CC BY
174
OEO-ECONOMICS
Zakhid MAMEDOV
D.Sc. (Econ.), chief researcher, Institute of Economics, National Academy of Sciences of the Azerbaijan Republic
(Baku, Azerbaijan).
RUSSIAN BANK EXPANSION IN CIS COUNTRIES AND CIS BANK PARTICIPATION IN THE RUSSIAN MARKET
Abstract
Based on extensive factual material, this article analyzes the size of the presence of Russian banking capital in the countries of the Commonwealth of Inde-
pendent States, the participation of CIS banks in the Russian market, and Azerba-ijani-Russian cooperation in the banking sector.
I n t r o d u c t i o n
The present stage in Russia’s development has a qualitatively new character and is distinguished primarily by the increasing integration of its economy into the world economic system. New Russian companies declare their intention to go global and take real steps in this direction, acquiring new assets abroad.
In terms of political and economic interests, the post-Soviet space is a special region for Russia:
■ first, the CIS countries are its nearest neighbors, with which Russia in the recent historical past had close ties within the framework of the single national economic complex of the U.S.S.R.;
■ second, most of these countries are in the midst of economic reforms similar to those underway in Russia;
■ third, this is a region where Russia is trying to implement its integration initiatives at the interstate level.
“Russian capital investment in the CIS countries for a long time mostly consisted of direct investment, which served to increase investment stock. In 2004, the situation changed: direct and portfolio investment accounted for less than a fifth of total Russian investment in the CIS. As regards investments from CIS countries in Russia, these consist in large part of so-called “other investments,” mostly trade and other credits.
“That is why in 2003, when investment flows from CIS countries to Russia totaled $890 million, the increase in investment stock was $120 million; in 2004, the figures were $1,097 million and $129.9 million, respectively; and in 2005, $1,665 million and $174.4 million” (see Table 1).1
Table 1
Mutual Investment Stock of Russia and Individual CIS Countries (as of 1 January of the respective year, million dollars)
Investment from Russia in CIS countries
Investment from CIS countries in Russia
2000 2003 2004 2005 2006 2000 2003 2004 2005 2006
Armenia 0.0 134.0 139.5 137.9 133.0 0.4 0.9 1.4 0.2 3.5
Azerbaijan 0.2 0.0 0.1 0.1 0.9 0.0 0.2 0.4 2.8 57.6
Belarus 490.2 610.3 709.7 95.0 93.7 2.5 15.4 4.5 13.9 14.1
Georgia 0.4 0.3 0.4 0.6 15.0 0.3 0.5 5.5 9.7 1.4
Kazakhstan 2.2 2.0 7.0 105.7 31.4 5.7 15.2 62.6 160.0 252.9
Kyrgyzstan 0.0 0.1 0.1 0.0 1.5 0.1 0.7 3.9 4.2 7.8
Moldova 52.0 169.8 169.8 155.2 158.2 1.4 3.1 2.1 2.2 2.6
Tajikistan 0.0 0.0 0.4 1.0 1.0 0.0 0.0 0.2 16.7 16.4
Turkmenistan 0.0 0.2 0.0 0.8 0.4 0.3 0.3 0.6 0.0 0.0
Ukraine 10.2 69.0 98.6 451.8 516.0 4.9 13.8 22.0 38.9 64.6
Uzbekistan 0.4 1.9 2.0 137.4 123.8 3.5 3.5 18.8 3.3 5.2
Total 555.6 9 00 6 .6 7. 2 T" 1 1,085.5 1,074.9 19.1 53.6 122.0 251.9 426.1
N o t e: Excluding monetary authorities, commercial and savings banks.
The state of CIS banking systems varies from country to country, reflecting regional and national differences. The different results of processes at work in the banking systems of CIS countries are explained by differences in the macroeconomic and political situation, and also by the policy pursued by each particular state with respect to national banks.
