Transcript [Presentation Title/Subject]

International Banking. A Unique Opportunity for Russia
Mark T. Robinson
President, Citibank ZAO, Russia
10 April 2008
Graduate School of Management
St. Petersburg
Russia’s Development of a World-Class Financial Services Sector
International banking is contributing to the modernization of the financial
services sector, which is necessary for the Russian economy to
develop…
…Can Russia develop a world-class financial services sector and play a
leadership role in the global financial markets?
It is helpful to measure how Russia stacks-up against the 4 key elements
necessary for a global financial center.
1
Four Key Elements Drive the Success of a Financial Center
Financial markets
- which are the beating heart of a center and need to be liquid
and broad
Companies and individuals
- which as investors and issuers supply the fuel for the markets
Financial institutions
- which maintain the relationship between investors & issuers
and markets
Local environment
- which provides the right infrastructure, governance and support for
the center
2
Financial markets
Companies and individuals
Financial institutions
Local environment
Financial Markets are Key To Capturing Russia’s Economic Potential
WORLD GDP
2007
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Country/Region
United States
Japan
China
Germany
United Kingdom
France
Italy
Spain
Canada
Brazil
Russia
India
South Korea
Australia
2020 E
$MMM
Rank
13,843
4,384
3,316
3,297
2,751
2,560
2,140
1,448
1,411
1,287
1,231
1,131
972
896
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Country/Region
United States
China
Japan
India
Germany
United Kingdom
Russia
France
Italy
Brazil
South Korea
Canada
Spain
Mexico
$MMM
27,066
23,941
7,190
6,510
4,638
4,306
3,994
3,593
2,710
2,494
2,369
2,347
2,119
1,652
Source: EIU
3
Russian Financial Markets are Growing Fast
One of the youngest emerging financial markets is already a major player
FX trading volume on MICEX, daily average
5
4.3
2.4
1.7
2
1.0
0.5
1
400
300
50
72
93
98
114
480
204
28
27
2004
2005
2006
2007
2008*
-50
Percent Increase since Jan 2002
2000 2001 2002 2003 2004 2005 2006 2007
Number of issuances
Source: C-bonds, Citi estimates
Equity Market Performance
• Average daily FX trading volumes on MICEX
grew by 46% in 2007 and are expected to reach
$4.3bn in 2008
1000
900
800
700
• Total FX trading volume on MICEX was $856bn
in 2007
600
500
400
300
200
100
0
Dec 03
-100
Volume of issuances (RUB, bn)
* 1 Jan 2008 – 28 Mar 2008
Source: Reuters, Citi calculations
100
0
83
0
2003
150
50
181
55
250
200
470
255
200
100
0
Jan 02
155
500
RUB bn
3
255
600
3.5
4
US$ bn
Rouble Bonds issued by Russian companies
• Rouble bond market grew on average at 38%
per annum during the last 3 years
Dec 04
RTS Index
Dec 05
S&P 500
Shanghai
Dec 06
Dec 07
• RTS Index grew 9 times from 262 points in
2002 to around 2,060 points currently.
Bombay SENSEX
Brazil BOVESPA
4
The Russian Stock Exchanges are now Top 20
Capitalisation of Russian stock market increased by 6 times in less than 4 years.
The MICEX Group joined the top 20 global exchanges by daily trading volume for equities and bonds
Top 20 Stock Exchanges
Russian RTS & MICEX moved from Top 30 in 2004…
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
…
24
25
26
Stock Exchange
Market capitalisation* ($bn)
NYSE
Tokyo
Nasdaq
London SE
Euronext
Osaka SE
Deutsche Börse
TSX Group
BME Spanish Exchanges
Hong Kong Exchanges
Swiss Exchange
Borsa Italiana
Australian SE
OMX
JSE
Taiwan SE Corp.
Korea Exchange
Bombay SE
National Stock Exchange India
Sao Paulo SE
…
"Russian Trading System" SE
Mexican Exchange
MICEX SE
…
12,708
3,558
3,533
2,865
2,441
2,287
1,195
1,178
941
861
826
790
776
729
443
441
389
386
363
330
181
172
153
Source: World Federation of Exchanges, www.stocks.investfunds.ru
Data as of end of 2004.
Top 20 Stock Exchanges
…to Top 20 in 2008
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Stock Exchange
Market capitalisation* ($bn)
NYSE
Tokyo SE
Euronext
Nasdaq
London SE
Shanghai SE
Hong Kong Exchanges
