Russian-African friendship

Date: 26 June 2009

Source: Forbes Russia

Standard Bank CEO Jacko Maree and Ruben Vardanyan, Chairman of the Board of Directors of Troika Dialog sit down for a cross interrogation with Forbes.

In March 2009, Standard Bank and Troika Dialog announced a strategic partnership deal: South Africa’s largest bank acquired a 33% stake in the Russian investment company for $200 mln and also contributed its entire subsidiary Russian bank to Troika. The partnership raised a number of questions, namely: hadn’t Standard Bank rescued Troika (similar to how Renaissance Capital had been rescued by the Onexim Group) from a mountain of debt? And was this deal a conversion of Troika’s debt to Standard Bank into shares? We met with the directors of Troika Dialog and Standard Bank separately in order to ask them both the same questions – about the deal in March, the outlook for the financial market, and the current economic situation.

Jacko Maree (J. M.): Standard Bank has operated in Russia since 1997, and we have conducted a number of operations together with Troika Dialog, collaborated on successful projects, and established an excellent relationship with Ruben Vardanyan. For example, he has visited Standard Bank’s training center in South Africa. We discussed possible forms of partnership over the course of several years.

Ruben Vardanyan (R. V.): We were looking for a strategic investor since 2006, and we discussed this idea with four major banks, including Standard Bank. In November 2008 we had a more in-depth discussion about a possible partnership – the crisis added additional benefits, and by January 2009 we had started discussing the parameters of the deal.

J. М.: There was a lot of speculation on the market that Troika was under enormous debt. All of this was in fact made up. Long before the deal we had organized a loan to Troika Dialog in the amount of $130 mln – this is normal business for us, we ourselves participated in the syndicate of bank-creditors, but the sum was insignificant. There’s no connection between the loan we extended and our entrance into Troika’s capital.

R.V.: Maturity on the loan will come in July 2009. This wasn’t a situation where we sold a stake because we had to fulfill our obligations before a counterparty. Besides the Standard Bank loan, we didn’t have any public debt, nor did we have any debt with Sberbank (with our own shares as pledge).

J. М.: Standard Bank is first of all a South African bank, but we have always paid close attention to other dynamically growing markets. For many years now we have worked closely with China, Russia and Brazil. Troika Dialog has a rather wide presence in the CIS. We believe that in certain conditions it is much more effective to find a strong local partner and develop our business together. We complement each other perfectly. Standard Bank is a corporate, client bank, while Troika Dialog is an investment bank. And our client bases are different.

R. V.: My expectation is that we will succeed in building a new model of cooperation between local emerging market champions.

R. V.: It might be a Chinese bank, but not exclusively. If the model proves itself viable, many others will become interested, for example – banks in India. What are the benefits? Due to the crisis, the global financial system is turning into several local markets, where national regulators and local players will play a much greater role than when you have free movement of anything and everything. Cash flows traveling south-south, south-east, and east-east will increase, and this means that capital movement will not follow one direction like before – from the West and outward to acquire everything. Whereas up until now financial, human, and merchandise resources for the most part have accumulated in the U.S. and Europe, and then dispersed across the world, now Russia, south-eastern Asia, India and the Middle East will have more direct contact. Investors will be interested in a partnership of local champions, since the latter not only have a thorough knowledge of the local market, but have also expanded their local presence considerably.

J. М.: The ICBC is the largest bank in the world by capitalization and deposit volume. The ICBC paid $5.5 bln for a 20% stake in Standard Bank in 2008. No Chinese company has paid more for foreign assets. The ICBC takes its partnership with us very seriously. Thanks to its presence in Russia and its partnership with Troika Dialog, Standard Bank could become a conduit for Chinese investments here.

J. М.: I’m certain of this. Even now, one shouldn’t speak about developed and emerging economies, but about fast- and slow-growth markets. Of course, the fast-growth markets are less stable, as they involve more ups and downs, although the current crisis happened because of problems in a developed economy, in the U.S.

