Friday 8 August 2014

Interview: Per Fischer on the Russia Conundrum

What the events in Russia mean for trade and finance



A key question today for bankers and the trade finance community is the impact of the sanctions on Russia and the unfolding economic dynamics from the political developments in the region. In a free-wheeling interview Teresa Casal and Vivek Y. Kelkar speak to Per Fischer, Head of Financial Institutions covering CEE, CIS, Russia, Turkey, Baltics and Mongolia at Commerzbank about what the developments might mean.


Q: With the recent events in Russia and Ukraine what are p
eople are looking for in Central and Eastern Europe and Russia? What is happening with liquidity? Is there a retrenchment of lines, a change in the price perception of the risk, etc?

Per:
Let’s look at the region overall. The Russian economy had deteriorated already at the end of last year. The overall growth in the Russian economy was only about 1.3%. This is much too low for an economy that is developing or emerging. Russia also saw capital flight towards the end of 2013 and we’ve also seen a downgrading by at least one rating agency. Many Russian corporates have had already some problems in tapping the capital markets for refinancing. All this was before the sanctions were imposed in April 2014.

So we’ve seen that many banks had already either raised their pricing for Russian risk or in some cases had even decreased their lines. This trend has only been accelerated by the sanctions. The preparedness of banks to take Russian risk decreased even before the sanctions and it is much lower today.

The other countries in Central and Eastern Europe have had a continuing growth path and have so far not been affected by the sanctions on Russia. Poland is doing quite well; the Czech Republic is doing quite well, as indeed are Hungary and some of the Balkans. Most of these countries have their trade with Western Europe and in particular with Germany and benefit from the robust German economic performance.

Further east, however, we might see many countries that will be negatively impacted by the Russian issue both politically and economically. Of course, those that produce oil and gas are much less dependent on Russia and will continue with moderate growth. But everything is very volatile. If harsher sanctions are decided, economies in western and eastern Europe would suffer.

Q: How severe is the problem for the Russian corporates? How is the Russian banking sector poised?

Per:
All the big Russian corporates, including Gazprom and others from the commodities sector, were very active in placing bonds abroad, in issuing syndicated loans and tapping the capital markets. But from April-May 2014 these markets have been more or less closed for Russian corporates and many of them have lost access to the capital markets. Western banks in many cases are not prepared to issue bonds or refinance bonds or loans. This is putting pressure on the Russian corporate sector.

The question, therefore, is will the Russian banks be able to raise funds on the capital markets now? I doubt it. With the sanctions coming in even the Russian banking sector is going to be affected, especially for refinancing purposes.


Q: How do you think the smaller Russian banks will fare?

Per:
Overall, of course, they will also be hit by the deteriorating Russian economic situation. This affects the whole economy. Russia has about 900 banks. The Russian Central Bank has been trying to consolidate the Russian banking sector by minimising the number of banks.

If the sanctions hit mostly the state owned banking sector then non state owned banks will maybe benefit gradually. There is, however, no doubt that that the whole Russian banking system is suffering already by the deteriorating economic situation and the sanctions. Small and very small banks with no international business might be less or later affected.

Most significantly, the EBRD is considering cancelling their Trade Financing Programme to Russian banks. This TFP programme is very important to a lot of smaller banks for their international business. If the EBRD programme is cancelled the cost may be high.

Q: The EBRD cancellation is a very serious issue. Would other commercial banks follow suit? Or is there an opportunity for commercial banks to enter some of that business? Would the sanctions affect that opportunity?

Per:
It is indeed very serious because others might follow suit given the Russian political situation. This trade facilitation programme gives smaller banks access to trade financing, especially in cases where there is little or no credit history and the risk is perceived as very high. The onus of volume that was channeled through the TFP programme will now fall on the commercial banks and they might not be in a position to bear it.

Each bank will certainly make its own analysis. Those that are focused and strong on trade finance may not immediately withdraw their short-term lines, sanctions permitting. The general appetite today for Russian risk is not bullish. It will be difficult to make an opportunistic move and now to enter business that others have exited.

Q: How is the Russian central bank reacting?

Per:
The Central Bank has clearly shown that it has two priorities. One, it is committed to consolidating the banking system. So rules have been eased to enable bank mergers or raise equity.