TSX Group
Deutsche Börse
BME Spanish Exchanges
Bombay
National Stock Exchange India
Sao Paulo SE
Swiss Exchange
Australian SE
"Russian Trading System" SE
OMX
MICEX SE
Borsa Italiana
Korea Exchange
14,611
4,552
3,728
3,703
3,474
3,135
2,209
2,032
1,858
1,618
1,473
1,346
1,283
1,206
1,159
1,150
1,118
1,026
959
957
Source: World Federation of Exchanges, www.stocks.investfunds.ru
Data as of 31 Jan 2008.
* Domestic capitalisation - the total number of issued shares of domestic companies and also that of foreign companies not listed elsewhere, multiplied by
their respective prices at a given time.
The market infrastructure will need to continue modernizing to meet increased volume and complexity
5
Financial markets
Companies and individuals
Financial institutions
Local environment
Russia’s New Multinationals Need Capital to Grow
Top 5 Russian companies are in Top 200 globally by Market cap
Rank Company
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Gazprom
Rosneft
Lukoil
Sberbank
Norilsk Nickel
Unified Energy Systems
Surgutneftegaz
Gazpromneft
TNK BP
Novatek
VTB
Novolipetsk Steel
Severstal
Uralkali
Mechel
Hydra OGK
MMK
Tatneft
AFK Sistema
PIK Group
Slavneft
Poluys Gold
Silvinit
Mosenergo
Rostelecom
LSR Group
Baltika
Bank of Moscow
Sibirsky Cement
Raspadskaya
Source: Bloomberg, 28 Mar 2008
Sector
Oil & Gas
Oil & Gas
Oil & Gas
Banks
Metals & Mining
Utilities
Oil & Gas
Oil & Gas
Oil & Gas
Oil & Gas
Banks
Metals & Mining
Metals & Mining
Fertilizers
Metals & Mining
Utilities
Metals & Mining
Oil & Gas
Telecoms
Real Estate
Oil & Gas
Metals & Mining
Fertilizers
Utilities
Telecoms
Construction
Consumer
Banks
Construction
Metals & Mining
Curr Market Global Rank by
Cap ($bn)
Market Cap
301.8
93.3
69.7
67.1
53.6
43.0
32.0
27.3
26.6
24.8
24.5
24.3
23.6
16.6
14.8
14.4
14.0
14.0
13.7
12.6
10.5
9.8
9.5
8.7
8.5
7.1
7.0
6.3
0.0
5.8
5.2
6
72
103
108
157
-
6
Russian Companies Are Already Large International Issuers
EQUITY
DEBT
Russian Companies’ IPO proceeds
(US$Bn)
Russian Corporate Debt
(US$Bn)
CAGR = 58%
32
$222bn
30.5
106
16
5.1
8
0.2
0.01
0.6
2002
2003
2004
2005
32
31
14
0
2006
2007
2008E
85
$56bn
19.7
17.7
US$ bn
US$ bn
24
10
2004
2007
Source: www.cbr.ru,
www.cbonds.ru
Corporate
Loans Syndicated loans
Source: Citi Investment Research
Russia is 3rd Largest IPO Market
in 2007
Bonds
Source: Thomson Financial, Central Bank of Russia
Russia is Top 20 largest Int’l bond issuers
in 2007
7
Russia Has an Emerging Investor Class
The emerging Russian middle class of 30 million is set to become one of the largest in the
world…Russian consumers tend to be early adapters of new technology with discerning tastes…
• Russia ranked the second most attractive retail market in the world after India (1)
• Personal consumption rate more than doubled since 1999
• Russia’s cities are growing, its 11 “Millionniki” cities have populations over 1 million
• 12th-largest retail market in the world, to become 9th-largest by 2010
• Strong growth in personal wealth will continue to fuel consumer spending, which will benefit a wide range
of industries including real estate, telecoms, food producers, retailers and transport
Individual investors activity,
2006 - 2007
Internet Connections Per 1000 pop.
+4%
6.7
6.4
6
+13%
4
1.7
1.5
2
2006
2007
Users
Millions
8
250
200
150
100
50
0
200
205
120
45
Russia
Brazil
India
China
Members of pension funds
Members of investment funds
Source: Russian Federal Financial Markets Service
(1) According to 2007 A.T. Kearney Global Retail Development Index
Source: Miniwatts Marketing Group.
8
Financial markets
Companies and individuals
Financial institutions
Local environment
Large Opportunity for Further Development of the Banking Sector
Possessing a large-scale modern domestic financial services sector facilitates capital allocation between
investors and companies.
Banking Assets as % of GDP, 2007
300%
 The Russian banking sector remains
under-penetrated by global standards.
266%
218%
200%
 Banking assets stood at 68% of GDP
at the end of 2007, much lower than in