1 See: A.M. Libman, Ekspansia rossiiskogo kapitala v strany SNG, Moscow, 2006.
THE CAUCASUS & GLOBALIZATION
“The CIS countries also differ in terms of the concentration of banking capital, which varies from relatively moderate in Ukraine (where the share of the top five banks in the total assets of the banking system is 45%, while the share of each of them does not exceed 15%) to extremely high in Uzbekistan and Azerbaijan (where the share of one major bank in banking system assets is 70%). In Turkmenistan, two largest banks—State Bank for Foreign Economic Activity and Daikhanbank— hold about 80% of total banking system assets. In Moldova, the share of the largest banks is about 70% of banking system assets.”2
The interpenetration of banking institutions from some CIS countries into the markets of others is still insufficient, but the process is already underway. Whereas until recently this interpenetration was limited, today it has accelerated under the impact of growing demand for credit resources on the part of corporate clients and due to an improvement in the macroeconomic environment and rising levels of intraregional cooperation. Standard & Poor’s international rating agency notes that mutual market entry by CIS banks is promoted by the revival of old and the formation of new industrial alliances and trading arrangements. In view of a good knowledge of regional peculiarities, national banks are prepared to follow their large corporate clients to other countries. Kazakh and Russian (to a lesser extent, Ukrainian) credit institutions are most prepared to expand their foreign operations in the CIS.
Thus, about 40% of Kyrgyzstan’s banking system is controlled by Kazakh banks. Kazakhstan’s major financial institutions—Kazkommertsbank, TuranAlem, Halyk Bank, ATF Bank and Temir-bank—are active in the Russian market. TuranAlem also intends to invest $100 million in the construction of a hotel in the Georgian capital Tbilisi.
Russian Bank Expansion in CIS Countries
Changes in the Russian banking system influence the state of banks in the Commonwealth countries, including the concentration and centralization of banking capital, the switch to International Financial Reporting Standards (IFRS), development of the bank refinancing system, and improvements in the legislative framework and prudential supervision.
CIS banking systems cannot ignore the major achievements of Russian banks. By now, most CIS countries have achieved significant progress compared to the early 1990s, when they first took the path of transition to a market economy. But in order to compete successfully in the world market and improve the investment climate, they must continue their reforms, including reforms in the banking sector. Enhancing the efficiency of the intermediary function of banks in the redistribution of loan funds and achieving their stability—such are the key problems they will have to resolve. The CIS is a major region which is five times larger than the European Union in terms of area, but with a population that is only half the size of the EU population. For reasons of undeveloped intermediation and growing demand for banking services, there is great potential for the development of banking systems. In the opinion of Standard & Poor’s, the ability and readiness of government authorities to maintain and accelerate reforms in the economy and in the legislative and regulatory framework are the main factor determining the long-term prospects for progress and prosperity of both the region and its banks.
At the end of 2006, the share of Russian banks in the CIS countries’ total banking assets was 77%; the banks of Ukraine had 10%, Kazakhstan 8%, Belarus 2%, Uzbekistan 1%, Azerbaijan
2 Z.F. Mamedov, “O nekotorykh voprosakh azerbaidzhano-rossiiskogo sotrudnichestva v finansovo-kreditnoi sfere,” in: Torgovo-ekonomicheskoie sotrudnichestvo mezhdu RF i Azerbaidzhanskoi Respublikoi: sostoianie i per-spektivy, International conference, Baku, 28 June, 2007.
THE CAUCASUS & GLOBALIZATION
0.60%, Moldova 0.35%, Georgia 0.34%, Armenia 0.24%, and Kyrgyzstan 0.13%.3 But whereas in absolute terms the assets of Russian banks are many times larger than those of other countries (EUR 414 billion in Russia, EUR 58.9 billion in Ukraine, EUR 58.7 billion in Kazakhstan), the relative figures are not in their favor. The ratio of banking assets to GDP is 95% in Kazakhstan, 76% in Ukraine, and only 54% in Russia. There is a similar picture with bank capitalization. In absolute terms, Russia is the undisputed leader: the equity capital of Russian banks is EUR 50 billion, whereas that of Ukrainian banks is EUR 7.1 billion, and Kazakh banks, EUR 6.3 billion. At the same time, the capital-to-GDP ratio is 6% in Russia, 10% in Kazakhstan, and 9% in Ukraine. Kazakhstan is somewhat ahead of Russia in terms of loans to enterprises: the loans-to-GDP ratio in Kazakhstan is 27%, and in Russia, 26%.
“The total assets of CIS banking systems are around $240 billion, which amounts, for example, to half of the assets of Dresdner Bank or Barclays Bank and a third of the assets of ABN AMRO. The dimensions of the banking systems and national economies in the Commonwealth differ widely. Russia dominates with 70% of CIS territory and half of the population. In the past two years, capital adequacy levels have risen steadily: 97% of credit institutions are profitable; return on assets is maintained at the level of 2.5%, and return on equity capital, at the level of 18-19%, which is characteristic of developed banking systems.”4
In terms of development level of the banking system, Russia is clearly ahead of the other Commonwealth countries, which is why Russian banks have gained experience which credit institutions in the other CIS countries have yet to acquire. In the recent period, exports of banking services by Russian banks have been based on such competitive advantages as a high level of technological development, a wide range of banking products offered in the domestic market and, of course, significant financial resources.
