Gnedovsky, veksel were a crucial source of liquidity, a sort of surrogate currency in an economy plagued by non-payments. “In the 1990s, when there was a lack of liquidity, veksel were in wide use not as a financial instrument, but as means of settlement,” says Gnedovsky. “Even large companies often used them to settle up. These large companies like Lukoil and Gazprom then exited the market when liquidity stopped being an issue. But now we could be seeing a return to the situation in the 1990s, when veksel were the basic source of liquidity on the open market.”

Gnedovsky argues that veksel are more crisis-resistant than bonds. “This is entirely logical, since veksel are shorter and more understandable, both of which are attractive to investors in current conditions. Moreover, in the case of an issuer’s default, bonds become illiquid, whereas veksel continue to be a means of settling payments, although at a considerable discount.”

Veles Capital is well positioned to benefit from a reemergence of veksel. Its leading position on the veksel market “just developed historically,” says Gnedovsky. Being a paper form, veksel operators must have complex logistics operations to ferry the papers to and fro across all Russia, verify them with issuers, and store them. Because it is a market specific to Russia, it is not a core competence of the global banks operating in Russia or their Russian competitors. The market is instead dominated by second-tier local, owner-managed operations such as Veles Capital and Region.

According to Cbonds.ru, the volume of veksel issued in 2007 grew 18% on the year to reach RUB30.5bn (€883m). This means the veksel market comprises 30-40% of Russia’s debt market. Veles Capital’s annual turnover on the veksel market grew from €14bn in 2005 to €35bn in 2007, making them the market leader by turnover.

Last year’s veksel revival was caused by the first phase of the credit crunch dampening the bond market and a broad swathe of companies turning to veksel for ruble financing. Construction and aviation companies with large cashflow needs were among the largest issuers. The sudden collapse in global markets after Lehman Brothers went bust in September also hit the veksel market hard, but Gnedovsky says the veksel market has gained relative to the bond market.

The attraction of veksel, explains Gnedovsky, lies in their flexibility. Veksel maturity starts at one to three months, with the maximum of one year, compared with a minimum three to four years maturity for bonds. Veksel are also a less volatile and more liquid instrument, and, in connection with their paper form, there is very little regulation of the market. “Veksel survive and thrive in the most difficult circumstances,” says Gnedovsky.

America’s Skewed Foreign Policy Priorities

Graham Stack for Russia Profile

With Cocaine Under Its Nose, America Has Georgia on Its Mind

America’s obsession with “containing Russia” is endangering the United States’ own security, by the country’s turning a blind eye, among other things, to Mexico’s escalating narco-cartel crisis. Within hours of Barack Obama’s world-moving acceptance speech, the news broke that  two Mexican security chiefs had been killed in a plane crash most regard as murder. But in the U.S. electoral race, neither candidate raised the issue of the Mexican crisis.

Among the victims of the plane crash in Mexico City were Juan Camilo Mouriño, the 36-year-old close friend and ally of President Felipe Calderón, and Mexico’s interior minister as of January this year. Calderón had charged Mouriño with heading the fight against Mexico’s insidious drug cartels immediately following his election in 2006. José Luis Santiago Vasconcelos, a presidential advisor on security issues, was also among the thirteen officials killed in a crash  almost everyone regards as organised by  drug cartels.

The crash, coming hours after Obama’s triumph, exposed a major lacuna in U.S. election foreign policy debates, which failed to mention the Mexican crisis. Instead, besides inevitably mulling over the disastrous situation in the Middle East and Afghanistan, the debates focused on “containing Russia.”

Discussion of Russian “aggression” in Georgia thus eclipsed the mention of a major law and order crisis in the United States’ direct neighbor, its second largest trading partner and the largest source of immigrants. It eclipsed mention of the cocaine trade that is behind the violence, and for which the United States is both the major source of demand, and the major supplier of weaponry. All this despite the fact that President George W. Bush, as a former governor of Texas, is well acquainted with Mexico and despite the fact that U.S. Latino voters are a major pro-Obama constituency. And despite the fact that the 43rd U.S. president refuses to deny past use of cocaine, while the 44th president openly admits to having used the drug.

