International Banking. A Unique Opportunity for Russia

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International Banking. A Unique Opportunity for
Russia

• Mark T. RobinsonPresident, Citibank ZAO, Russia

10 April 2008 Graduate School of Management St.
Petersburg
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Russias Development of a World-Class Financial
Services Sector
International banking is contributing to the
modernization of the financial services sector,
which is necessary for the Russian economy to
develop Can Russia develop a world-class
financial services sector and play a leadership
role in the global financial markets?
It is helpful to measure how Russia stacks-up
against the 4 key elements necessary for a global
financial center.
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Four Key Elements Drive the Success of a
Financial Center
Financial markets
- which are the beating heart of a center and
need to be liquid and broad
Companies and individuals
- which as investors and issuers supply the fuel
for the markets
Financial institutions
- which maintain the relationship between
investors issuers and markets
Local environment
- which provides the right infrastructure,
governance and support for the center
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Financial markets
Companies and individuals
Financial institutions
Local environment
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Financial Markets are Key To Capturing Russias
Economic Potential
WORLD GDP
2007
2020 E
Source EIU
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Russian Financial Markets are Growing Fast
One of the youngest emerging financial markets is
already a major player
FX trading volume on MICEX, daily average
Rouble Bonds issued by Russian companies
1 Jan 2008 28 Mar 2008 Source Reuters, Citi
calculations
Source C-bonds, Citi estimates

• Average daily FX trading volumes on MICEX grew
  by 46 in 2007 and are expected to reach 4.3bn
  in 2008
• Total FX trading volume on MICEX was 856bn in
  2007
• Rouble bond market grew on average at 38 per
  annum during the last 3 years
• RTS Index grew 9 times from 262 points in 2002
  to around 2,060 points currently.

Equity Market Performance
Jan 02
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The Russian Stock Exchanges are now Top 20
Capitalisation of Russian stock market increased
by 6 times in less than 4 years. The MICEX Group
joined the top 20 global exchanges by daily
trading volume for equities and bonds
Top 20 Stock Exchanges
Top 20 Stock Exchanges
Russian RTS MICEX moved from Top 30 in 2004
to Top 20 in 2008
Source World Federation of Exchanges,
www.stocks.investfunds.ruData as of 31 Jan 2008.
Source World Federation of Exchanges,
www.stocks.investfunds.ruData as of end of 2004.
Domestic capitalisation - the total number of
issued shares of domestic companies and also that
of foreign companies not listed elsewhere,
multiplied by their respective prices at a given
time.
The market infrastructure will need to continue
modernizing to meet increased volume and
complexity
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Financial markets
Companies and individuals
Financial institutions
Local environment
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Russias New Multinationals Need Capital to Grow
Top 5 Russian companies are in Top 200 globally
by Market cap
Source Bloomberg, 28 Mar 2008
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Russian Companies Are Already Large International
Issuers
EQUITY
DEBT
Russian Companies IPO proceeds (USBn)
Russian Corporate Debt(USBn)
CAGR 58
Source www.cbr.ru, www.cbonds.ru
Source Citi Investment Research
Source Thomson Financial, Central Bank of Russia
Russia is Top 20 largest Intl bond issuersin
2007
Russia is 3rd Largest IPO Marketin 2007
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Russia Has an Emerging Investor Class
The emerging Russian middle class of 30 million
is set to become one of the largest in the
worldRussian consumers tend to be early adapters
of new technology with discerning tastes

• Russia ranked the second most attractive retail
  market in the world after India (1)
• Personal consumption rate more than doubled
  since 1999
• Russias cities are growing, its 11
  Millionniki cities have populations over 1
  million
• 12th-largest retail market in the world, to
  become 9th-largest by 2010
• Strong growth in personal wealth will continue
  to fuel consumer spending, which will benefit a
  wide range of industries including real
  estate, telecoms, food producers, retailers and
  transport

Internet Connections Per 1000 pop.
Individual investors activity,2006 - 2007
Source Russian Federal Financial Markets Service
Source Miniwatts Marketing Group.
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(1) According to 2007 A.T. Kearney Global Retail
Development Index
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Financial markets
Companies and individuals
Financial institutions
Local environment
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Large Opportunity for Further Development of the
Banking Sector
Possessing a large-scale modern domestic
financial services sector facilitates capital
allocation between investors and companies.
Banking Assets as of GDP, 2007

• The Russian banking sector remains
  under-penetrated by global standards.
• Banking assets stood at 68 of GDP at the end of
  2007, much lower than in other BRIC countries.

Source EIU
Consumer Loans as of GDP, 2007

• Corporate loans stood at about 30 of GDP at the
  end of 2007, while retail loans, including
  mortgages, were only 11 of GDP.
• The Russian banking sector exhibits consistently
  strong loan growth rates over the last several
  years in the range of 35-55.

