Russian banks to adopt stricter reserve rules than West

In an announcement earlier today, the head of Russia's Central Bank, Elvira Nabiullina, stated that Russia's banks will be forced to comply with the new Basel III requirements starting on January 1, 2014. Basel III is the newest in a series of financial controls designed to strengthen the balance sheets of banks, in order to hopefully prevent any serious or systemic financial crises arising from a lack of an adequate reserve ratio. (For more detail on the Basel III rules themselves, see this downloadable report from KPMG from 2011, and for more recent news visit this section of the WSJ website).

While this many in America feel the new reserve requirements of Basel III are too stringent, and will harm not the U.S. economy, in particular the financial and housing sectors, in Russia the Basel III rules will actually be more severe than in the West. Ms. Nabiullina announced that the new Central Bank requirements for common equity will be 5 percent, capital assets at 5.5 percent (with an increase to 6 percent beginning January 1, 2015), and aggregate capital at 10 percent, according to an article from Russia Beyond the Headlines (RBTH). RBTH noted that "these requirements will be stricter than the Western ones, which provide for the adequacy of common equity at the level of 4.5 percent."

Basel III to be implemented in Russia - and then some. Image http://goldenageofgaia.com/wp-content/uploads/2013/06/basel-III.jpg

One analyst at VTB Bank, one of the largest banks in Russia, doesn't think that the Russian banking system will have much trouble meeting the tougher rules--mainly because the financial system in Russia is very different, in general, than in Europe or the United States,and credit rules are already tighter. Asset structure in Russian banks is still relatively basic and static, and there is a less favorable attitude towards highly leveraged bank balance sheets. Thus, the medicine of Basel III will be somewhat easier for Russian banks to swallow than their Western counterparts. In combination with the monetary policy of the Russian (and Ukrainian) central bank, and the general aversion to inflation, banks' more rigid credit policies are seen by some as limiting the potential growth of the Russian economy. At the moment, though, the priority throughout Europe, the US, and Russia seems to be stability rather than growth or profits.

However, it is important to note that the new effective date of January 1, 2014 for the Basel III rules is later than the original date, set in October of 2013. Svetlana Pavlova, assistant vice president and analyst at Moody’s, thinks that shifting the dates of Basel III’s implementation in Russia bodes ill for the country's financial sector. Also, the lowering of the capital assets level from the original 7.5% to the new 5.5%, while still strict, is seen by some as a matter of concern.

On the whole, the announcement about the Basel III “In general, capitalization is higher in our banks than in European ones. And this is correct: Considering the higher volatility of the Russian economy and tempo of growth of the banking sector, our banks need to be stronger to match the level of risk,” said Pavlova.

Basel III: rebuilding the capital of the global financial system. Image http://www.eamcap.com/wp-content/uploads/2010/09/Basel-III-capital.jpg

For more on this story, read the full article from RBTH here: http://rbth.ru/business/2013/07/22/banks_to_adopt_basel_iii_standards_in_2014_28277.html

A Day in the Life of a Russian Oligarch

If you follow business news about Russia, Ukraine, or post-Communist Eastern Europe in general, you've no doubt read a lot about oligarchs. But who are they, really, and what do they do besides amass wealth using government support and/or corruption?

Business Insider has picked up and shared an interesting interview with Sergei Veremeenko, one of Russia's most famous and successful oligarchs (net worth estimated at $1.4bln, and he's also married to Miss World 2006). Like the majority of oligarchs, Veremeenko made most of his millions from...you guessed it, natural resources (read: oil) and finance. He was born in the oil-rich Ufa area and thus had a natural career path into energy, but then diversified in 1992 when he partnered with fellow billionaire (and fellow Sergei) Sergei Pugachev to found the International Industrial Bank.

Check out the 8+ minute-long video interview by VICE at this link: http://www.forbes.com/fdc/welcome_mjx.shtml

Where is a BMW like Bitcoin?...In Argentina

While this isn't exactly recent news, in May Bloomberg ran an article about the economic effects of the rampant devaluation of the Argentinian peso, and how Argentinians are buying more and more luxury cars such as BMWs, Mini-Coopers, and Land Rovers as stores of value and hedges against inflation. Definitely gives a different perspective to car ownership!

    BMW                       =                    BITCOIN?

I was fascinated when I read this for the first time a few weeks ago, so I thought I'd share it here on my blog:

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BMWs Gaining Bitcoin-Like Appeal as CPI Hedge: Argentina Credit

By Camila Russo and Eliana Raszewski - May 14, 2013

Argentines are buying more BMWs, Jaguars and other luxury cars as a store of value as inflation decimates their deposits and pummels the nation’s bonds.

Purchases of cars from Germany’s Bayerische Motoren Werke AG (BMW) and Jaguar Land Rover Automotive Plc, owned by India’s Tata Motors Ltd. (TTMT), jumped the most in April among brands sold in Argentina. The sales were part of a 30 percent surge in car sales from a year earlier that was the biggest increase in 20 months, according to the Argentine Car Producers Association. While used-car prices rose in line with inflation last year, or about 25 percent, peso bonds tied to consumer prices fell 13 percent. The drop was the biggest in emerging markets.

Car sales in Argentina increased by the most in almost two years last month as a ban on buying dollars made Argentines turn to vehicles to protect savings against the fastest inflation in the Western Hemisphere after Venezuela. Luxury models are becoming more attractive because they are imported at the official dollar rate, said Gonzalo Dalmasso, vehicle industry analyst at Buenos Aires research company Abeceb.com. Argentines with savings in dollars are able to purchase cars at half the cost by trading in the unofficial currency market.

“I’m seeing a lot of people buying high-end cars for the first time, trading Minis for middle of the market models,” Ignacio Monteserin, a salesman at BMW’s Mini Cooper dealership in Buenos Aires’s Libertador Avenue, said. “It’s become very convenient to own luxury cars in general because of the big gap in the exchange rates and you get to have a quality good that will preserve the value of your money with time.”

Surging Sales

Car sales in Argentina surged 30 percent in April from a year earlier to 88,323 units, the fastest increase since August 2011 and the second-highest on record, according to a car association known as Adefa.

Argentines have bought 1,588 BMWs so far this year, more than double the amount they purchased in the same period last year, according to Argentina’s Car Dealers Association, or Acara. Jaguar and Land Rover sales increased by 200 percent and 278 percent respectively, the data show.

Mini Cooper sales rose 54 percent in January to April from a year earlier. A Mini Coupe costs 194,000 pesos, or $37,072 at the official rate of 5.2380 per dollar. It costs $19,400 at the parallel rate at 10 pesos per dollar, cutting the price in half for Argentines who have savings in dollars and go to the black market to sell them for pesos. The same model in the U.S. costs $22,150.

Bitcoin, Gold

Argentines are buying cars, gold and even virtual currency such as bitcoin as they look for ways to preserve their savings as the peso is forecast to fall 17 percent this year.