other BRIC countries.
162%
111%
111%
89%
100%
78%
68%
0%
Germany
UK
China
India
Brazil
Turkey
Poland
Russia
Source: EIU
 Corporate loans stood at about 30% of
GDP at the end of 2007, while retail
loans, including mortgages, were only
11% of GDP.
 The Russian banking sector exhibits
consistently strong loan growth rates
over the last several years in the range
of 35-55%.
Consumer Loans as % of GDP, 2007
50%
48%
40%
30%
23%
21%
17%
14%
10%
10%
0%
South Africa
2
22%
20%
Hungary
Poland
Czech
Republic
Romania
Turkey
Russia
Source: Citi Investment Research
9
Increasing Consolidation in the Banking Sector
Top 25 Russian banks by assets, 1st of January 2008
Rank by
Assets
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
-
Banks
Sberbank
VTB
Gazprombank
Bank of Moscow
Rosselkhozbank
Alfa-bank
Raiffeisenbank Austria
Rosbank
Unicredit
Uralsib
VTB 24
Promsvyazbank
MDM
VTB North-West
Russian Standard
URSA
Nomos
Petrokommerts
Ak Bars
Svyaz-bank
Citi
Zenit
Absolyut Bank
Saint Petersburg
Transkreditbank
TOP-25 Totals
Source: CBR. All financials are based on RAS
Assets Q42007, $ MM
Assets Change
(vs. Q4-2006)
Revenue FY
2007, $MM
Change vs
FY 2006
201,468
52%
21,641
40%
61,606
107%
1,937
33%
32,622
16%
2,799
73%
20,753
50%
984
53%
19,686
114%
740
111%
19,675
47%
1,106
79%
17,008
97%
1,076
159%
15,657
47%
1,139
19%
14,676
58%
632
53%
14,447
30%
1,047
16%
13,183
108%
608
107%
11,697
72%
695
65%
11,310
44%
1,002
44%
8,749
57%
576
30%
7,551
N/A
2,295
N/A
7,416
85%
563
62%
7,409
99%
586
71%
6,940
39%
331
6%
6,444
63%
298
53%
6,401
191%
458
361%
5,998
22%
579
55%
5,562
56%
333
51%
5,389
109%
189
74%
5,163
N/A
259
N/A
4,879
77%
354
61%
531,690
59%
42,228
47%
 Number of banks decreased
by half over 1997-2007
decade, market consolidation
trend continues.
 Top 5 banks are state owned,
controlling 40%+ of sector’s
total assets
 Top 25 banks own 70% of
total banking assets
 International players quite
visible- 5 of Top 25 banks
controlled by foreign
investors
 In 2007 the industry
continued fast expansion –
growth over 2006 amounted
to 55% for banking assets
and 45% for Revenues
(RAS)
10
Financial markets
Companies and individuals
Financial institutions
Local environment
The Local Environment is a Key Factor for Business Development
To be truly successful, a financial center needs to attend to non-financial factors and ensure they are optimised.
Factors of competitiveness ranked (2007)
1. Business
Environment
2. People Factors
 Favourable and understanding
regulation
 Fair and just business environment
 Corporate tax regime
 Government responsiveness
 Deep pool of educated personnel
 Flexibility of labour market
 Culture and language
3. Infrastructure
 Availability of business
infrastructure
 Clustering effect of suppliers of
professional services
 Operational costs
4. Market Access
 Access to customers
 Access to international financial
markets
 Volume and value of financial
markets
Global cities ranked by Global Financial centers Index
Rank
1
City
London
2
New York
3
Hong Kong
4
5
Singapore
Zurich
6
Frankfurt
7
Geneva
8
Chicago
9
Tokyo
10
Sydney
…
?
…
Moscow
Key Success Areas
 Strong on people, market
access, regulation,
environment and culture
 Strengths are people and
market access
 Geographic position and
competitive in the area of
regulation
 Strong banking regulation
 Niche center for private
banking and wealth
management
 Strong market access,
business environment and
infrastructure
 Strong business environment,
and a niche center for private
banking and asset
management
 High on people and remains a
powerful regional and
specialist center
 Good liquidity, infrastructure
and market access
 Strong national center with
good regulation
…
Source: The City of London Corporation, March 2008.
11
Case Study: London & Paris – A Tale of Two Cities – Lessons For Russia
Though cities similar in history and core size, London has transformed into a truly global financial center,
while Paris has fallen further behind and is now a regional center behind even Frankfurt. There are varied
reasons for this.

