Dialogue Chain. Episode 7.
Alexey Savatyugin, aide to the Chairman of the Accounts Chamber of Russia, shares a brief overview of the Russian financial market in converstion with Apurva Sanghi, lead economist for Russia at the World Bank Group.
Sanghi: Good morning, Alexey. And it’s a pleasure to meet you and to have this opportunity for this conversation. And I have to say if I hadn’t been an economist I would love to have been a journalist. So, this gives me an opportunity to try my second role.
Savatyugin: Thank you. I know you’re a journalist as well as an economist. You write opinion pieces for economics publications.
Sanghi: (Laughs) Thank you so much. So, Alexey let me… I’m going to ask you three to four questions. So, let me begin by asking you how would you describe the current state of the Russian financial market. What’s working and what’s not?
Savatyugin: I think that the strength of the financial market is in its infrastructure. Our stock exchange is good, our central securities depositary is good, and the quality of our securities record system meets global standards. We have good technologies, good IT, and we can accommodate large volumes of investment. Those are the strengths of our financial market.
Sanghi: Yes, I’m more interested in a not-good part (laughs).
Savatyugin: There are weaknesses too. Our market isn’t large. As a proportion of GDP, it’s not really significant. It’s over-regulated. The rules are very tough, the barriers to entry are high, and it’s difficult to operate in this sector. As for the stock market, the number of issuers is low and not getting any higher. In our market, there aren’t many investors, institutional investors who bring long-term money with them. We don’t have many individual investors either. More have appeared over the last couple of years, but it’s still not enough. About 2 million individuals out of 140 million invest in the financial market. That’s not a lot. So, we have poor demand, we have poor supply… There’s also another feature of our financial market worth mentioning, which I consider one of its weaknesses, and that’s the massive governmentalization of the market, the large public sector. We have a strong regulator, which is good, but we also have a public sector which dominates almost every segment of the financial market – banking, infrastructure, pension funds, and in recent years, insurance as well.
The only segment where there’s no state participation is the microfinance market, but that’s very small. And the public sector is growing. That’s related to Russia’s past crises, when the authorities stepped in to save banks, but it’s also been a long-running trend since the early 2000s: the number of market participants has been falling across all segments. I remember the days when we had more than 2,000 banks; now we have just over 400. They say the banks that leave are the weak, unreliable ones, and that only the good banks stick around. Maybe. But with fewer players, there’s less competition and a smaller ecosystem; there’s less need for experts and information resources, and the system as a whole deteriorates.
Sanghi: I completely agree. In fact, in my conversation with Evsey [Gurvich] in the previous session, we were discussing that and that point came up – the growing role of the state and the state footprint. But just to do a quick follow-up. You mentioned that there’re barriers to entry. Are there commensurate barriers to exit also?
Savatyugin: Yes, of course. There are certainly barriers to exit. If you are a banker or a participant in the stock market, you can’t just come here, hand in your licence and say, “I’m done. I’ve had enough of this business. I’m going to bake cakes or become a professional sportsman.” It’s tough to exit the business. A couple of years ago, a new term appeared: “burnt-out bankers”. These people entered banking in the 1990s when the margin was high, profits were high, and it was easy to start a bank. We used to have thousands of banks. They got used to turning a profit, but that’s no longer the case. Now, you have to fight for every percentage point, for every million. It’s becoming increasingly difficult. And it’s more about compliance than business. They want to get rid of the business, they want to exit the market, but it turns out that nobody wants their business as it can’t be easily sold, or its liabilities to counterparties or clients are very high. So they can’t get rid of the business economically, and they can’t leave the market. And then there are regulatory constraints that limit the ways you can dispose of your property.
Sanghi: So, you mentioned that financial market regulations are onerous. If they were – this is hypothetical – if there was one financial market regulation you could change, what would it be?