The peso in the illegal currency market, known as the blue market locally, weakened to a record 10.45 pesos per dollar last week. This means Argentines with peso salaries who buy dollars in the black market to protect against a weakening of the local currency and 25 percent inflation lose about half of their money.

Inflation-linked bonds don’t protect against rising prices because they’re tied to the official price index, which at 10.6 percent is less than half the estimates of independent economists. They have dropped 3.4 percent this year after losing 13 percent in 2012.

Argentina’s official price index has been questioned by economists since 2007, when then-President Nestor Kirchner changed staff at the National Statistics Institute. The International Monetary Fund in February censured the country for not improving its inflation measurement.

Bond Losses

Argentina’s dollar-denominated bonds aren’t a better alternative as a U.S. legal dispute on repayment of the nation’s defaulted debt caused average yields to soar to 13.92 percent, almost three times the average in emerging markets, according to JPMorgan Chase & Co.

The notes have plunged 10 percent his year.

The rate banks pay for 30-day deposits of more than 1 million pesos was 15.38 percent on May 10.

“The government takes away their salaries and deposits through inflation and negative interest rates,” said Jorge Remes Lenicov, a former Economy Minister from January 2002 to April 2002, when the country abandoned a decade-long peso peg to the dollar.

The extra yield investors demand to hold Argentine government dollar bonds instead of U.S. Treasuries narrowed 20 basis points to 1,171 basis points at 1:27 p.m. in Buenos Airs, according to JPMorgan’s EMBI Global index.

Default Swaps

The cost to insure Argentine debt against default within the next five years through credit default swaps rose 107 basis points to 2,770 basis points, according to data compiled by CMA Ltd.

While inflation and a gap in the exchange rates is fueling sales, the same reasons are also deterring investment in the car industry, said Cristiano Rattazzi, President of Fiat Auto Argentina SA.

“There are no certainties,” Rattazzi, who is also head of the car makers association, said in a phone interview in Buenos Aires. “It’s a very unstable environment. What if they devalue? What if there are multiple exchange rates? All of these questions and high inflation are putting a big break on investment.”

The Argentine government in March 2011 ordered car importers to match their imports with exports or investment of equal value to boost the trade surplus.

‘Enjoy It’

The decree prompted BMW to export rice and Porsche Automobil Holding SE to begin exporting olives and Malbec red wine. Shizuoka Subaru Motor Co. agreed to export chicken feed, Hyundai Motor Co. began sending soy flour to Vietnam and Mitsubishi Motors Corp. (7211) started shipping peanuts.

As Argentines continue to lose purchasing power, cars and other durable goods are temporary solutions to the region’s fastest inflation after Venezuela, said Lenicov.

“There’s nowhere to put your money in,” Lenicov said. “The reasoning is you lose money almost anywhere because of inflation, so if you buy a car, at least you get to enjoy it.”

To contact the reporters on this story: Camila Russo in Buenos Aires at crusso15@bloomberg.net; Eliana Raszewski in Buenos Aires at eraszewski@bloomberg.net

To contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net

http://www.bloomberg.com/news/print/2013-05-14/bmws-gaining-bitcoin-like-appeal-as-cpi-hedge-argentina-credit.html

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Energy in Ukraine: Exxon to spend $735mln on new Black Sea wells

According to RIA Novosti and Bloomberg, Texas-based oil company ExxonMobil (largest in the world by revenue) will spend $735mln to drill two new deep-water oil wells in the Black Sea, off the coast of southern Ukraine. $400mln of that money will go to cover the cost of the drilling, while $335mln has been ear-marked for the Ukrainian government as a "signing bonus," according to a minister in Ukraine's energy ministry.

Photo credit RIA Novosti.

Smells like a big of political palm-greasing to me. I'm not sure whether to applaud at such a seemingly open admission of corruption, or to shake my head and wag my finger.

Either way, according to RIA Novosti, "The Black Sea is relatively undeveloped by the global oil industry. It has fewer than 100 oil wells, whereas the North Sea has 7,000, according to Bloomberg. A recently opened gas field off the coast of Romania, now yielding 630 million cubic feet a day (17.8 million cubic meters) has fueled interest in the area."

Here's more information about that "recently opened gas field" off Romania, also in the Black Sea and not far from Ukraine: http://www.energy365.com/devenergypedia/romania-exxonmobil-and-petrom-grant-romgaz-10-option-on-offshore-midia-block-in-black-sea/. ExxonMobil recently granted the Romanian state-owned firm Romgaz a 10% share in operations in the offshore oil and gas blocks there.

Current ExxonMobil operations in Black Sea off coast of Romania. Photo credit: http://www.energy365.com/devenergypedia/wp-content/uploads/2013/02/Romania-ExxonMobil-and-Petrom-grant-Romgaz-10-per-cent-option-on-offshore-Midia-Block-in-Black-Sea.jpg

The agreement in Ukraine, meanwhile, is due to be finalized later this year. It should be an interesting development to watch, in an increasingly interesting and active Ukrainian energy market. Not only are oil exploration and production increasing, but shale gas could soon play a huge role as well; and of course all of this has very serious political undertones and effects. Exxon, and all American energy companies and investors, should keep a weather eye on the political horizon in Ukraine.

Russia invests in California tech, while American hotels invest in Russia

It's been a busy week for me here in Kiev, and between a stomach illness, my usual Russian classes and internship work, and preparing to take the Test of Russian as a Foreign Language (TORFL) exam earlier today, I unfortunately haven't had much time to blog. From now on, I'm hoping to start posting regularly every Monday, Thursday, and Saturday/Sunday.

With that being said, there's been no shortage of interesting business news from Russia and Eastern Europe lately, especially with regard to foreign investment and finance. One of the stories that grabbed my attention a few days ago was this piece by RIA Novosti about the recent $12m investment of Russia's largest bank, Sberbank, in California-based tech business Sequent. The Sberbank portion of the deal was led by SBT Venture Capital, the venture cap arm of the Russian bank.

Sberbank Russia

Sberbank joined with California-based investors to lead a new round of financing for Sequent, which, according to its official website, "combines expertise in the payments industry with innovation in the mobile ecosystem to offer next-generation credential management solutions." Elaborating further about their corporate identity and mission, Sequent says their "software and services platform enables consumers to easily and securely download payment cards and other credentials to their mobile devices. Consumers use those credentials to make payments and access information and offers from mobile network operators, retailers and financial institutions."

Basically, Sequent makes credit-card processing IT systems. I'm not sure whether Sberbank is hoping to acquire some of their technology for use in their banking systems in Russia, or just sees Sequent as a good investment for the future. Regardless, while this story is already three days old, I thought it was worth posting about, since big Russian investments in American companies (especially California-based tech firms) are a little rare.

Meanwhile, money has been flowing the other direction as well, as many American hotels are pumping money into new projects in Russia. Holiday Inn Express is planning a major expansion in the country between now and 2019, and Hyatt Regency will add a second location in Moscow. Perhaps most notably, the luxury Four Seasons Hotel and Resort opened its first location in St. Petersburg this week, with plans to add a second in Moscow next year.

