An Age of Careful Decisions
The global economy is going through a period of radical change that may alter the rules of the game. Not surprisingly, financial institutions will always be influential stakeholders in these transformations. Andrei Degtyarev, Chairman of the Board at Absolut Bank, talks to BRICS Business Magazine about how the roles of banks have changed over the last few months and what important developments are taking place in Russia today.
Against the backdrop of recent foreign economic developments, what changes have taken place in Russia’s financial industry? Has it become less significant?
The world is volatile and difficult to predict, especially as of late. However, the banking system remains the economy’s primary blood vessel; both in Russia and in Western countries, nothing has changed in this respect. There are certain fundamental elements that simply do not change overnight. It is an entirely different matter how banking institutions, and the banking industry as a whole, are losing the mystery that used to surround them. This trend persists as the very notion of ‘banking secret’ becomes more diluted and banks assume the role of mediators acting on behalf of governments or tax authorities to identify people engaged in questionable transactions or tax evasion. This trend is characteristic of all countries – not just Russia. Banks used to be safe havens where people could hide capital and store their wealth in secret, but they are turning into transparent financial institutions.
How did the role of financiers change along with the industry?
Perhaps the most obvious manifestations of these changes can be seen in Russia. If we take the period when our banking system was coming of age, we can see that most of the players on the market were essentially financial and industrial groups. To put it simply, there was always a group of companies around each bank that it financed, whereas the bank itself was generally just an entity to support their development. The 1998 and 2008 crises changed this dramatically.
Regulations in recent years have made the model I just described no longer viable. There is now a strict line between the business of proprietors and that of the bank itself. Banks are finally becoming financial institutions in the classical sense – establishments that provide financial services, but do not support the interests of their shareholders.
In light of the changes in the foreign economic climate, which industries have become more prominent and gained more clout?
Because these changes are still gaining traction, many trends have not clearly manifested themselves yet. But one thing is certain: the industries that are now spearheading the import replacement efforts will grow exponentially. This primarily applies to the consumer, food, and agriculture industries. There are some expectations that the sectors connected with the military will grow as well, which is logical. It is an open secret that many things used to be manufactured overseas and imported from the so-called ‘near’ and ‘far’ abroad. Today, for obvious reasons, that is no longer possible and the industry must be developed domestically. This demand may boost production within the country. Industries engaged in the manufacturing of equipment and hardware for the oil and gas industry will also show upward growth. These are exactly the industries that were hit during the ‘trade war’ with western countries, but they will need to develop their own technologies and manufacturing capabilities.
During the last BRICS summit, the member nations signed an agreement to set up a BRICS Development Bank as an alternative to the World Bank, as well as to pool their reserve currencies to create their own version of the IMF. How will this step affect the global financial system?
To be honest, I do not think that this will change the global financial system. This bank’s capital of $100 billion is not that high against the backdrop of the total volume of transactions, which is measured in trillions of euros and dollars. The fact that this bank exists would, of course, provide more diversified opportunities for the BRICS countries, but it would not shift the balance in any significant way. Moreover, even the BRICS countries’ heavyweights are not interested in upsetting the existing balance, that is in displacing the dollar or the euro. Take China, for instance, with its enormous foreign exchange reserves denominated in dollars – it is highly unlikely that they would want to devalue this currency and undo years of China’s efforts to boost its manufacturing and export capabilities.
Today, the world is busy looking for new technologies and alternative energy sources that could end the dependency on foreign resources that many countries and economies suffer from. How will the global landscape change when these are found?
By and large, all of these alternative sources have already been found. And it did not happen yesterday. However, the resources owned by the entities, corporations, and states that act as exporters of raw materials are quite significant, and it is in nobody’s interest to drastically change the situation. Alternative energy sources have a high production cost and can only be turned into a mass product capable of replacing the known types of raw materials if large investments are made. Nobody is rushing to invest in this project and until that happens, alternative sources will never become mainstream – no matter what anyone says.
If we talk about Europe in the context of new technologies, things are quite straightforward, A new raw materials supplier that could replace Russia has already been found. This is why it is highly unlikely that they would be searching for any alternative sources in the foreseeable future. They would simply import a more expensive kind of shale gas from across the ocean.
Russia’s economy is stagnating. How are bankers coping?
Their response is quite predictable. Bankers become more conservative when it comes to the assets they want to invest in or the projects and entities they want to debt-finance. More cautious positions and behavior have become a common trend in the banking community. A significant safety margin is being generated, both in terms of regulations and liquidity. Larger market players have started paying more attention to costs – they are trying to cut them, rather than venture into new inflated capital investments. In other words, a period of moderation and prudence is upon us. Nobody is planning any significant expansion or development – an age of careful decisions and actions has arrived.
Will the Russian economic system be able to function normally without foreign investment?
It is difficult to imagine a country capable of surviving without foreign investment. As far as I know, even North Korea does not function without them. The question is: What kind of countries and investors are we talking about? Today, Russia is faced with a situation where only Western Europe and the United States have closed their doors, but it does not go any further. It does not translate to the entire world; there are other markets in Latin America, in the Arab world, in India, and in China, which is why foreign investment will continue. Moreover, as time goes by, Western investors will realize that they let go of a large market share and the subsequent profits. This will be a compelling argument to return.