Serious changes are underway in the banking segment of the market. Whereas at the first stage the expansion of Russian banks was primarily driven by the need to service the foreign trade and investment operations of their national clients, today credit institutions increasingly seek to make profit from painstaking work in the domestic financial markets of CIS countries, including the retail market.
The activities of Russian banks in the CIS countries are largely associated with the demand for banking services among their major corporate clients (Russian companies), counterparties and participants in foreign trade activities.
Subsidiary credit institutions of Vneshtorgbank (VTB), Alfa Bank, National Reserve Bank (NRB), Gazprombank, Bank of Moscow, Petrokommerts, UralSib, Rosbank, Nomos Bank and some other banks operate in the region (this explains the presence of commercial bank Petrokommerts in Ukraine and Moldova, UralSib Financial Corporation in Azerbaijan, and Gazprombank in Belarus).
It should be noted that state-owned Vneshtorgbank (the second largest bank in Russia with assets of around $14 billion, which is comparable to the total assets of Kazakh banks) is in a privileged position and has at its disposal a number of additional resources drawn from the Russian and international markets; it has access to advanced financial market technologies and broad experience in providing various services, enjoys political support at the state level and is simultaneously a commercial entity capable of pursuing an independent, aggressive and flexible banking policy. The expansion of the network of Russian banking institutions with state participation in the CIS countries makes it possible to promote the economic and political interests of the state and business.
The online version of the National Banking Journal of 24 October, 2006, noted in its News section: “In accordance with its development strategy, by the end of 2007 Russia’s VTB intends to acquire banks in Kazakhstan, Azerbaijan and Belarus,”5 i.e. to open the banks in the CIS where there
See: Z. Mamedov, “Zhdut li nas v Baku?” NBJ, June 2007, pp. 24-25.
Bankovskoie delo v Moskve, No. 11, 2005, p. 17.
[http ://www.nbj.ru/archive/number/article/?article=11854].
THE CAUCASUS & GLOBALIZATION
are no VTB offices. The heads of VTB intend to spend $1.5 billion on the acquisition and development of banks in CIS countries. These plans can be regarded as the starting point of the Russian banking sector’s expansion policy. VTB has prestige and resources. It is interesting to note that this bank, initially created to promote export and import operations, is now in the vanguard of Russian aspirations to foreign retail markets of banking services (as demonstrated by its acquisition of Armsberbank (Armenian Savings Bank), the United Georgian Bank and Ukraine’s Mriya Bank, and also by its intention to acquire Slavneftebank in Belarus).
Vneshtorgbank’s strategy for entering the financial markets of CIS countries is as follows:
■ creation of a client base from among local companies;
■ outreach to local trading partners of Vneshtorgbank’s Russian clients;
■ outreach to local enterprises through long-term loans, including the issuance and sale of debt instruments;
■ creation of a stable client base from among industrial enterprises by organizing large projects and investment programs;
■ Vneshtorgbank’s orientation towards big business, aggressive pricing policy and significant resources should gear its subsidiary banking institutions to a repartition of the local market in their favor.
In general, curiously enough, the market of the Central Caucasus6 with all its political and mental peculiarities has been tapped by Russian banks to a greater extent than the market of any other region in the post-Soviet space. VTB is particularly active in expanding its presence in this market: in March 2004, it acquired 70% of the shares of Armenia’s Armsberbank (the successor to the Armenian division of Soviet Sberbank with the largest branch network in the republic consisting of more than 100 branches). Armenia has 20 commercial banks; the share of foreign capital is almost 50%, and that of Russian capital, about 15%. Among the factors behind Armenia’s investment attractiveness to Russian banks are low competition in the banking services market and liberal legislation.
Vneshtorgbank is also present in the Georgian market: in 2005, it made a deal to acquire the United Georgian Bank.
The only large Russian bank with its own subsidiary in Azerbaijan is UralSib: its NIKoil Bank is among the top ten banks in the republic in terms of assets. VTB is considering several purchase options at an estimated cost of $15-20 million.