Four Seasons in St. Petersburg.

In general, international tourism to Russia seems to be on the rise right now, and will only increase in the near future with the upcoming Winter Olympics in Sochi, and the 2018 World Cup in Russia as well. These new projects seem to be a good play by American hotel companies, who are planning ahead for the upsurge in Western visitors.

For these and other great stories about business in Russia, check out the RIA Novosti Business page on a regular basis.

Breaking 1,000 Hits

Over the past week, Send Me the Cabbage has surpassed 1,000 pageviews! It's a minor first milestone that I had expected would take much longer to achieve, but thank you to all of my readers thus far.

Some interesting facts about my audience thus far...

The top 5 pageviews by country have been:
1) United States
2) Russia
3) Germany
4) Ukraine
5) Netherlands

While readership from the U.S. has easily dwarfed my international audience thus far, I am pretty proud of the fact that I've already had over 100 visits from Russia and over 60 from Ukraine.

Also, the top 3 most popular posts on SMTC thus far:
1) International Banking: Regulation, a Capital Idea?
2) Bookshelf: The Ascent of Money
3) Ukraine Seeks Privatization of Gas Pipelines

Not a bad start to what is still very much a personal hobby and side-project of mine, and considering I often don't have time to write an entry every day. Looking forward to even more views moving forward!

It's a Gas: Rosneft to acquire Itera; Gazprom ups 2013 European forecast

Lots of action in the Russian energy market lately, besides the recent press about the formation of the $20 billion investment fund L1 Energy by oligarchs Fridman and Khan (see my previous post about that here). The two most important developments concern Rosneft's purchase of Itera, and also Gazprom's more positive forecast for the European energy market--both of which should be cause for relection on the Russian energy market as a whole.

Rosneft Office in Moscow (photo Upstreamonline.com)

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Russian energy company Rosneft, which currently owns a majority share in Itera Oil and Gas, announced yesterday that it will acquire the 49% of Itera it does not already own for $2.9 billion. The deal will take place between Rosneft, led by CEO Igor Sechin, and Itera Holdings, Inc., a natural resources company controlled by another Igor, Igor Makarov. The move apparently has the blessing of Russian President Vladimir Putin, and will allow Rosneft to drastically expand its natural gas production abilities, which are currently only 1/10th the level of major state-owned rival Gazprom.

Putin and Igor Sechin, CEO of Rosneft (photo Maxim Shimetov)

Rosneft announced a few months ago that it intended to double natural gas production by 2020, and the acquisition of the remainder of Itera is a major step in that direction, following closely on the heels of the $55 billion deal earlier this year that saw Rosneft buy TNK-BP to become the world's largest publicly traded oil company in terms of production. Reuters has also reported that Rosneft is lobbying the Russian government for the right to export LNG; currently Gazprom has exclusive export rights.

Like many stories, I originally found out about this one via DealBook.
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Meanwhile, aforementioned Russian state-owned energy titan Gazprom revised its 2013 Europe gas export forecast upwards by 10 percent, to more than 160 billion cubic meters, and announced plans to triple its share on the LNG market to 15 percent, according to website Russia Beyond the Headlines. The gas monopoly stated that exports to Europe have been up by more than 10% on the year so far, and that by the close of 2013 Gazprom hopes to have exported more than 160 bcm (5.6 trillion cubic feet) of natural gas.

Also according to Gazprom, Turkey may soon surpass Germany to become the largest importer of Russian natural gas, since the Turkish energy market has been growing rapidly as of late. However, Turkish gas usage was down in the first few months of 2013, and thus Gazprom's forecast may be a bit too optimistic. Yet there will certainly be no shortage of supply to meet future demand, most of which Russia may be able to find in Asia.

Last year, according to The Moscow Times, "just 7 percent of Russia's gas exports were sold to Asian consumers, all in the form of liquid natural gas, or LNG, from the Sakhalin II project. But Russia's gas exports to Asia will expand dramatically if the construction of two new LNG terminals goes ahead: Gazprom's Vladivostok and Novatek's Yamal projects. Rosneft also plans to build a terminal in Sakhalin. If these three projects are realized by 2020, Russia's LNG capacity would increase from 10 million tons per year to about 45 million tons, or to an amount equal to 18 percent of global LNG exports in 2012."

LNG supply and demand are both set to dramatically increase around the globe, and Russia will face competition from a growing Australian energy sector, as well as the much-heralded LNG boom that has started in North America, especially the United States. Gazprom--and now Rosneft as well--will need to move quickly to sufficiently expand LNG production in order to not miss out on a prime energy opportunity in the near future.
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On a macro-economic level, the Rosneft-Itera deal and the slow expansion of Gazprom into natural gas and LNG could signal the start of a gradual large-scale shift in Russian energy policy towards a more broadly diversified approach that includes natural gas AND oil. With global demand for oil possibly peaking in the next few years, according to The Economist and other sources, Russia needs to move away from its traditional disproportionate emphasis on oil production and export as the foundation of the Russian energy sector, and instead focus on fully participating in the unfolding gas boom. Doing so will ensure Russia remains competitive and profitable in both the Western European energy market, where a great deal of Russian energy currently goes, and in the shifting global energy market as well. Expansion of energy exports to Asia is an absolute must to bolster long-term economic growth. Russia will likely remain overly dependent on oil and gas as the bedrock of its economic prosperity, but hopefully there will be at least some intra-sector diversification within energy moving forward.

The future of Russian energy: diversification or death? (Image from Foreign Affairs)

To visit the websites mentioned or cited in this article, follow these links:
New York Times - DealBook: http://dealbook.nytimes.com/
Russia Beyond the Headlines: http://rbth.ru/
Moscow Times: http://www.themoscowtimes.com/
Reuters: http://www.reuters.com/
Upstream Online: http://www.upstreamonline.com/

Also, here is a link to an interesting article about Russian oil that Foreign Affairs ran at the end of last year: Putin's Petroleum Problem

Feel free to leave comments or thoughts below.

Russia, China Building Gold Reserves (Special FX for Wizards)

If you haven't yet discovered fellow Blogger Christopher Cruden and his site, "SPECIAL FX FOR WIZARDS," it's worth bookmarking. The blog presents an array of financial and economic analyses on a daily basis, and is mainly focused on FOREX and related topics. Many of the arguments and stances are more Austrian and conservative in nature, taking issue with loose American and Western monetary policies.

One recent entry that caught my eye--thanks in part to the picture of Putin admiring a bar of gold--discusses the recent amassing of gold reserves by both Russia and China:

All Gold Everything. Move over Trinidad James.

"Western economic commentary on China and Russia is usually coloured by monetarist assumptions not necessarily shared in Moscow and Beijing. For this reason, Russian and Chinese fiscal and monetary policies are misunderstood in financial markets, as well as the reasons their governments buy gold.

