WASHINGTON, Jan. 30 (UPI) -- MDM Bank recently was named "Russian bank of the year 2002" by The Banker magazine. As its youthful chairman, Vladimir Rashevsky, was in town Wednesday, I took the opportunity to find out how Russian banking was recovering from the 1998 default of the country and banking system.
MDM Bank is one of eight banks (seven in Russia, one in Latvia) that are majority-owned by MDM Financial Group, formed in 2001, which is domiciled in Austria and owns its Russian and Latvian assets through Cyprus, a well-known financial haven for offshore Russian money.
MDM is the second-largest privately owned banking group in Russia, after Alfa Group, and is in fifth or sixth place overall -- the majority-state-controlled banks Sberbank, Vneshtorgbank and the National Bank are all larger, and Agroprombank (for which European Bank for Reconstruction and Development is in negotiations to buy a share stake) is comparable in size. Total assets of MDM Bank were about $3 billion at the end of 2002 (final results are not yet prepared), and capital of about $400 million.
The bank has three main lines of business: corporate banking, retail banking and investment banking/financial markets. MDM does business with 60 of the 100 largest companies in Russia.
Since the bank originated from a Soviet trading house, its position in foreign exchange and note dealing has always been substantial -- the bank believes that it has 45 percent of the bank note market (dealing in foreign bank notes), a very substantial business in Russia, where so much economic activity is carried out on a cash basis. In 2002, for example, Russia imported $10 billion of dollar banknotes, nearly $5 billion of which was handled by MDM.
Investment banking itself is a relatively new business for the bank, formed within the past 18 months, but already MDM is in second place as issuer and underwriter of debt for Russian corporate issuers, and has been active in domestic mergers and acquisitions. The bank also recently helped a Russian client make an acquisition in Kazakhstan, an example of where a Russian bank such as MDM has an important competitive advantage over a Western bank for historical reasons.
I asked Rashevsky whether the Russian economic system had changed qualitatively since the 1998 crisis. "I would say that the system has changed very substantially, primarily through politics," he said. "A good part of our crisis in 1998 was a political crisis because Boris Yeltsin was not keeping all the reins in his hands. Sometimes people could not understand what he actually did, so there was no political stability. Now the situation is quite different. President Vladimir Putin has very high ratings, there is no doubt he will be re-elected. Economically, the situation is much better than in 1998. The debt problem is -- not resolved, but it's less -- if you look at the figures, in 1998 debt was 60 percent of gross domestic product, now it's 37 percent. Russia now has enough reserves to fulfill all its obligations; from $12 billion in 1998 they have risen to $50 billion, and the current account surplus is $60 billion. The currency rate is absolutely controlled by the Central Bank and will be whatever the government wants. Interest rates and inflation are both declining."
"Banking assets have reached the same level as before the 1998 crisis," Rashevsky continued. "However, retail deposits in the banking system have risen from $9 billion in 1998 to $32 billion. I still think, however, that this isn't the maximum -- about another $70 billion are outside the banking system. To attract these back into the system, it's very important to have deposit insurance, a law for which is in front of the Duma (parliament) currently."
In 1998, Russia's economy was badly affected by oil prices of around $8 to $10 per barrel. Of course, it is benefiting from the current price of more than $30. Budget and financial projections by the government and business are made on the basis of $17 to $20, according to Rashevsky, and the country has reserves to survive two to three years at $8 to $10 per barrel, although that would be without significant economic growth.
I asked whether there were major changes in managerial competence in Russia since 1998.
"Yes, there have been major changes. The level of management in the top 100 companies is very high, and even midsized companies of the second 100 and below pay very serious attention to their level of management. The process is not complete, but it's under way. When we lend money, we demand a very high level of disclosure, and demand a high level of competence in their management team. If we look at all Russian companies, 30 percent of them have skilled management, but those 30 percent control 60 percent of the Russian economy. Market research is still difficult, but due to the slowdown in the world's economy, lots of professionals are being hired by Russian companies."
The window for Russian banks to raise money internationally opened in 2002. MDM opened the Russian bank syndicated loan market, and now has facilities with U.S. Eximbank and the major export banks, and is rated "B" by Fitch, the highest possible rating for a Russian private bank. The bank carried out through Regulation S (no sales permitted in the United States) a $125 million, three-year Eurobond issue in December, with a coupon of 10.75 percent and an issue price of par.
Fund management is a new business for the bank, which has established a Cayman Islands fund management company and plans to create an equity fund, an external debt fund, a Russian domestic debt fund and a private equity fund. Rashevsky continued: "We see quite a big demand from Russian capital, which was withdrawn from the country during the last 10 years, and now sees the country is much more predictable, and the market is opening. Of course, they want to invest Western-style, with their money legally protected, so they need someone who can 'front' them."
One of the noted directions for the future is the pension fund business. Russia is introducing pension reform legislation, which is expected to be fully operational by 2006 with funds collecting $10 billion per annum. Already, with the funds operating only on a test basis, they have collected $3 billion. MDM is very active in the payroll business, processing 4 million payrolls, so expects the pension fund business to be a big producer in future years, as its payroll clients will be natural early customers.
MDM Financial is looking at making an initial public offering, and is being advised on equity structure by Daiwa European Securities, but such an issue is probably two to three years off. A pity -- the shares might otherwise be an interesting investment.