Since Mexico’s President Calderon took office in mid-2006 and declared war on the cartels supplying the $15 billion U.S. market, there have been nearly 5,000 officially registered deaths from drug-related violence. Twenty thousand soldiers have been deployed to contain the violence.

According to Bruce M. Bagley, a professor of international studies at the University of Miami and a leading international expert on the drug cartels, “violence in Mexico is used against other criminal gangs, against government security forces, and, increasingly, against innocent civilian by-standers in the form of indiscriminate narco-terrorism, designed to intimidate both civilians and government authorities.”

Nor is an end to the violence in sight. Following this year’s 50 percent escalation, according to Sam Logan, an independent investigator for the Swiss-based International Relations and Security network, “violence in Mexico will continue to escalate” in the next two years.

Logan refers to a recent UN study which found that up to 60 percent of Mexico’s cities are controlled by organized crime, “with Mexico ranking 6th in the world for organized crime, after Afghanistan, Iraq, Pakistan, Nigeria and Equatorial Guinea.”

November 5’s deaths thus seem to confirm what Guillermo Valdés, head of Cisen, Mexico’s secret service, told the Financial Times in July: “Drug traffickers have become our principal threat because they are trying to take over the power of the state.” According to Logan, “As organized crime gains increasing control over the country, the possible formation of a mega-cartel could precipitate the slow, steady failure of the government.”

The narco-violence thus threatens to undermine the much-hailed democratic breakthrough of 2000, when in fair elections Vicente Fox became the first president in post-revolutionary Mexican history not from the ruling Institutional Revolutionary Party, (PRI).

But U.S. foreign policy, for all its pro-democracy rhetoric, looks the other way in the case of Mexico. “Yes, narco-violence poses a threat to democracy, it attacks government institutions, erodes their legitimacy and effectiveness and undermines citizen’s beliefs in government authority and efficacy,” said Bagley. “It also leads to widespread corruption in key state institutions like the police, military, judiciary and government officials at all levels of Mexico’s federal system.”

On the local level, the source of much of Mexico’s democratic vibrancy, the cartels are also smothering freedoms. According to a local democracy researcher Trevor Stack of the University of Aberdeen, “Narco-cartels are impacting more and more on local politics even in small localities, rural towns and villages. People are whispering now ‘x or y’ is connected with the cartels, and this was not the case before. There is fear in the air.”

Besides the danger to democracy in Mexico undermining the United States’ pro-democracy foreign policy, Bagley sees a very direct threefold threat to U.S. national security. “Spillover of Mexican violence into U.S. territory, already underway, growing instability of governing institutions in Mexico and growing potential for corruption to spread in Mexico’s armed forces could render the country almost ungovernable,” he said.

Mexican narco-terrorism reached the United States in 2008, according to Bagley. In August, the bodies of five Mexicans were found in Alabama. They had been tortured before their throats were slashed. And, incredibly, in Phoenix, Arizona, Mexican traffickers dressed in police SWAT uniforms attacked the home of a renegade drug dealer with high caliber weapons and killed him. Most U.S. narco-violence still takes place within cartel structures, but it is only a matter of time before it spills onto the streets.

Despite the direct threat to U.S. security arising from the narco-cartels, the Bush administration has paid little attention to the escalating crisis. “At a U.S. national security level, Mexico ranks very low. The violence has been on the rise since the middle of former president Fox’s administration, but only a couple weeks ago did Bush send Condoleezza Rice down to have a chat,” said Logan.

Rice’s visit marked this year’s U.S.-Mexican “Merida Initiative,” signed into U.S. law in June. The Merida Initiative is a U.S. aid package, providing $400 million of anti-narcotics assistance to Mexico in the form of helicopters, training and surveillance equipment, among other things.

Four hundred million dollars might sound like an impressive figure, until compared with the estimated $4 billion the United States has poured into Georgia since 2004 – a country with two percent of Mexico’s population, located on a different continent. Meanwhile, according to Bagley, “Most Mexicans continue to blame the United States” for the crisis. The Merida Initiative has at least symbolic importance, as “a sign of U.S. acceptance of co-responsibility.”

But, judging by the U.S. presidential campaign, U.S. foreign policy is not likely to pay closer attention to Mexico and to its security crisis anytime soon. This glaring evidence of skewed U.S. foreign policy priorities is all too reminiscent of the 2000 election campaign – and the complete failure to anticipate the devastating September 11 terrorist attacks just one year later.