"China has been notably relaxed about her own people acquiring gold, and the government itself appears to be absorbing all of China’s mine output. Russia is also building her official reserves from her own mine supply. The result over time has been the transfer of aboveground gold stocks towards these countries and their allies. The geo-political implications are highly important, but have been ignored by western governments.

"China and Russia see themselves as having much in common: they are coordinating security, infrastructure projects and cross-border trade through the Shanghai Cooperation Organisation. Furthermore, those at the top have personal experience of the catastrophic failings of socialism, which have not yet been experienced in Western Europe and North America. Consequently neither government subscribes to the economic and monetary concepts prevalent in the West without serious reservations.

"We saw evidence of this from Russia recently, with Putin’s appointment of his own personal economic adviser, Elvira Nabiullina, as the new head of Russia’s central bank. Ms Nabiullina is on record admiring, among others, the writings of Robert Higgs – a leading US economist of the Austrian School. She is therefore likely to take a strong line against the expansion of bank credit, which is confirmed by Russian commentators who believe she will prioritise reforms to strengthen bank balance sheets.

"She is not alone. The People’s Bank of China recently let overnight money-market rates soar to over 20%. The message is clear for those prepared to look for it: they are not going to fuel an extended credit bubble. The two countries have learned how damaging a bank-credit-fuelled business cycle can be, and are determined to restrict bank lending. Western commentators find this hard to understand because it does not conform to the way western monetary policy works.

"It seems that the leaders of both Russia and China are also painfully aware of the importance of currency stability in a way the West is not. The comparison with the West’s reckless monetary policies is stark. It follows that Russia and China are increasingly concerned about the major currencies, given both countries have substantial trade surpluses. Their exposure to this currency risk explains their keenness for gold. Furthermore, they know that if the renminbi and the rouble are to survive a western currency crisis, they must have the sound-money credibility provided by a combination of monetary restraint and gold backing. And the reason China is happy to let her citizens plough increasing amounts of their savings into gold is consistent with ensuring her people buy into sound money as well.

"While the Chinese and Russian governments are authoritarian mercantilists, there are elements of the Austrian School’s economics in their approach. The tragedy for the West and Japan is they have embarked on the opposite weak-money course that can only end in the ultimate destruction of their currencies, leaving Russia and China as the dominant economic powers."

L1 Energy: Russian Oligarchs Fridman & Khan and the Global Energy Market

Very interesting article about the return of famous Russian oligarchs Mikhail Fridman and German Khan to the global energy market, courtesy of DealBook: http://dealbook.nytimes.com/2013/06/28/oligarchs-assemble-team-for-oil-deals/?_r=0

The article ties together the recent news about the two businessmen's joint L1 Energy fund, in which they plan to invest as much as $10 billion and then leverage into $20 billion using borrowed funds. Much of the initial investment will come from the famous Alfa Group, co-founded and co-owned by Fridman, Khan, and  Alexei Kuzmechov and one of the largest privately owned ventures in Russia. Fridman and Khan have also been recruiting some of the top industry talent for their new venture, including James T. Hackett, former head of Anadarko Petroleum, and, very interestingly, John Browne, former chief of BP.

Fridman, left, and Khan, right, are assembling a massive fund for energy investing

Some readers may recall that Fridman and Khan's relationship with BP in the past has been anything but amiable. Formerly business partners of the British oil and energy giant in Russia, a conflict over the management of the Russian partnership led the Russians to demand the resignation of the British executive of TNK-BP, Robert W. Dudley. After the Russian partners moved to pressure Dudley by having his visa revoked, he left Russia and even went into hiding for a time. Then in 2011, when Dudley--as CEO of BP--concluded an Arctic oil deal with Rosneft (a rival to TNK in the Russian energy market), Fridman and Khan blocked the deal using legal action. The deal eventually went through, but not before the BP office in Moscow was raided by armed police.

In the wake of the recently troubled relationship between BP and the Russian oligarchs, the addition of Browne to the L1 Energy team adds a certain amount of credibility to the platform for Western investors, at least at face value, and is a very shrewd business move by Fridman and Khan in order to reassure doubters about the legitimacy and openness of their operations. It will be interesting to watch the growth and development of the L1 Energy group in the near future, as it moves to develop long-term controlling stakes in "exploration and production, oilfield services, infrastructure and other energy projects."

John Browne, formerly of BP

Ukrsotsbank Internship Journal: The 3-Day Work Week

This past week at my internship was much shorter than usual, with only three working days as a result of Orthodox Ascension on Monday, 24 June, and then Ukraine’s Constitution Day on Friday, 28 June. However, while the work week was 40% shorter, I was still quite busy in the PR Department with a new translation project—this time from English to Russian!

On Tuesday, upon coming into work, Маша (one of the ladies who works in my sub-department) asked me to translate the entirety of an internal PR document outlining how to use the yearly Local Sustainability Report. The report details what UniCredit/Ukrsotsbank did over the past year in order to ensure financial stability as well as environmental sustainability, both in terms of the business environment and the natural environment. However, while the basic structure and outline of the report is prepared centrally by UniCredit, country-specific details need to be filled in the PR department of each department. This allows the document to speak much more directly and closely to stakeholders and investors in each individual country in which the UniCredit Group operates, since there are often large differences between banking and finance operations between countries in Europe, especially in terms of sustainability initiatives. Thus, the bank essentially needs to have a report about how to use another report!

Translating the guidelines for the local sustainability report proved challenging almost immediately, simply because of the large number of rather cumbersome English phrases and somewhat unusual words in the document. However, a combination of my own knowledge, Google Translate, and cross-checking with my colleagues allowed me to get through the first three pages before the short week ended. I still have the bulk of the document to translate next week.

Additionally, I checked the English translation of a press release about the new internet banking services being started by Ukrsotsbank in Ukraine. I found a handful of relatively minor errors or oddly phrased expressions, but in general I found it more interesting to learn more about the development of online banking and commerce in Ukraine. Online business and financial transactions are increasing rapidly here, and it is good to see that Ukrsotsbank and UniCredit are committed to providing technologically updated client services to the people of Ukraine. I still think that the bank should develop a mobile banking app though…

Anyway, I certainly didn't mind not having to work Friday afternoon, and ended up using my free time to meet up with Yurii, the only other guy in my part of the office, for a free beach party near the Dnieper River. Unfortunately, after only about an hour it started to rain heavily, which ended up leading to quite an adventure...but that's maybe a topic for another post.

Ukrostsbank Internship Journal

Since I have to keep a weekly journal of what I do at my internship anyway, in order to receive academic credit through The School of Russian and Asian Studies (SRAS), I figured I'd just make my journal entries the regular Monday post here on SMTC for the remainder of my time in Ukraine.