R.V.: I think that the attitude toward risk is changing, but the distinction exists and will exist – the differences in legislation are too great, corporate standards, quality of management, that is – the business habitat. But there are aberrations. For example, the world’s largest banks are Chinese, but at the same time they are not global players. It was simple before – major players could emerge from three markets only: Europe, the U.S. and Japan. Now the local market in China has reached immense proportions, but even though the local banks have grown larger than their international peers, they continue working domestically rather than entering 20-30 foreign markets. This means that their influence over the world economy is going to increase.

J.M.: Growth is likely to begin in developing countries, not in the US or Europe. And even though growth in China’s GDP has slowed, this country has the potential to pull the global economy out of the recession. Plus, neither India nor Brazil experienced the crisis. Recovery may turn out to be faster in those countries where local financial markets are more isolated from foreign markets, and, subsequently, there is no banking crisis in its conventional sense. But despite the “emerging elements,” 2009 promises to be very harsh. Gradual recovery will begin in 2010.

R.V.: I don’t know when, but the upturn will start in the U.S. – the world’s biggest economy and the main driver behind global demand. Moreover, the dollar will remain as the reserve currency.

R.V.: This is a good idea. Nothing is impossible, it’s entirely realistic. If somebody had said back in the 1990s that the LSE would outperform the NYSE in trading volumes, everyone would have scoffed. But now this is the case. One of the major qualitative changes in recent years is that the world has become more dynamic and shifting.

J.M.: I don’t think the crisis will lead to significant changes in the global exchange system; however, a number of regions such as post-Soviet republics will gain more and more importance in different spheres. China’s influence in Asia will increase, as will Nigeria’s in Africa. In ten years’ time, the currencies of the leading developing countries will become a vital part of any investment portfolio. The era of the dollar and euro’s supremacy will come to an end.

J.M.: Standard Bank has traditionally focused on its work with natural resource and commodities companies. We hope that countries with strong mining industries as well as mining companies will flourish in the near future. However, no country can exclusively rely upon exporting commodities, so Russia, Brazil, and Nigeria need to diversify beyond exporting goods and services. This is everyone’s goal.

R.V.: Russian straightforwardness is at times frustrating. On the whole the society has reached the end of another step in globalization. Over the past 20 years, new markets, such as Eastern Europe, Russia, India and China have integrated into the global economy, resulting in great quantitative changes. At the same time, technology has advanced to the point that it has entirely altered the framework of consumption, production and services. What’s next? First of all, a quantum leap in high tech industries such as medicine, bioengineering, etc.

J.M.: The banking business will certainly return to the basics. Banks will become simply banks again. Profits from deals on capital markets and placing structured products will decline. This isn’t necessarily bad, since many innovators went too far. Standard Bank has traditionally financed trade operations and the real sector, for instance, precious metals mining.

R.V.: I believe a number of important changes will happen. We now see a major rift between the global financial systems and local regulations, when local regulatory bodies are eager to preserve and protect their markets. And regulators are likely to make the supervision over financial institutions and capital flow only stiffer. Protectionism in this field will be getting stronger. At the international level, there will be stricter regulations of banking operations and actions in offshore zones. The number of blind-spots on the world map will reduce. Another point is that financial instruments will be regulated more rigidly. It is obvious that the situation when there are only a few dozens banks with the highest rating AAA and thousands products of the same class is abnormal. After the crisis all the banks will naturally divide into two categories. The first will embrace conventional banking: credits, deposits, settlement and cash services, i.e. basic financial services. The second will include IB services: corporate finance, brokerage, capital markets, etc. This clear differentiation in specialization will enable the client to assess risks singlehandedly. One will opt for system risks, another for market risks. Investors and clients will estimate banks not only judging by owners and balance sheets, but also from the point of view of their ability to survive in case of a collapse. Investors and clients will start to evaluate supplementary reserves which banks can take advantage of in severe times. And the Government is not necessarily the most reliable owner; should the crisis develop by a W-pattern, the bankruptcy of entire countries will become real. And, finally, the margin and return on banking operations will reduce. This means professionalism and fresh thinking will be the thing that matters.