As the newspaper Vedomosti reports, VTB has negotiated the purchase of Azerbaijan’s AF Bank. According to the journal Banki i biznes, on 1 April, 2007, this bank ranked 36th among Azerbaijan banks in terms of assets (13 million manats or $15 million) and 27th in terms of capital (8.9 million manats or about $10 million). The bank has one branch and one office; it funds the construction of real estate and “plans to implement three huge projects to develop the tourism sector in Azerbaijan.” As regards its shareholders, there is no information on the bank’s website.7
In 2005, in order to gain entry to the Ukrainian retail market, VTB acquired Mriya Bank, ranked among Ukraine’s top thirty banks. Initially, it considered a project involving a larger bank, Ukrsotsbank, but the purchase of a small bank in possession of all the necessary licenses was much less costly for VTB. According to experts, the transaction amount was $80-100 million, which constitutes two or three book values (BV) of Mriya Bank. The market price of banks at that time was around 4 BV.8
6 For an explanation of the term “Central Caucasus” see: E. Ismailov, V. Papava, Tsentral’nyi Kavkaz: istoria poli-tika, ekonomika, Mysl Publishers, Moscow, 2007.
7 See: Vedomosti, 27 August, 2007.
8 See: Vedomosti, 12 January, 2006.
Table 2
Russian Banks in CIS Countries
Subsidiary bank Russian owner Number of branches in local market Number of private clients
| Ukraine |
Petrokommerts- Ukraine Petrokommerts 4 branches and 16 offices 40,000
Mriya VTB 22 branches and 143 offices 37,000
Alfa-Bank-Ukraine Alfa Bank 4 offices 5,000
NRB-Ukraine Sberbank 2 offices n/a
| Kazakhstan |
Alfa-Bank- Kazakhstan Alfa Bank 3 branches (November 2005) n/a
Texakabank Sberbank 34 n/a
| Belarus |
Belrosbank Rosbank — n/a
Slavneftebank VTB 11 offices 20,000
Belgazprombank Gazprombank 7 branches and 50 offices 40,000
| Armenia |
Armsberbank VTB 101 (branches and offices) 300,000
Areksimbank Impexbank (19% stake) — n/a
| Azerbaijan |
II NIKoil UralSib 5 branches 15,000
| Georgia |
United Georgian Bank VTB 40 branches 80,000
S o u r c e: Compiled by the author.
That same year, VTB set up a subsidiary bank in Ukraine called CJSC VTB-Ukraine. VTB is also considering the possibility of investment in Moldova, Kazakhstan, Turkmenistan, Uzbekistan and Tajikistan.
The conservative Sberbank has also launched an expansion into the markets of CIS countries, acquiring banks in Ukraine and Kazakhstan. Today it is working to complete the purchase of NRB-Ukraine from the Russian National Reserve Bank. In 2006, Sberbank acquired NRB-Ukraine, owned
by the Russian National Reserve Corporation (NRC), for $100 million (this transaction has encountered difficulties for lack of a decision by the National Bank of Ukraine). NRC established this bank in the period of active cooperation with Gazprom in the mid-1990s. NRB-Ukraine was engaged in settling Ukraine’s gas debts in the amount of $1.4 billion, converted in 1995 into illiquid 12-year bonds, which were restructured in view of Ukraine’s failure to perform its obligations. NRC bought these bonds from Gazprom at a discount.
In 2005, the Rosbank depository became the first Russian depository to open a nominee account with the central depositories of the Republic of Kazakhstan and the Republic of Uzbekistan.
The general structure of Russian bank assets and liabilities in CIS countries is given in Table 3.
Table 3
Assets and Liabilities of Russian Banks in CIS Countries (opening balance, %)
2004 2005 2004 2005
| ASSETS LIABILITIES |
Direct investment abroad 8 8 Direct investment in Russia 2 3
Portfolio investment 3 8 Portfolio investment 2 3
Foreign currency cash 0 0 Current accounts and deposits 66 74
Current accounts and deposits 18 24 Loans 27 17
Loans 59 56 Other liabilities 3 3
Arrears 1 0
Other assets 10 4
S o u r c e: [www.cbr.ru/statististics/credit_statistics].
In principle, the absolute amount of assets changes insignificantly, which is why it makes sense to focus on their structure, where loans and deposits play the dominant role. In 2004, there were serious changes in loan periods (maturities): whereas at the beginning of the year long-term loans made up only about 30% of the total, at the end of the year the figure was close to 40%. Consequently, Russian banks increasingly assume obligations in long-term investment financing in CIS countries. The liability structure, on the contrary, is dominated by current accounts and deposits, and these mostly short-term. In fact, Russian banks in their interaction with CIS countries currently perform the function of maturity transformation in supply and demand for money, which may become a source of risk to their operation in this market.