Two, the Central Bank is focused on making the banking system Basle III compliant. It has taken several positive steps. For instance, subordinated loans that were granted to state-owned banks during the crisis days of 2008-09 have now been changed or swapped into first rank capital. That has helped some of the state owned banks raise their capital adequacy ratio. This will help Russian corporate clients turn to these state-owned banks to get the refinancing that they may lose from the capital markets. The overall demand for credit from the Russian corporates to the state owned banks has already significantly increased.

Q: How much pressure will the additional demand for credit put on the state-owned banks. Is their capital adequacy ratio healthy enough to take that pressure?

Per:
We have to remember that more Russian banks may be hit by the sanctions. The Russian Central Bank will have to formulate a clear strategy to deal with the situation. By raising the capital adequacy ratios, the Central Bank has already to some extent taken mitigating steps.

The other important point is that the Russian central bank is working extensively to strengthen and improve compliance mechanisms, setting up structures, etc. to improve the Russian banking system.

Q: How do you see Russia going forward?

Per:
Don’t forget that Russia has the fourth biggest currency reserves in the world so they can weather some economic problems as they did in 2008-09. I expect that the Russians will come up with some counter-measures. But everything will depend upon what sanctions might come in the future and the degree of the sanctions.

Q: Beyond Russia, what will be the impact on other countries in the region especially Ukraine?

Per:
Ukraine plays a much smaller role in the region’s trade. But Ukraine for a number of years has faced a difficult banking situation; the capital position of many Ukrainian banks has deteriorated because of the devaluation of the Grivna. The Ukrainian economy has had almost no growth during the last 2 years and for 2014 a decrease of 5% is forecast. Many foreign banks have exited the Ukrainian market. And since the Russia-Ukraine tensions started, the Russian banks, which are quite important to the Ukrainian banking system, have stopped to credit the Ukrainian economy. The negotiations between Gazprom and Ukraine about gas prices have failed.

Given this scenario, the IMF programme to stabilise the Ukrainian economy assumes great importance. This is an $18 billion programme which includes a re-capitalisation of the Ukrainian banking system. The Ukrainian Central Bank also has a big role to play to stabilise internal structures, set policies and ensure liquidity.

The IMF programme is both short term and long term and will work at different levels. But we have to remember a lot will depend upon the political situation.

Q: How do you see Kazakhstan?

Per:
Kazakhstan has economically almost everything. Fundamentally the country is in a good situation with its tight budgets, reserves, etc. But even Kazakhstan had to devalue its currency, the Tenge.

Yet, a lot more needs to be done to strengthen the banking system. There is a restructuring of several banks going on and we hope that this ongoing merger of KKB and BTA will help to stabilize the country’s banking system. The good parts of Bank TuranAlem (BTA) are now being merged with Kazkommertsbank (KKB), the bad parts of both banks will be merged into BTA.

But what is interesting is the strengthening of the corporate sector. For the first-time in post-Soviet history a government, i.e. the Kazakhstan government, will allocate substantial money to a team of specialists from International finance institutes (IFI) led by EBRD which will then choose projects in different fields like energy, transport and mining among others.

The Kazakhstan state will act as co-financier, will provide grants and technical assistance and will of course oversee the projects.

In my opinion this model or experiment could be a show case if it is producing positive results also for other countries in emerging markets.

Q: As a banker in trade finance where do you see the most opportunity? Is there still a case by case basis to invest in Russia?

Per:
Turkey has done much better than expected. There is still of course a substantial current account deficit but it is narrowing which is good. The Turkish economy is in quite good shape. It’s growing quite stably with ca. 3 % as forecast for 2014.

Investing in Russia is actually more risky than ever before – but the country still offers big opportunities for FDI and trade – now it is a political question whether investors become bullish again for Russia.

In Central Europe I would certainly prefer Poland and Czech Republic and I would also add Azerbaijan and Kazakhstan. Latvia and Lithuania are also doing better than expected. Soon we will see all three Baltic states belonging to the Euro zone. Who would have thought about this 10-15 years ago?

Q: Given their trade levels with Russia how much could the countries on the Russian rim be affected?

Per:
The Russian Customs Union countries will of course be impacted but those that have opened trade, and can raise trade levels, for instance with China may not be quite as severely affected. It depends on the degree of inter-trade dependency. Some are more dependent other less. For instance, Azerbaijan is less dependent since they can shift a part of their exports, especially agricultural commodities to other countries. Azerbaijan has also managed to export part of their commodities to the West. Kazakhstan does have a significant trade with Russia but it also has flexibility. And it has significantly increased trade relationships with China.

Thank you, Per.

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