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Ukrsotsbank Internship Journal
17.06.2013 – 21.06.2013

This was my second full week in the PR Department, and I felt like I finally began to settle into a regular routine. I started off the week by finishing up the English version of my PowerPoint report/presentation on the potential PR-related problems that Uksotsbank could face in the near future during its legal merger with UniCredit Bank. I had started to translate it into Russian as extra practice, but just decided to refine and simplify it in English and give it to Nastya, my manager, as soon as possible. She was very happy to receive it, and told me it was very excellent work.

My next project was to condense the bank’s long and detailed political risk report for Ukraine—which is prepared for shareholders and investors every year—into a shorter and more readable single-page document. The original idea for the project was actually mine; I had seen the new reports lying in the office and, being naturally intrigued, picked one up and began reading. While I found it very interesting, I also thought it a bit too detailed for its purpose…and if I, a history major, thought it was overwhelming, then what were other people going to think? Thus I approached my managers and asked if I could condense the political and economic information presented in the report to one page. My idea was well-received and after a couple hours I finished my “executive summary” version of the report. Hopefully it will allow investors and businessmen—Ukrainian, American, and others—to make better-informed decisions.

Next, my managers asked me to prepare, in English, short slide deck with finance definitions for kids. Ukrsotsbank/UniCredit is developing some new marketing materials aimed at making finance fun and easily comprehensible for young children, in the form of children’s books. After doing extensive research on the internet about best practices for explaining banking to children, I put together a short slide deck that defined such basic terms and concepts as currency, deposits, credits, debits, debt, etc. Not exactly an extremely challenging project, but interested nonetheless.

My final project of the week, on Friday, was to translate a press release about the recent awards Ukrsotsbank/UniCredit has received from Global Finance magazine. Unlike most of my translation work to date, this time I was translating from English to Russian. It was obviously much more difficult, and took me the better part of the afternoon to finish, but I was able to deliver what I deemed to be an accurate translation by the end of the working day. I will see what Yurii, who handles most of the press releases, has to say about it on Tuesday, since we have a long weekend this week.

In addition to the four concrete tasks outlined above, I also kept my superiors updated on external PR developments I noted. For example, I purchased the Ukrainian business magazine Власть Денег (“The Power of Money”) last weekend, and among the many reviews and ratings of various finance and credit terms, I found an article which ranked Ukrsotsbank #1 in Ukraine for long-term loans and mortgages. When I showed it to Nastya, she had not heard anything about it from the external PR team, so she was very grateful for the article as it was excellent PR material. It seems my extra efforts to learn about business in Ukraine outside of my internship and classes are paying off in unexpected ways at the office.

TEDxKyiv 2013

"Время летит" -- "time flies." The last three weeks--my first three weeks in Kiev--have flown by, which isn't surprising considering my daily schedule involves 3 hours of Russian class, 4 hours of work at my internship at Ukrsotsbank, and another 2 hours or so on the metro. And that doesn't even include a daily minimum of 2 hours spent doing my Russian homework, or trying to translate various business articles in Forbes Russia, Власть денег, and other publications, so I can learn more business-specific words.

With that being said, I obviously haven't had much time to blog lately; but I did want to share my thoughts on the recent TEDxKyiv 2013 conference, which I had the opportunity to attend last weekend in Kiev. I wrote about the conference for the website of my study abroad program, SRAS, and you can read my full article here: http://students.sras.org/tedxkyiv-conference-ideas-worth-spreading/

Going to a TED conference had long been on my bucket list, and to have the opportunity to cross that off my list relatively early in life--and in a foreign country, no less--was outstanding. I'd highly recommend the TEDxKyiv conference to anyone who visits Kiev in the summer, and has both an interest in "big ideas" and entrepreneurship, as well as at least a minimal knowledge of Russian/Ukrainian.

Kiev vs. Kyiv

Also, while I'm on the subject of names...<<Kyiv>> is the Ukrainian spelling of their capital city, and is also the version that has been officially adopted for many diplomatic and international purposes over the past few years. However, in Russian, the city is called <<Kiev>>. Since I'm technically studying Russian, not Ukrainian, and since I don't want to be using the two spelling interchangeably here on SMTC, I've decided to just stick with <<Kiev>> from here on out. Apologies to any staunch Ukrainian nationalists out there.

Ukrsotsbank & UniCredit: The Name Game

Well, after the fourth day at my internship in Kiev, I have finally sorted out the identity of my current employer, and now understand the hidden complexities behind the names of both <<Ukrsotsbank>> and it's sister corporation, <<UniCredit Bank.>>

In starting my new project about the PR and corporate identity challenges that both banks will face during their upcoming (and long-awaited) merger, I researched the history of UniCredit Group's operations in Ukraine. While this might be somewhat boring for some readers of my blog, I nonetheless wanted to post about it, if only to explain the history for my own benefit.

In 2007, the bulge-bracket Italian bank UniCredit Group (sometimes referred to as just "the Group" here) was operating in Ukraine through three different banks: UniCredit Bank (originally established in 1997 with Polish capital); the branches of HVB Bank Ukraine; and the branches of PJSC Ukrsotsbank, set up in 1990. The latter two banks were acquired by UniCredit Group within Ukraine. However, while HVB was quickly merged with UniCredit under the latter name, Ukrsotsbank--which UniCredit purchased from famous Ukrainian billionaire and oligarch Viktor Pinchuk for $2.07 billion--retained its former name, both operationally and legally. Since Ukrsotsbank had better name and brand recognition in Ukraine than HVB did, it made sense at the time.

Ukrsotsbank was one of the few banks in Eastern Europe to remain strong and profitable during the global recession--no small feat, to be sure. It was regarded as one of the strongest, if not necessarily largest, banks in Ukraine, with one of the most sound balance sheets and capital reserves. However, in 2011 UniCredit Group announced that it was rebranding Ukrsotsbank under the UniCredit Bank name, as simply the next step in the strategic integration process of UniCredit operations in Ukraine. Since then, all Ukrsotsbank branches bear the UniCredit name, thought legally the company is still PJSC Ukrsotsbank, and the shares on the Ukrainian national stock exchange trade under the Ukrsotsbank name.

Hence, the confusion over the identity of Ukrsotsbank vis-a-vis UniCredit Bank vis-a-vis UniCredit Group.

Italian parent banking group, which previously operated in Ukraine through....

 HVB Bank merged with UniCredit Bank in 2007...

leaving two bank brands...

And soon, Ukrsotsbank will merge with UniCredit Bank, leaving only the UniCredit Bank name in Ukraine 

A formal, legal merger of Ukrsotsbank and UniCredit Bank was announced at the time of the rebranding, but like all merger processes--especially in finance--it has taken longer than expected to complete. However, the merger is expected to be complete sometime in the next year, and my current project at the Corporate Identity office of Ukrsotsbank is to investigate and report out about various PR and client/investor relations issues the bank might face during the merger process.

In conducting the research for my project, I came to realize that my previous posts here on Send Me the Cabbage were inaccurate. Technically--legally speaking--I am currently interning at PJSC Ukrsotsbank, which operates under the UniCredit Bank name; and both Ukrsotsbank and UniCredit Bank are subsidiary operations of UniCredit Group.