CIS Bank Participation in the Russian Market
More and more banks with foreign capital operate in Russia. Nonresidents are increasingly active in acquiring stakes in Russian commercial banks, and this confirms that the Russian banking system has become more open and continues to improve.
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“Today the Russian banking services market has become so attractive, while the banks of neighboring states have grown so much stronger that they have all the necessary incentives and opportunities to develop a diversified business in Russia. Clearly, the potential of the Russian economy is much higher than the economic potential of the other Commonwealth countries. And if today these differences are not very essential, in time the gap is bound to widen, so that such investments in the future of CIS banks in Russia are well justified. Moreover, such a policy can bring closer the D-day when CIS banks, having gained enough weight, put in order their ownership structure and, with high credit ratings of parent banks at the ready, charge forward in the battle for regional clients.
“Eleven credit institutions controlled by banks from CIS countries currently operate in Russia. And although the stories of their appearance and the specifics of their activity in the Russian market differ significantly, they can be divided into two groups. First, banks set up to service cross-border payments, including those related to interstate programs, and to support national companies trying to do business in the Russian domestic market. Most of these banks were established in the mid-1990s, when specific demand for settlements arose among economic agents against the background of the disintegration of the Soviet Union and the need to restore lost economic ties.
“The situation began to change radically in the 2000s, when economic growth and development of the banking services market in Russia led to the emergence of the second group: universal banks offering services mainly to Russian clients and seeking to make most of their profit from these activities. Some banks from the first group also began moving into the second group.
“In developing retail banking in Russia, banks from CIS countries prefer to start not with the registration of a new credit institution, but with the purchase of existing institutions with a sufficiently developed and diversified business. This is justified and cost effective.”9 First, they are interested in acquiring a successful Russian bank brand (its value for them is indisputable, because their own brand usually carries no weight in Russia). Second, CIS banks are better placed than Western banks to handle the clients of the bank being purchased.
Thus, when a Russian credit institution is bought by a Western bank, the latter is obliged, in view of stringent corporate requirements for borrower quality and business practice, to shed most of the “inherited” clients whose risks do not allow them to get the approval of loan committees. Plus the necessary reorganization of management, whose departure inevitably leads to the loss of many clients. It is another thing when the buyer is a CIS bank, which can keep the existing business more or less intact by following a flexible risk policy.
The same flexibility and continuity are becoming a special competitive advantage for banks from Near Abroad countries, because they can meet many “specific” needs and requirements of Russian clients which will never be taken into account not only by Western banks, but even by major Russian banks.
Special attention should be paid to the pricing policy of CIS banks. Since their corporate brand does not give them any particular advantages in the Russian market while they are interested in attracting new clients (including through pricing), interest rates on their deposit and loan products are often better than the market average. One should also bear in mind the high credit ratings of their parent banks. Although these are not directly projected onto the ratings of the subsidiaries in view of their intricate ownership structure, clients nevertheless take them into account. At any rate, to those who are looking for a bank with sufficiently high deposit rates and acceptable risk levels, the terms offered by CIS banks may appear uniquely favorable.
There is yet another advantage. Whereas Western subsidiary banks in effect do not work with Russian banks in the interbank credit market but look for partners among the top three state-owned
“Banki SNG: iz Rossii s liuboviu,” Bankovskoie delo v Moskve, No. 11, 2006.
THE CAUCASUS & GLOBALIZATION
banks (Sberbank, VTB and Vneshekonombank), CIS banks have a much wider range of partners. These include even some regional banks, which means the appearance of an additional source of liquidity helping to maintain the stability of the domestic banking system.
Interest rates adjusted in favor of clients can be regarded as payment both for the insufficient prestige of banks, for their entry into the Russian market, and for strengthening their positions in this market. For example, even if today a bank forgoes part of its profit by introducing “speculative” interest rates, this enables it to occupy a niche in the Russian market, while these losses may be more than compensated in the future given the general growth of the Russian economy, rising household income and adequate improvement in the performance of the banking sector.
Let us recall that all subsidiaries of CIS banks have easily passed the selection procedure for inclusion in the deposit insurance system, so confirming their sufficient reliability.