Savatyugin: Just one? Rather than abolish any existing regulations (although there are plenty I would happily abolish), I would prefer a regulation that is about to be introduced not to be introduced. This autumn, a new law is likely to be passed, and I think that we don’t need this law. This law is called the ‘qualified investor law’; it divides individual investors into groups based on their qualifications and specifies the types of financial instruments in which different groups are allowed to invest. I don’t think we need this law at all. It could significantly disrupt our market of individual investors, which is already very weak.
Sanghi: Because somebody else is deciding who should invest in what. Yeah. I get it.
Savatyugin: Exactly. This is my property, my money, which I earned honestly. You don’t question the source of my money. You didn’t help me earn it. Why are you telling me how to spend it? And why do these restrictions exist only in the financial market? It’s difficult to explain. I haven’t managed to get either legislators or regulators to give me any coherent arguments for it for it. Why are you telling me how to spend my money?
Sanghi: So, moving on to retail investment in Russia. Do you agree with the view that Russian people prefer to keep money under the mattress? And if so, why? Maybe you disagree. I don’t know.
Savatyugin: True. People keep their money – well, figuratively speaking – under their mattresses or in safe-deposit boxes or somewhere else. As for how much…well, there are various estimates. According to experts, about 4–6 trillion roubles are just lying around somewhere like that and are outside of the financial system. But I think that’s okay. It’s a way of protecting money. The level of trust in our financial system is not that high yet. Over the quarter-century it’s been in existence, the financial market has undergone one full-fledged default on sovereign debt and at least half a dozen serious banking crises. That’s a lot. The rules of the game change. People need to be sure they will definitely have at least something. They understand that inflation eats into that money they’re keeping under the mattress, but despite its negative profitability, it’s a highly liquid asset, the money they keep in their homes, yards or under their mattresses. And thank God.
Sanghi: Okay. And if I could just get your views on the Russian pension system. If you could describe from your perspective what is the current state of non-pension funds as well as the future of pension savings.
Savatyugin: The Russian pension system has probably had a harder time than any other segment of the financial market. Our pension system was shaped…well, it began to take shape in the second half of the 1990s, so more than 20 years [ago]. And it is constantly being reformed. People are constantly thinking up new rules for the game. So, now, who can really say what the rules of the game in our pension system will be in even five years? There’s no agreement among the regulators or among the legislators. And this is long-term money! The planning horizon here is very long-term. How can you invest if you don’t even know the general framework for the next year’s reforms?
To a great extent, it was the weaknesses of our pension funds that led to the creation of the megaregulator in 2013, when the Bank of Russia took over the Financial Markets Service. And one of the problems the government had with the financial market was that we had no idea what was happening with the pension funds; we had no idea about their assets or the ways they were managed. So it fell to the Bank of Russia to sort things out. I guess the Bank of Russia has done that. Because, well, there are fewer pension funds, and they’ve all gone public and started disclosing information. But they don’t know how they are going to operate. And there’s a linguistic paradox in our term ‘non-state pension funds’. So, the assets of the majority of these non-state pension funds are public. It’s public money, the Bank of Russia’s money.
Sanghi: Very good. Alexey it has been very educational to me and, I’m sure, to our viewers to hear your views about the state of the Russian financial market, what’s working, what’s not, retail investment, the pension system, the non-state state pension system, in particular, pension funds. So, Alexey in the time-honoured tradition of this Dialogue Chain, I want to ask you who are you going to talk to next?
Savatyugin: A couple of years ago, I happened to visit Bangladesh, where I met Professor Muhammad Yunus, the Nobel Prize winner. He shared with me in detail his experience of establishing microfinance organizations in Bangladesh and all over the globe. We here in Russia passed a law on microfinance organizations 10 years ago. It would be interesting to discuss with Professor Yunus the current state of affairs and his views on the contemporary financial system.
Sanghi: Well, I shall look forward to seeing that one. Thank you very much again Alexey.
Savatyugin: Thank you.