Понятно?

To play off of an old Foxtrot comic...the key to working in corporate identity is knowing the identity of your corporation. I'm hopeful I can help guide Ukrsotsbank and UniCredit clients and shareholders through the merger process and help strengthen the market share of the UniCredit Group here in Ukraine.

Ukrsotsbank: First Impressions

My internship finally began in earnest this past Thursday, and after two days on the job I felt like posting about my first impressions and what I've learned so far. Since I have to keep a journal of my internship for my study abroad program, in order to get cultural immersion credit for my Russian minor at IU, I'll be able to keep track of my experience on a regular basis.

After spending two hours on Wednesday traveling to various UniCredit offices here in Kiev to take care of all of my paperwork and make sure I knew about the safety rules and regulations, my first impression is that Ukrainian banks are just about as bureaucratic as American banks. In fact, I was struck by not only how similar the paperwork and HR process seemed to be, but also at how much I was able to understand during the safety lecture. Fire extinguisher instructions are about the same in Ukrainian as in English.

On Thursday after class I took the metro to Olimpiskii station and walked to my office nearby. The weather was great and I was finally breaking in my new Brooks Brothers suit. I don’t think Kievans often see tall, red-headed young foreigners walking around in suits and power ties, but I wanted to make a great impression on my first day and I definitely did. I first met with Nastya (Настия), one of my immediate supervisors, and she could not have been nicer. She informed me that I actually have a choice as to which of the three PR departments I want to work in this summer, so I will probably choose External Communications department since that involves the highest-profile PR work as well as the most English. She was impressed that I had already researched the identity and history of Ukrsotsbank and knew a little bit about their more recent shareholder and client relations issues.

After meeting the rest of my colleagues at the office--all of whom also seemed very nice and very interested in their first-ever American intern-- I was given a very nice and large desk, and they tried to get me internet access but were unable to get it to work. It seems internet systems in Ukraine are not very fast, even at large banks. After arranging my desk, I was told I was free to go for the day and would actually start tomorrow (Friday), but instead I asked if there was anything at all I could do. I was already at the office and was excited and in work mode, and did not want to waste my momentum.

So I was given the UniCredit Ukraine 2012 annual report to review, and asked to do a final edit of the entire 152-page report. One of my other supervisors said that it had already been reviewed for final publication to shareholders and the public, but it was very important that someone with an excellent grasp of English proofread it one last time. It’s a good thing I did, too, because I found a few relatively significant errors and countless grammatical problems and misspellings. On Friday I was asked to do more editing and review work on one of my supervisor's presentation slidedecks as well as for the English-language version of the  UniCredit Ukraine website.

So far, I have a favorable impression of both Ukrsotsbank/UniCredit and the general working environment in Kiev, which is more open and friendly than I assumed would be the case. Also almost everyone knows at least a little English and seems more than willing to help me improve my Russian. Настия also told me, after I explained my specific interest in investment banking, that I should get in touch with Ukrsotsbank’s IB division here in Kiev (which I didn’t even know existed). She said I had been placed with the PR department mainly because of my former professional experience with PR work, but that I might be able to transfer to the investment banking group. I was honestly very surprised to find such openness and flexibility at an Eastern European bank; I had assumed that the atmosphere would be different, but as with many of my other preconceived notions about Ukraine, I have been proved wrong upon actually living here!

Cabbage at a Kiev Bank

Found the perfect photo to add to my blog today while walking around Kiev: a picture of a bank advertisement from Universal Bank that offers credit for as little as 1.90 UAH per day. It's "cabbage for the cost of cabbage," as the advertisement declares:

I'm spending this weekend trying to experience as much of Kiev as possible and improve my spoken Russian before starting at my internship on Monday or Tuesday. The city is an enigmatic and captivating mix of young and old, ancient and new, Slavic and Cossack and European. From what I can tell, the broader culture reflects the business culture too. I am looking forward to learning about it firsthand by representing UniCredit Ukraine to its shareholders, Ukrainians, and the international business community.

Foreign Finance Friday: Kiev Update - UniCredit Ukraine

After a long day here in Kiev full of testing and paperwork and orientation, I have more updates about my internship placement and class schedule for the next 10 weeks.

As I mentioned in my last post, I will be working with UniCredit Bank Ukraine, also known as PJSC Ukrsotsbank (PJS Укрсоцьанк in Ukrainian, PJSC Укрсоцьанк in Russian). The naming of banks and companies in general can be very confusing in Ukraine and Russia (see my previous post about Russian stock companies), so from now on I'll simply refer to the bank as UniCredit Ukraine.

Ukrsotsbank, now part of UniCredit.

UniCredit Ukraine is one of the largest and strongest universal banks in the country, and is part of the larger Italian bank UniCredit. The bank was first started in Ukraine in 1990, and since its inception has been one of the leading financial institutions in Eastern Europe. In early 2008, UniCredit Group acquired roughly 94% of the total share capital and former Ukrsotsbank joined the UniCredit Group of banks, which covers 22 countries in Europe alone, and a total of 49 different nations.

UniCredit Ukraine is one of the few banks in Ukraine that seems to have weathered the 2008-2009 global recession fairly well, probably due in large part to its acquisition by UniCredit, and also thanks to a large amount of government support. While the Ukrainian and American banking systems may seem radically different, the concept of "bailouts" or at the very least overt government support of the banking system is very similar. Boris Tymonkin, head of UniCredit Ukraine, recently stated that Ukraine's banking system "came out of recession with honor," as total external debt has been reduced by almost a half and continues to decline; and the fact that "there were no foreign payment defaults" was significant. However, in 2011 UniCredit had to write down almost all of the goodwill on UniCredit Ukraine, part of the reason why the bank posted significant losses that year.

UniCredit Ukraine (photo Kyiv Post)

Some key financial indices for UniCredit Ukraine, as of 01/01/13 (Q4 2012) with USD approximations:

Loan Portfolio: 23,688 billion UAH ($2,906 billion USD)

Assets - 38,829 bln UAH ($4,763 bln)

Funds of legal entities deposited on thrift and current accounts - 6,725 bln UAH ($823 bln)

Funds of individuals -11,644 bln UAH ($1,428 bln)

Capital - 7,657 billion UAH ($939 bln)

Net profit of the bank - 1,873 million UAH ($230 bln)

I will specifically be working in the Corporate Identity and Communication Department. It's not investment banking (UniCredit doesn't really have any IB offices in Ukraine), so I probably won't learn many hardcore financial valuation or accounting skills, but I was planning on studying those during the summer anyway. I'm very excited though--I think it will be a great opportunity to "officially" start my career in finance, giving me the opportunity to work for a very large and well-known bank, improve my understanding of international finance and business in Ukraine, and sharpen my PR and critical thinking skills--all while improving my professional Russian proficiency. Should make for one awesome summer.

In Kyiv!