Another specific feature of banks from CIS countries distinguishing them from their colleagues based in the developed countries is that most of them do not advertise their affiliation with parent financial groups, either in terms of accounting records reflecting the ownership structure or in terms of information provided to clients. The parent bank’s corporate brand cannot have a particularly positive influence on the image of its subsidiaries (the reputation of a purchased regional bank is often more important to clients than the reputation of a bank from Kazakhstan little known in the region). That is why they find it more cost effective, while offering quality banking products, to appear “in the guise” of an average Russian bank. In fact, the clients of such banks become their easiest “prey.” Such a strategy ensures rapid development of business and growing customer interest.
For example, none of the four banks in the TuranAlem group has most of its capital contributed by nonresidents (according to the formal balance sheet), which is explained by the special procedure for their acquisition through Russian intermediaries and puts them on a par with conventional Russian banks in the eyes of bank regulators.
The Moscow-based Moskommertsbank has a similar structure (in the Interfax-100 rankings as of 1 July, 2006, it was 104th in terms of net assets). This bank belongs to Kazakhstan’s Kazkom-mertsbank, although 100% of its capital, according to its balance sheet, consists of funds contributed by residents. Such a method of forming bank capital may be due to the simplified procedure for purchasing banks open to residents, as well as the simplified procedure for selling them as the need arises.
However, one might expect that once the CIS banks manage to gain a stronger foothold in the Russian market, they will make their ownership structure more transparent. This will automatically boost their credit ratings and may translate into a “great leap forward” in the development of their business in Russia, primarily in the regions.
Regional priority is precisely what distinguishes CIS banks in their business activities from European and American financial institutions.
“Attention is drawn to the fact that Kazakh banks, apart from the Moscow region, are particularly active in Russian regions bordering on Kazakhstan. And this is no accident.
■ First, geographical proximity reduces the costs of doing business.
■ Second, bank clientele in these Russian regions is closer in character to the typical clientele of Kazakh banks, which means it is possible to use marketing techniques and offer product lines tried out with ‘domestic’ clients.
■ Third, Kazakhstan business interests are present in these regions, which creates additional demand for bank services.
■ Fourth, it is much easier for a bank from Near Abroad countries to enter regional markets than to start operating in large megalopolises with stiff competition. Kazakh banks in the regions, representing the best financial institutions of their country, appear in a favorable
Table 4
Major Investors in the Economy of Individual CIS Countries
Country Investors
Armenia Russia, Greece, France, U.S.
Azerbaijan Italy, Russia, U.S., Britain, Turkey
Belarus Russia, Germany
Georgia U.S., Britain, Azerbaijan, Russia
Kazakhstan U.S., Canada, Turkey, Japan
Kyrgyzstan Kazakhstan, Canada, U.S., Germany, Turkey
Moldova Rumania, Russia, U.S., Spain, Britain, France
Tajikistan Britain, Canada, U.S., South Korea, Russia
Turkmenistan U.S., Britain, Malaysia
Ukraine Germany, U.S., Cyprus, Britain, Netherlands, Russia, Austria
Uzbekistan Britain, Malaysia, Turkey
S o u r c e: Compiled by the author.
light against the general background of our regional banks, whereas in the capital their advantages pale beside major Russian banks and Western subsidiaries.”10
Developing business in neighboring Russian regions is the simplest and most promising path for Kazakh banks, which means that after Omsk, Chelyabinsk, Kazan and Astrakhan they can be expected to appear in Novosibirsk, Yekaterinburg, Ufa, Samara, Volgograd and Perm.
Kazakh banks are also active in the markets of other CIS countries (especially in neighboring Kyrgyzstan)11 and seek to expand their activities in Russia. TuranAlem and Kazkommertsbank are particularly active in this respect. The Russian banking market as the largest one in this region is also attractive to financial institutions from other CIS countries: apart from Kazakh banks, one will find banks from Ukraine, Armenia, Azerbaijan and Uzbekistan, but their share of Russian banking assets is insignificant.12
“Kazakh banks, which continue to be mostly oriented towards the domestic market, are increasingly expanding their operations, including the acquisition of assets in Russia, Kyrgyzstan, Uzbekistan, Georgia, Ukraine and other CIS countries.
“As they enter the Russian market, they find it more cost effective to buy Russian banks instead of starting ‘from scratch.’ They prefer to begin their expansion in the regions, where they directly
10 See: A.V. Buzdalin, “Banki SNG idut v Rossiu,” Biznes i banki, No. 42, 2006; “Banki SNG: iz Rossii s liuboviu.”
11 According to Standard & Poor’s, about 40% of total banking system assets in Kyrgyzstan are controlled by Kazakh banks (see: CIS Banking Systems: Mixed Prospects But Common Risks, Standard & Poor’s, 10 December, 2004).
