"Underlying all the noise [about Russia] there is a fundamental, very dynamic, and robust story ... And that story is, frankly, more interesting because it improves lives [...] and gives hope [for ordinary Russians]." -- Paul Swigart, CEO, VTB Capital Inc.
Russia is very much in the news and the news is rarely flattering. But beyond the justified concern about the Russian state of affairs it is also this story referred to in the quote above about the Russian economy and its impact on the daily lives of 143 millions of Russians that deserves a closer look. Speaking with sought-after experts on the Russian economy revealed that they are keenly aware of the profound impact of the economy on ordinary people. It was gratifying to realize this fact at a time when bankers, traders, and brokers do not would not win a popularity contests.
But let's take a step back. Over the last decade, members of the Russian elite have discovered New York and moved in, at times buying luxury apartments and basketball teams. For many years London had been the uncontested favored destination for investors in these circles. And yet, there is a newfound belief that the United States is the place to be.
This development comes at a time when Western European banks are still reeling from the aftermath of the global economic downturn, struggling to maintain in their global presence. While the United States remains a very competitive playing field, Russian banks see a strategic opening. There is a confidence that their presence will be a key for the implementation of their respective international strategies.
These Russian banks are by no means household names. But those who have interest in the Russian market and, beyond, in the CIS and Eastern Europe are already familiar with them. For those who are looking beyond institutions like UBS and Deutsche Bank can do so right here in New York where Russian bankers are going "head to head" as Forbes put it last year.
Since last year, Russia's second largest investment bank, VTB, is represented here as VTB Capital Inc., and has already been making an impact. In addition to being a senior co-manager involved in a $4 billion bond placement, VTB raised $95 million from the sale of its stake in software developer Luxsoft this November. These and other deals successfully support VTB's objectives in the United States, namely to be an important and profitable distribution hub that plays an key role in their capital markets activities, to reach U.S. clients, and, more fundamentally, to bring VTB closer to the Western investment community.
When a VTB manager such as Jyrki Talvitie, Senior Vice President and head of the bank's Investor Relations Division shares his economic views people listen. Paul Swigart, CEO of VTB's U.S. investment banking arm weighed in as well. After all, they have expertise in Russia and the CIS, as the No. 2 bank in Russia, uniting 15 banks in the Russia, the CIS, Europe, Africa, and Asia. They also have around 20 financial, investment and other companies offering services to customers in 20 countries.
So asking Talvitie about Russia and the Russian economy provided an opportunity to learn about his important perspective. When Russia's Ministry of Economic Development recently revised down the country's 2013 GDP growth forecast from 1.8 percent to 1.4 percent, reflecting a weak industrial performance, Talvitie was not surprised. "We think that 1.4 percent growth is achievable, though the figure is hardly satisfying. Next year is likely to be rather challenging for the Russian economy." This is in line with World Bank projections that see Russia's growth in 2014 moderately positive at 3.1 percent, however with downside risks after the economy's losing momentum this year.
"High inflation is one of the key challenges for Russia now. But with the Russian Central Bank committing to inflation targeting and new tariff policy, disinflation is likely to resume after a harvest- and tariff-affected 2013. Underlying inflation is already running close to historical lows (4.0 to 4.5 percent) and next year headline inflation is likely to drop to 4.0 percent as well." Talvitie doesn't mince words when he says that "[t]he economic slowdown is quite a worrying trend," but he adds that he believes that the Russian government is taking "the right steps to spur growth long-term."
This view is not shared by the influential economist Nouriel Roubini, supported by analysts at Roubini Global Economics, who finds that the Russian authorities have actually "failed to address most of the important institutional weakness," with policy makers prioritizing macroeconomic stability by maintaining restrictive fiscal and monetary policies." Talvitie's and Roubini's overarching assessment, however, converges in the assessment that Russia's growth is bound to remain slow.
Meanwhile, the Russian banking sector -- relatively small in relation to its GDP -- is bound to continue its growth at a faster pace than the GDP, catching up to reflect its actually performance and role in the country's economy. From VTB's point of view, Talvitie cautioned, one would not expect the same high growth figures of years past, given the current economic environment.
In a move to send a signal in support of its currency, Russia recently chose an official symbol for the ruble, a stylized cyrillic 'R' that is identical to the 'P' in the Latin alphabet. While not a reserve currency yet, Talvitie finds that it could be used in that function in the CIS countries "in the foreseeable future." This assessment is based on solid Central Bank of Russia (CBR) reserves and a "tight CBR focus on inflation ... [that] will ensure a favorable macroeconomic background" for such a development. In the view of Nouriel Roubini, whose analytical prowess is widely recognized, lower oil prices and capital outflows will hit the ruble, however, predicting it to drop toward 34.7/$ by the end of 2014.
The Russian currency has come a long way, though, and despite dependencies on the dollar it saw a tangible increase in market share in 2013, making it the 12th most actively traded currency worldwide, according to Talvitie. He added that "Russia is also involved in the process of encouraging direct payments in bilateral trade in national currencies, bypassing the dollar or the Euro, with VTB [being] the first bank to offer its clients direct settlements in CNY/RUB."
When asked about the Russian-U.S. economic relationship, Talvitie finds that the investment relations between the two countries are pretty limited at the moment. "The total accumulated inbound investment from the United States into Russia was $6.8 billion at the end of 2012. And the number of foreign direct investments by American companies into Russia, at $3.7 billion, is much smaller compared for example with Germany, at $18.7 billion. However, we still see good examples of cooperation. One such example is TPG Capital, one of the largest American private equity firms globally, which holds VTB shares, with its founding partner David Bonderman being also a member of VTB's supervisory council.
The upcoming Winter Olympic Games in Russia's Black Sea city of Sochi will yet be another case study on the economic effects of this prestigious event on its host city and host country. There is hope that the huge amount of infrastructure investments will be the basis for further growth. On a lighter note, Talvitie was bullish in his prediction about the Russian medal count, pointing to the country's traditional strength in several disciplines and the fact that host countries usually get an additional boost. "I think Russia will receive more medals than the United States," he ventured to add. His bank itself is a corporate sponsor of sports in Russia and embraces the support of what is known as environmental, social, and corporate governance (ESG), that expresses, in non-financial terms, the sustainability and ethical impact of doing business. It is a responsible thing to do for VTB and all financial institutions at large.
Without discounting legitimate and urgent concerns about Russia, there was a realization that the representatives of that country's second largest bank have a keen awareness of the impact of economic development. Without discounting what we hear about Russian politics it becomes obvious that it is in everybody's interest to continue to build a strong basis for Russia's economy. It is the economy that can lift Russians up, that -- in the words of VTB Capital Inc.'s CEO Paul Swigart -- "improves lives, creates jobs, and gives hope." And it is the story of Russia's dynamic and robust economy, something that could not have been imagined 25 years ago, that makes Russia an exciting place today, a place that has energy.
While these are challenging times for many economies, and thinking beyond Western Europe, there is reason to believe that Russia's best days are still ahead. And VTB Bank, through VTB Capital, is one of several institutions that can help investors take advantage of that fact, given its expertise in Russia and the CIS. After having a conversation with these representatives of that Russian economic marketplace it is comforting to know that they are professionals who remain mindful of the profound effect of their work on all Russians. It is them who are the best hope to improve Russia to become what we all want it to be.