The last week has been hectic to say the least, but I am happy to report that I am finally in Kyiv, Ukraine. After three flights in 19 hours I am finally settled in with my host family, who are very nice and helpful. I also found out earlier today that I have finally been placed in an internship and will be spending the summer working for UniCredit Ukraine (Urksotsbank), a major international Italian bank that is currently one of the strongest and most profitable banks in Ukraine. I should find out more about the internship and my specific placement after my orientation tomorrow morning, so more details to come soon!

Bookshelf: Medici Money and Renaissance Currency Exchange

Medici Money: Banking, Metaphysics, and Art in Fifteenth-Century Florence by Tim Parks is the third financial history book I've read so far this summer, and easily the most historical thus far. A relatively short book at around 250 pages of text, Medici Money chronicles the rise and fall of the famous Medici family and their elaborate banking system in 15th century Florence.

Image from Google Image search.

As Parks explains in the opening pages, "This book is a brief reflection on the Medici of the fifteenth century--their bank; their politics; their marriages, slaves, and mistresses; the conspiracies they survived; the houses they built and the artists they patronized. The attempt throughout will be to suggest how much their story has to tell us about the way we experience the relationship between high culture and credit cards today, how far it informs our continuing suspicions with regard to international finance and its dealings with religion and politics." A sweeping goal, to be sure, but an important one as well--few historians have endeavored to connect the Medici and their banking with modern-day finance.

The book begins with a well-written look at the historical environment of the Medici, focusing on how the metaphysics and morality--or lack thereof--of the Catholic Renaissance era affected the exchange of money. After spending some time investigating the important topic of usury, Parks moves into a broad examination of Renaissance finance, noting how the central financial and religious importance of Rome created a steep economic imbalance in Renaissance Europe. Much of the flow of expensive goods was from the south (Italy) to the north (England, Germany, Belgium), but the return flow of currency back to Italy was often slower and more difficult. The result was a massive financial imbalance within Europe in favor of Italy, while at the same time huge trading deficits in the countries of northern Europe, who were often deep in debt to the local branches of Italian banks.

Despite this complex and inefficient environment, Italian bankers such as the Medici still found plenty of ways to make a profit, mainly from international currency exchange. While the Medici were merchants as well as bankers, and made some money by speculating on and selling various commodities and consumer goods, they amassed most of their wealth through currency exchange. A merchant would come to a Medici bank and asks for 1,000 florins, offering in return an exchange deal in London, where he will be exchanging florins into pounds sterling. In return for the loan, the merchant would write out a cambiale, or bill of exchange, instructing the Medici be paid 1,000 florins at 40 pence to the florin, as is the custom. While the "how" of the repayment has been clearly defined, this last phrase was very important, since it defined the "when," or the length of validity of the bill of exchange. "As is the custom" meant the standard length of the journey from Florence to London, which at the time was 90 days or three months.

Since currency values and exchange rates fluctuated daily then just as they do now, yet modern communication and financial data systems hadn't yet been invented, one may wonder how on earth the Medici were able to consistently profit from international currency exchange. The answer is that, at the time, currencies were always worth more in their country of issues, due to the complex and inefficient exchange market of the time. As a result, the florin was always worth 4 pence more in Florence than it was in London. So returning to the aforementioned transaction: our merchant would take his 1,000 florins and convert them to 40,000 pence in London, three months after departing Florence. He then sought out a local client or fellow merchant who wanted to pay him back in florins--perhaps someone speculating on English wool who thinks it will be worth more in Italy. Thus a second bill of exchange would be written, stating a payment of 40,000 pence at a rate of 36 pence to the florin. If all went well and the bill made it back to Italy in time, the Medici bank then collected 40,000/36, or 1,111 florins, resulting in a profit of 111 florins and an annualized interest rate of 22%. Not a bad rate of return.

Italian Renaissance bill of exchange, 1398. From http://arttattler.com/archivemoneyandbeauty.html.

By making hundreds of these deals, the Medici were able to augment their income from commercial merchant activity and ecclesiastical incomes from church bishops and cardinals. Thus, they built a diversified and global financial base upon which to expand their banking system and, over time, their power and influence within Florence. The downfall of the Medici banking system, and thus their family, came when they began ignoring the fundamentals of finance to spend enormous sums on ensuring political prestige. This led to bankruptcy, liquidity crises, the breakdown of cooperation between their various European bank branches, and, ultimately, the closing of the entire bank and the expulsion of the Medici from Florence. Yet not before the Medici family had been able to create a glorious, if rather brief, "golden age" that forever linked Florence with the pinnacle of Renaissance art, architecture, and culture. And it was all of it--from the sculptures of Donatello to the political theory of Machiavelli--paid for with Medici money. After all, as Cosimo de Medici once said, "The poor man is never able to do good works."

Foreign Finance Fridays (New Column)

In addition to my semi-regular "Bookshelf" columns discussing and reviewing various books I've read, I am also going to start a "Foreign Finance Friday" column that will investigate a particular aspect of international finance. While much of this blog already deals with cross-border business, I thought I'd establish a regular Friday feature on the topic.

In preparation for my upcoming study abroad and internship program in Kiev, Ukraine, I checked out the "New English-Russian Banking and Economic Dictionary" back in April, which merited its own post. The reference work contains over 15,000 terms related to banking and finance, of which I chose what I deemed to be the most relevant and important 120 entries to study. Many are cognates (meaning they look/sound just like their English equivalent); some are not.

So for the first Foreign Finance Friday, I thought I'd share one of my favorite Russian finance terms:

акционерный капитал корпорации

This three-word phrase is the Russian expression for the single English word, "stock." Translated, the phrase literally means "joint-stock capital of a corporation." In Russia, "joint-stock" refers to all non-partnership business entities that issue shares, whether publicly or privately traded. Founders of a joint-stock company sign a written agreement for its formation, which establishes the size of authorized capital, types and categories of shares, cost of shares, etc.

Image from http://www.bridgewest.eu/public/redesign20/images/box-flags/original/Russia.png

Joint-stock companies must also register with the Russian Federal Securities Market Commission as either a publicly traded or open joint-stock company (Russian: Открытое акционерное общество - abbreviated OAO), or a privately traded or closed joint-stock company (Russian: Закрытое акционерное общество - abbreviated ZAO), with a maximum of 50 shareholders. As is often the case in finance, understanding the meaning behind seemingly odd acronyms is important, regardless of what country you might be in.

More info on Russian business entities at this link.

Bookshelf: What I'm Reading Links

While I eventually want to create a true "Links" sidebar section for this blog, for now I thought I'd just create a "Bookshelf" list with links to the various books I'm currently reading. Right now, my list consists of:

- Money and Power: How Goldman Sachs Came to Rule the World, by William D. Cohan

- House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, also by William D. Cohan

- Medici Money: Banking, Metaphysics, and Art in Fifteenth-Century Florence, by Tim Parks

- Ukraine: Other Places Guide, by Ashley Hardaway

- Dirty Russian, by Erin Coyne and Igor Fisun

You can find links to all of these books in the "Bookshelf" sidebar. And as an inveterate reader, I am always in search of new books to add to my never-ending list, so you have any suggestions please leave a comment!