In the George Bush-Al Gore debates of 2000, just as in the Barack Obama-John McCain ones in 2008, foreign policy discussion waxed lyrical about containing Russia – with Serbia and Kosovo in 2000 taking the place of this year’s Georgia and Ossetia.

Bizarre as it may seem in hindsight, such was the concern with Russia in the 2000 presidential debates that neither candidate once mentioned Al Qaida, Osama bin Laden, Afghanistan or international terrorism.

Belgazprombank: A bank for Belarus’ budding private sector

Graham Stack for business new europe
Interview with Sergei Shaban, deputy chairman of Belgazprombank

Q: How did it come about that Belgazprombank – whose two main shareholders are Russian state-owned giants Gazprombank (48.1%) and Gazprom (48.1%) – has its main focus on private small and midsize enterprises?

A: The Bank was founded in 1990 under another name and bought by Gazprom in 1997. But in those seven years, we had decided on this strategy of targeting small and medium enterprises. When Gazprom acquired us, it set Belgazprombank the task of handling gas payments beween Belarus and Russia. But we made sure we retained the SME business line. In two years, we had unraveled the gas payments, and settled the indebtedness of the Belarusian structures to Gazprom, and were finished with the main task. Then we focused again on our work with SMEs”

Q: So what does your loan book look like?

A: 99% of our credits go to private business. We have a 10-25% market share of SMEs in Belarus, and two thirds of the market for microcredits from $1000-10,000, where we have a partnership with the European Bank for Reconstruction and Development (EBRD). And in retail, 30% of the car loan market, which is 52% of our retail loans.

We credit businesses across all sectors. Import operations for retail, however, are declining in significance. Our client basis has outgrown that stage, which makes us very happy. Only 23% of our loan portfolio goes to trade now, with 18% going to construction and real estate, and 14% to manufacturing. 42% goes to private individuals. We are proud to have credited construction of the first modern logistic centres in Belarus, and the Vitebsk Condensed Gas Plant.

Q: Is the SME segment not very restricted in Belarus, where government policy has traditionally focused on state-owned large industry?

It is true that small and medium business is still only a niche in Belarus, but, thanks to the new investment climate created by the government, we expect it to grow very rapidly.

We’re very happy about government reforms, especially the state programme for support of small and medium sized towns with less than 50,000. They have created a whole series of special conditions ranging from tax rebates to lifting price controls. Food producers have a big future here.

But we’re also proud to have financed larger projects such as Belarus’ first state of the art logistics centre and the Vitebsk Plant for Condensed Gas.

Q: How does it help to have such powerful backers as Gazprombank and Gazprom?

A: It of course makes a fundamental difference, especially in times of financial crisis. Gazprombank and Gazprom took the decision in April this year to increase shareholders’ equity from $45m to $195m over two years. After disbursal of the first tranche, shareholders’ equity has risen to $120m, making Belgazprombank third largest in the country in terms of shareholder equity. As a result of this expansion, Belgazprombank can now issue credits of up to $30m.

Q: Is there demand for such credits?

A: No, there’s no demand for $30m credits. Not yet anyway. The previous maximum credit we could give was $10m, so our customer base is oriented towards that size of crediting – around $5-7m. Now we have three times the potential, we still have to create a new client base to match the new possibilities.

Of course, such clients will not be from import operations, but from construction and production – such as financing the Vitebsk Plant for Condensed Gas. And there are a lot of large real estate projects.

Q: How will privatization affect your client base?

A: The largest Belarus companies are going to stay under state control for the foreseeable future. But midsize companies will more and more shift to private hands. And this creates chances for us.

By the way, the start of the privatization drive was marked by Gazprom’s purchase of Belarusian pipeline operator Belgaztrans, another of our shareholders. When this deal was completed, and nothing terrible happened, the state realized it had nothing to fear from privatization”

Q: Does Russia use the gas price issue to persuade Belarus to open its economy to investors?

A: Yes of course, it is definitely a lever of influence. I believe Russia has understood that it is more effective to use economic levers than political ones. If Russia raises prices gradually, giving Belarus the chance to adapt economically while becoming more open to Russian investment, then it is profitable for both sides.