Source Citi Investment Research
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Increasing Consolidation in the Banking Sector
Top 25 Russian banks by assets, 1st of January
2008

• Number of banks decreased by half over 1997-2007
  decade, market consolidation trend continues.
• Top 5 banks are state owned, controlling 40 of
  sectors total assets
• Top 25 banks own 70 of total banking assets
• International players quite visible- 5 of Top 25
  banks controlled by foreign investors
• In 2007 the industry continued fast expansion
  growth over 2006 amounted to 55 for banking
  assets and 45 for Revenues (RAS)

Source CBR. All financials are based on RAS
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Financial markets
Companies and individuals
Financial institutions
Local environment
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The Local Environment is a Key Factor for
Business Development
To be truly successful, a financial center needs
to attend to non-financial factors and ensure
they are optimised.
Global cities ranked by Global Financial centers
Index
Factors of competitiveness ranked (2007)
Rank City Key Success Areas
1 London Strong on people, market access, regulation, environment and culture
2 New York Strengths are people and market access
3 Hong Kong Geographic position and competitive in the area of regulation
4 Singapore Strong banking regulation
5 Zurich Niche center for private banking and wealth management
6 Frankfurt Strong market access, business environment and infrastructure
7 Geneva Strong business environment, and a niche center for private banking and asset management
8 Chicago High on people and remains a powerful regional and specialist center
9 Tokyo Good liquidity, infrastructure and market access
10 Sydney Strong national center with good regulation

? Moscow
Favourable and understanding regulation Fair and just business environment Corporate tax regime Government responsiveness
Deep pool of educated personnel Flexibility of labour market Culture and language
Availability of business infrastructure Clustering effect of suppliers of professional services Operational costs
Access to customers Access to international financial markets Volume and value of financial markets
1. Business Environment
2. People Factors
3. Infrastructure
4. Market Access
Source The City of London Corporation, March
2008.
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Case Study London Paris A Tale of Two Cities
Lessons For Russia

• Government policy Since the 18th century, the
  City of London has played a major role in public
  life in more recent times, where the financial
  sector has been a key growth sector in the
  economy, both Conservative and Labour governments
  have worked to ensure its competitiveness (e.g.
  tax, Big Bang, 1986 independence of Bank of
  England, 1997). This is in marked contrast to
  the more controlled French economy.
• Regulation The Financial Services Agency (the
  FSA) became a unified regulator early, its
  renowned light touch has been aided by the flow
  of private sector personnel into the
  organisation. French regulators have been more
  prescriptive.
• Critical mass All key financial sub-sectors have
  scale in London if I want to do a deal, I can
  always get it done here
• Innovation The City of London possesses a
  reputation for being able to structure innovative
  transactions indeed, Paris faces a shortage of
  financial structurers who prefer to based
  themselves in London.
• Lifestyle Londons huge arts and social cultures
  acquired a new lease of life in the 1990s. It
  turned the city into a desired destination for
  foreign workers (from bankers to barmen) Pariss
  cultural life is thought to have stagnated by
  contrast.
• Culture London has historic ties to many growth
  economies (e.g. Middle East, Asia), and a highly
  cosmopolitan population.

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SWOT Analysis Critical Success Factors More
Lessons For Russia
External Factors Financial Sector Factors
Tangible Well developed, domestic economy easily accessible to international companies Predictable legal system, easily enforced A pro-business government who understand the development opportunities in finance Competitive corporate and personal tax regime Efficient public infrastructure, such as transport, schools and healthcare Appropriate professional independent regulation A well developed, stable and privately owned banking sector Transparent and liquid liberalised financial markets providing broad issuer and investor opportunities both domestically and overseas Critical mass in asset management with strong supply of investment funds Strong availability of professional support services
Intangible A business environment marked by fairness and adherence to the legal framework General acceptance of a free-market philosophy Openness to foreign cultures and people the cosmopolitan factor Educated work-force with English language skills Attractiveness of city life to expatriates Ability to work in international environment Competitive mindset disposed towards product and service innovation A financially skilled work-force Light touch professional independent regulation Reputation and brand-name of financial sector players
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Moscow as a Global Financial center Facts for
Consideration
Strengths
Opportunities

• Growing prosperity and consumerism
• Potential hub for growing CIS economies
• Under developed financial sector attracting
  international players
• Individual investments will grow fast due to
  wealth and educational levels

• Deep pool of well educated personnel
• Flexibility of labour market
• Access to international sized customers
• Access to international financial markets
• Size of financial markets large and increasing
• Favourable geographical location, time-zone

MOSCOW

• Economic base not diversified
• Infrastructure development does not keep up with
  business growth
• Large portion of economy is government-controlled
• Underdeveloped small business sector burdened by
  regulations
• Market and banking supervision does not keep up
  with requirements
• Rapidly increasing wages due to rising
  competition for talent

Weaknesses
Threats

• Challenging business environment, unpredictable
  legal system
• Shortage of business infrastructure and
  professional support services
• Uncertain and unfavourable corporate tax regime
  (1)
• High operating costs
• Complicated visa regime for international
  personnel

(1) Total corporate tax rate is 51.4 vs. 35.7
in London. Source The City of London
Corporation, March 2008..
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Conclusions

• Over the last 5-10 years Russias financial
  sector evolved very fast both in terms of size
  and sophistication
• yet, lot of changes are required to have a truly
  world-class financial services sector
• that is necessary for Russia to compete in a
  rapidly developing and globalizing world.

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Key Global Financial Centers
by 2020?...
London
Amsterdam
Frankfurt
Moscow
Chicago
Toronto
Zurich
Tokyo
New York
Luxembourg
Paris
Shanghai
Bermuda
Dubai
Dublin
Hong Kong
Singapore
Key First tier centers Regional
centers Specialist centers Growing centers
Joburg
Sydney
FUTURE IS IN YOUR HANDS
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