Government policy: Since the 18th century, the City of London
has played a major role in public life – in more recent times,
where the financial sector has been a key growth sector in the
economy, both Conservative and Labour governments have
worked to ensure its competitiveness (e.g. tax, Big Bang, 1986;
independence of Bank of England, 1997). This is in marked
contrast to the more controlled French economy.

Regulation: The Financial Services Agency (the “FSA”) became
a unified regulator early, its renowned “light touch” has been
aided by the flow of private sector personnel into the
organisation. French regulators have been more prescriptive.

Critical mass: All key financial sub-sectors have scale in London
– “if I want to do a deal, I can always get it done here”

Innovation: The City of London possesses a reputation for being
able to structure innovative transactions – indeed, Paris faces a
shortage of financial structurers who prefer to based themselves
in London.

Lifestyle: London’s huge arts and social cultures acquired a new
lease of life in the 1990s. It turned the city into a desired
destination for foreign workers (from bankers to barmen);
Paris’s cultural life is thought to have stagnated by contrast.

Culture: London has historic ties to many growth economies
(e.g. Middle East, Asia), and a highly cosmopolitan population.
12
SWOT Analysis: Critical Success Factors – More Lessons For Russia
We undertook a comprehensive study of major financial centers around the world and discovered some
generic critical success factors.
Tangible
External Factors
Financial Sector Factors
 Well developed, domestic economy easily
accessible to international companies
 Appropriate professional & independent regulation
 Predictable legal system, easily enforced
 A pro-business government who understand the
development opportunities in finance
 Competitive corporate and personal tax regime
 Efficient public infrastructure, such as transport,
schools and healthcare
 A well developed, stable – and privately owned –
banking sector
 Transparent and liquid liberalised financial markets
providing broad issuer and investor opportunities
both domestically and overseas
 Critical mass in asset management with strong
supply of investment funds
 Strong availability of professional support services
Intangible
 A business environment marked by fairness and
adherence to the legal framework
 General acceptance of a free-market philosophy
 Openness to foreign cultures and people – the
“cosmopolitan factor”
 Educated work-force with English language skills
 Attractiveness of city life to expatriates
 Ability to work in international environment
 Competitive mindset disposed towards product and
service innovation
 A financially skilled work-force
 Light touch professional & independent regulation
 Reputation and brand-name of financial sector
players
13
Moscow as a Global Financial center – Facts for Consideration
Strengths
Opportunities
 Deep pool of well educated personnel
 Growing prosperity and consumerism
 Flexibility of labour market
 Potential hub for growing CIS economies
 Access to international sized customers
 Under developed financial sector attracting
international players
 Access to international financial markets
 Individual investments will grow fast due to wealth
and educational levels
 Size of financial markets large and increasing
 Favourable geographical location, time-zone
MOSCOW
Weaknesses
Threats
 Challenging business environment, unpredictable legal
system
 Shortage of business infrastructure and professional support
services
 Uncertain and unfavourable corporate tax regime
(1)
 High operating costs
 Complicated visa regime for international personnel
 Economic base not diversified
 Infrastructure development does not keep up with
business growth
 Large portion of economy is government-controlled
 Underdeveloped small business sector burdened by
regulations
 Market and banking supervision does not keep up
with requirements
 Rapidly increasing wages due to rising competition
for talent
(1) Total corporate tax rate is 51.4% vs. 35.7% in London. Source: The City of London Corporation, March 2008..
14
Conclusions
Over the last 5-10 years Russia’s financial sector
evolved very fast both in terms of size and
sophistication…
…yet, lot of changes are required to have a truly worldclass financial services sector…
…that is necessary for Russia to compete in a rapidly
developing and globalizing world.
15
Key Global Financial Centers – by 2020?...
London
Amsterdam
Frankfurt
Chicago
Toronto
New York
Bermuda
Moscow
Zurich
Luxembourg
Paris
Dublin
Tokyo
Dubai
Shanghai
Hong Kong
Singapore
Key
First tier centers
Regional centers
Specialist centers
Growing centers
Jo’burg
Sydney
FUTURE IS IN YOUR HANDS
16