12 See: A.V. Vernikov, “Transnatsional’nye banki v regione SNG,” in: Protivorechia protsessov valiutno-finan-sovoi integratsii v regione SNG, Institute for International Economic and Political Studies (IIEPS), Russian Academy of Sciences, Moscow, 2005.
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compete with Russian banks across the entire product line, a process facilitated by macroeconomic trends. Kazakh banks own 7 out of 11 credit institutions controlled by banks from Near Abroad countries (70% of CIS banking assets in Russia). Why is this so?
■ First, Kazakhstan has the most developed banking system in the territory of the former Soviet Union, which in some respects not only compares with, but also surpasses the Russian system (in particular, in implementing international banking standards).
■ Second, the high development potential of Kazakh banks encounters the problem of limited demand for their services within the country, which induces them to look for new markets.
■ Third, the economies of Russia and Kazakhstan are the most closely integrated ones among the CIS countries, and this should be adequately reflected in the integration of their financial systems as well.
■ And fourth, due to its geographical location Kazakhstan has the longest border with Russia, which encourages Kazakh banks to reach out into adjacent territories.”13
Competition in Kazakhstan’s banking sector is very high. At the same time, Kazakh banks are the most active among CIS banks in their efforts to enter the Russian market, including the retail market, regarding this as a priority task. It is quite possible that in the near future they will also try to penetrate the markets of other Commonwealth countries. In 2005, TuranAlem already bought 49% of the shares of Armenia’s Mezhinvestbank,14 which shows once again that what is at stake now is the possible presence or non-presence of Russian banks in the markets of neighboring countries. Besides, such giants of European retail banking as Raiffeisen, BNP, Banca Intesa and Societe Generale are so far active only in Ukraine and Russia. But if their interests extend to other countries, Russian banks may be short of both prestige and resources to resist them.
On 17 July, 2007, the Federal Antimonopoly Service of the Russian Federation allowed Kazakhstan’s financial holding company Seimar Alliance to acquire a 51% stake in Petrokommerts, one of the top twenty Russian banks. Up to now, such major transactions in the Russian banking sector have been performed only by Western investors. Petrokommerts is to be the second acquisition of the Kazakh holding company: a month earlier, Seimar Alliance announced the acquisition of 92.75% of the shares of Russia’s small StarBank.15 Until today, representatives of Kazakhstan’s financial sector have preferred to purchase more modest assets in Russia.
The major investors here are the republic’s two largest banks: Kazkommertsbank (the beneficiary of Moskommertsbank and the East Capital investment company) and TuranAlem (which owns 15.6% of SlavinvestBank, Omsk Bank, AgroinkomBank and BTA Bank). The assets of Petrokommerts make up more than half of the assets of the Kazakh bank in question.16
The economies of both Russia and Kazakhstan depend in large part on world energy prices, which serves to strengthen their national currencies against the U.S. dollar. But whereas the Bank of Russia seeks to keep the rising ruble in check so as to maintain the competitiveness of domestic producers, Kazakhstan follows a more liberal policy: from 2000 onward, its tenge strengthened steadily in relation to both the ruble and the dollar. Against the background of such exchange rate dynamics, credit policy success in Russia for Kazakh banks was associated with active efforts to attract resources from the Russian market, because if lending operations were funded by parent banks the short currency position was bound to have an adverse effect on the financial performance of their Russian
13 “Banki stran SNG uvelichivaiut svoio prisutstvie v Rossii (2006),” available at [http://www.gazetasng.ru/busi-ness-area/?id=553].
14 See: “TuranAlem (Kazakhstan) otkryvaet predstavitelstvo v Yerevane,” 18 August, 2005, available at [http://bta. kz/ru/press/monitoring/2005/08/18/813/pda.shtml].
15 See: “Kazakhi kupili mesto v dvadtsatke krupneishikh rossiiskikh bankov,” Kommersant, 18 July, 2007.
16 Ibidem.
subsidiaries. So, Kazakh banks in Russia could achieve financial success only if they developed the entire line of banking products.
In the summer of 2006, the government of Kazakhstan decided to convert its stabilization fund from national currency into dollar-denominated assets, which has led to a sharp drop in the tenge exchange rate. This may result in much faster credit expansion by Kazakh banks in Russia due to the financial attractiveness of loan funding by parent banks.