Goldman Sachs to Overhaul Russian Business Image

Russia, despite all of the improvements that have taken place since the collapse of communism, is not exactly considered an outstanding place to do business. Growing socio-political unrest, excessive government involvement in the markets, and an economic over-reliance on commodities--particularly oil--have caused international investors to be wary. On a broader scale, slowing growth and disappointing performances by all of the BRICS countries have led to deflated expectations for emerging markets in general. All of these financial and economic trends have been combined with an overwhelmingly negative perception of Russian international relations, especially Putin's continued support for Bashar-al-Assad's regime in the Syrian civil war, and the recent fiasco surrounding alleged CIA spy Ryan Fogle, who was outed by the Russian FSB (Федеральная служба безопасности Российской Федерации, successor to the KGB).

Image from Bloomberg.

Yet many Russians have continually insisted that perceptions of the Russian business environment do not reflect reality. German Gref, current head of Sberbank, Russia's largest bank, responded to a recent international business ranking that placed Russia behind Albania by stating, “We have to improve our image because we are really better than what people think of us.” (Video and full text of his comments available here in Russian; I have yet to translate all of it myself).

Enter Wall Street--more specifically, Goldman Sachs, arguably the leading American investment bank. Earlier this spring, it was announced that Goldman Sachs has been tasked with improving Russia's international business image. According to The Wild East, Goldman has been hired by a special working group formed by the Ministry for Economic Development, and composed of Sberbank, VTB, and, most importantly, the Russia Direct Investment Fund--headed by Kyrill Dmitriev, a former Goldman Sachs man.

The re-entry of Goldman Sachs into the Russian market is an important international move for the firm, considering they left Russia twice during the 1990s and only returned in 2006. While many Western firms have left Russia indefinitely due to the uncompetitive and government-dominated banking environment there, Goldman has been able to grow profits at its Moscow operation and remain an active player in the deal-making and advisory scene. Goldman Sachs assisted Russian giant VTB with its 2011 secondary debt placement of $5.2 billion, and has advised on the listing for Russia's national MICEX exchange.

One of the biggest challenges Goldman will face moving forward is how to help Russia in its efforts to improve its current credit rating of BBB, the second-lowest investment grade. Goldman certainly has the firepower and clout to make an impact, but it will have to contend not only with the specific challenges facing Russia's national economy, but also with the broader economic currents outlined above. Goldman has also already been attacked by some activist groups such as Human Rights Foundation, which has argued the bank shouldn't work for Russia due to the country's alleged human rights abuses. However, given Goldman's signature resilience and continued rebound following the 2007-2008 American financial crisis--and the current dearth of Western bulge-bracket finance in Russia--expanding its international involvement and deepening its presence in the "Wild East" of Russia might prove a very profitable move.

Image from Fox Business.

International Banking: Regulation, A Capital Idea?

As soon as I saw the cover of last week's print edition of The Economist, I knew it was going to be an especially interesting read (moreso than usual). The special focus of the May 11th issue is on the current state of international banking--in particular the future of investment banking in the wake of the 2007-2008 collapse and the ongoing recovery.

While the "Leaders" piece on the resurgence of American investment banks vis-a-vis their European cousins/competitors is fascinating, as is this "Twilight of the Gods" piece on the leaner future of investment banking, it is the article on new banking regulations and their impact on the dynamics of international finance that has most intrigued me.

Entitled "Regulation: The bite is worse than the bark," the article starts by summarizing the atmosphere surrounding new and proposed banking regulations, using a quote from the current chairman of UBS, Axel Weber. In an interview, Mr. Weber stated, "The mood among investment banks that I talk to...is such that they expect that the regulation is over, they expect that they will be able to keep growing their balance-sheets, that they will be growing bigger than ever. The mood among the regulators I talk with is more like 'we haven’t even started.'"

While Swiss banks such as UBS and Credit Suisse have been hit particularly hard by newer, stricter regulations, Mr. Weber is uniquely qualified to comment upon the sentiment on both sides of the regulatory divide. And his comments are particularly troubling for international banks operating in America--not just the Swiss, but British and Germany firms as well.

But first, an overview of the three primary options available to regulators:
1) Higher capital and liquidity requirements;
2) Restrictions on bank activities such as trading for their own profit;
3) Structural changes such as forcing banks to “ring-fence” their retail banks from their trading businesses or to reorganise global businesses into national subsidiaries.

All banks are set to be subject to at least one of the three forms of corrective medicine, but the bigger and more complex banks likely face at least two if not all three forms of regulations in the near future.
I'll save the technicalities and complexities of Basel 3 and the Volcker Rule for a future blog post; but suffice it to say that while the new rules will likely create a more stable financial system, they are also having unintended consequences for international investment banks.

While none of the above regulations pose a deep, mortal threat to the future of America's biggest investment banking firms, The Economist reports that two further sets of rules being discussed "could dash the hopes of Europe’s remaining big investment-banking contenders, Barclays and Deutsche Bank, of being able to go on challenging the dominance of America’s biggest banks."

The first is "a proposal to separate investment banking from retail banking," which in Britain could mean the construction of a Chinese Wall of sorts between the retail-banking arm and the investment-banking division of a bank. Continental Europe, meanwhile, "is debating variations of a plan by Erkki Liikanen, the governor of Finland’s central bank, to separate banks’ trading operations." Both potential rules would mean an increase in funding and operation costs for Europe's banks, and would deter big global banks from operating in Britain or Europe.

America, meanwhile "has made it clear it wants to be in the game," and it has been American banks that have led the aggressive resurgence of Wall Street and fueled overall banking sector recovery. But in Washington, DC, a second set of regulations is on the drawing board that could deal a severe blow to the American operations of European-based global banks, by forcing big foreign firms to establish local holding companies for their American subsidiary operations. This would most obviously and immediately impact Deutsche Bank and Barclays, two of the leading European banks which have both avoided the new capital requirements by moving assets and deregistering their American holding companies.

As The Economist explains, the proposed regulations on foreign banks make perfect sense to American regulators: "if a big European bank collapses on their doorstep, they do not want to have to ask its home country for money." However, an executive at Morgan Stanley has estimated that Deutsche Bank has a hidden capital deficit of $20 billion in its American business that would be exposed by the new regulations. Barclays is in a similar situation.

Image taken from blog Special FX for Wizards

The bottom line? "If other regulators were to follow its [America's] lead and force all foreign banks to hold capital and liquidity locally, the era of financial globalisation would be over." And the end of global finance is something I don't think even the most gung-ho regulator truly wants. Personally, as someone interested in a career in international finance and who is considering working at a firm such as Barclays or DB after graduation, financial globalization is certainly something I hope continues for a long, long time.


You can read the article in full at this link: Regulation: The bite is worse than the bark. Feel free to leave your thoughts and comments below.