Table 5
Banks of CIS Countries in Russia
Bank Country Russian subsidiary
IBA Azerbaijan IBA-Moscow
Halyk Savings Bank Kazakhstan Khlebny Bank (Chelyabinsk Region)
Kazkommertsbank Kazakhstan Moskommertsbank
TuranAlem Bank Kazakhstan SlavinvestBank
TuranAlem Bank Kazakhstan Omsk Bank
TuranAlem Bank Kazakhstan Volga-Kama Joint Stock Bank (Tatarstan)
Texakabank Kazakhstan Metrobank
Anelik Bank Armenia Anelik Bank (branch)
S o u r c e: Compiled by the author.
Azerbaijani-Russian Cooperation in the Banking Sector
The banking system of the Azerbaijan Republic attracts the attention of the most diverse investors. Azerbaijan has close ties with Turkey, a potential major investor: Turkish banks, including Kogbank and T.C. Ziraat Bankasi A.S., operate in Azerbaijan’s banking market. But so far the rate of expansion of Turkish banks in the republic is not very high because of recent financial problems in Turkey itself.
In the near future, Kazakhstan’s TuranAlem plans to enter our market (among all CIS countries, this bank is not represented only in Azerbaijan and Uzbekistan). Latvia’s Parex Bank intends to open a branch in Azerbaijan.
But judging by growth dynamics, very soon the capitalization of Azerbaijan banks will increase significantly and in the long term they will play the leading role in the financial market of the Caucasus region. True, so far they focus on the domestic market, and only the International Bank of Azerbaijan (IBA) is actively expanding its presence in Near Abroad countries. IBA has two subsidiaries (IBA-Moscow and IBA-Georgia), and also representative offices in London and Frankfurt.
The only large Russian bank with a subsidiary in Azerbaijan is UralSib. This subsidiary bank, NIKoil, is among the top ten banks in terms of assets. Initially, NIKoil-Azerbaijan represented only the oil interests of LUKoil in the Central Caucasus market, but once it became part of UralSib Corporation, it set out to tap the local retail banking market. Today its share of the Azerbaijan consumer market is over 3%, which is a fairly good result by Russian standards, but this share could be much larger, especially considering the intensity of migration flows between the two countries.
Russia’s NIKoil, long present in our market, intends to open branches in all economically developing regions of the republic in view of a shortage of banking services in rural areas. In accordance with Azerbaijan’s regional development strategy, it plans to open 6 branches and 38 offices in the next two years. Apart from financing farmers, the bank is to focus on the development of manufacturing enterprises and land reclamation infrastructure. Today this policy is being successfully implemented by NIKoil’s Gabala Branch,17 which provides loans for winegrowing, production of wines and brandies, and cotton production and processing.
Russia is Azerbaijan’s major trading partner. Historical and economic ties, a single transportation network, a common infrastructure and widespread knowledge of the Russian language facilitate cooperation between the two countries. In our opinion, further development of the banking system in both countries is a prerequisite for accelerating integration processes. Close economic integration with Russia meets Azerbaijan’s strategic interests.
C o n c l u s i o n
We believe it is time to think about creating within the CIS framework a system of mutual preferences for establishing subsidiary banks and branches. The Commonwealth countries do not make full use of their potential for trade operations and mutual investment. As for the use of national currencies in trade between CIS countries, only 20% of their mutual trade turnover is settled in these currencies. That is why it is necessary to create a single payment system in the CIS for settlements in national currencies. So, further development of the CIS countries’ banking system can pave the way for accelerating integration processes in the post-Soviet space.
17 See: Z.F. Mamedov, “O nekotorykh voprosakh azerbaidzhano-rossiiskogo sotrudnichestva v finansovo-kreditnoi
sfere.”
Vagif NASIBOV
Ph.D. (Technology), director of the Department of Reforms and Economic Problems of the Electric Power Industry, Azerbaijani Research and Development Institute of the Power Industry, OAO Azerenergy
(Baku, Azerbaijan).
THE FORMATION OF AN EFFICIENT INTERNAL ENERGY MARKET UNDER GLOBALIZATION CONDITIONS (AZERBAIJANI CASE STUDY)
Abstract
T
his article looks at the situation that has developed in the country’s electric power industry, studies the prin-
ciples and special features of forming an internal energy market in the Azerbaijan Republic, and justifies the need for reform-
