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24.04.08
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Strategic Commitment
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Interview by Felix Goryunov
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Joerg Bongartz is Chairman of the Board, Deutsche Bank Ltd., Moscow, and Chairman of the Banking Committee of the Association of European Businesses (AEB) in the Russian Federation. He spoke to Russia Profile about Deutsche Bank’s operations in Russia and the state of the Russian financial system.
R.P.: Russia’s financial system, including both banking and equity markets, is not yet developed enough to meet huge funding requirements for sustained economic growth, technological restructuring, and improvement of infrastructure. Therefore, Russia is dependent on the inflow of foreign capital, which has recently been aggravated by more expensive international credit. Is there a danger that under these circumstances the flow of foreign capital into Russia will diminish?
J.B.: Russia is integrated in the global financial market, but (fortunately) not to the extent that Russian financial institutions are directly affected by the U.S. subprime mortgage loans. On the other hand, global investment flows include Russia, and therefore the shocks on global equity markets affect share prices in Russia. At the same time, we see that high quality Russian issuers are still well accepted by international investors.
In recent months it has been more difficult to raise funds, and they have also become more expensive. But there are various ways of funding, such as capital markets, syndicated loans and bonds, or bilateral credit agreements. I believe that now is the time when loan structuring is becoming especially important for meeting requirements for raising debt. It is clear that Russia’s growth story and its investment requirements need adequate funding, both from outside and from the domestic market.
In general I am not very concerned about the impact of the global credit crunch on Russia’s financial system. The period of higher funding costs and funding constraints will continue, and no one knows how long this period will last. It is a phenomenon Deutsche Bank will deal with on a global basis, and we will have to deal with it in Russia. There will be cases when external funding for a corporation or a bank is not possible at all. In such cases, we must look for intelligent solutions of fund-raising in the Russian domestic market. I am convinced that there are substantial financial resources available domestically that have not yet been used.
R.P.: What are these resources?
J.B.: I am thinking first of the trillions of rubles in pension funds. Last year, Deutsche Bank launched an initiative, which was not a response to the above-mentioned global developments, but incidentally gained some momentum now because of them. We believe that a solution to the problem of insufficient funding could come from introducing a new instrument to the Russian securities market – the so-called “infrastructure bond.”
The first step in this direction is to create the right regulatory framework for infrastructure bond financing. We have discussed our initiative with Russia’s Federal Service for Financial Markets, the Ministry of Finance and the Ministry of Transport, and got their support. We don’t think that creating the new instrument as such is complex. Difficulties might occur during the realization of a Public Private Partnership (PPP) project. We suppose that infrastructure bonds will be based on PPP projects in infrastructure. However, legislation in this area still needs improvement. It is very important to create not only a new public instrument for issuers, but to develop attractive and stable instruments for investors.
The idea is that big infrastructure projects that are now planned by the Russian government have to be funded with long-term money, which could be raised not only from external sources. It is anticipated that such bond issues might become a vehicle whereby private capital would flow in for implementation of national infrastructure projects – construction of highways and railroads, sea ports, airports, power transmission lines, and pipelines.
While long-term funding is badly needed for infrastructure programs, excessive liquidity is locked in conservative investors like pension funds, and in other financial facilities. Having accumulated vast resources, these funds are lacking high quality borrowers and reliable mechanisms for placement of their spare capital. Clearly, bonds governed by a specific legal framework, meeting security requirements of those investors, are the missing link the market needs in the near future.
R.P.: Is this initiative backed by the Russian government?
J.B.: As Chairman of the Financial Institutions and Capital Markets Development working group in the Foreign Investment Advisory Council (FIAC), I can say that Deutsche Bank as a foreign investor highly appreciates collaboration with and economic policy efforts of the Russian government. The Ministry of Economic Development and Trade, the Ministry of Finance, and the Central Bank coordinate and contribute to the activities within the FIAC, related to changes of the legislation and the regulatory framework. In particular, those changes where Deutsche Bank is involved, affect the pension system, legal amendments to the derivatives, and pledge legislation.
R.P.: What is Russia’s role in the Deutsche Bank Group’s global operations?
J.B.: Deutsche Bank entered the Russian market as far back as 1881, by underwriting a capital increase of the Russian Foreign Trade Bank based in St. Petersburg. In 1973, we were the first Western bank to open a representative office in the Soviet Union, when we led a credit consortium to finance exports of large diameter pipes from Germany for a famous Soviet gas pipeline project.
After the break-up of the Soviet Union, we chaired a committee of the London Club, which comprised 13 international banks and represented 600 creditor banks worldwide. Upon completion of the Soviet foreign debt negotiations, we opened a subsidiary in 1998, as one of the first banks to hold a ruble denominated capital.
It is obvious that the Russian market, as well as other large emerging markets such as China and India, is greatly contributing to Deutsche Bank’s global franchise. Instilled by a positive macro-economic and political situation, our Russian client base is growing rapidly and demanding increasingly sophisticated services. Going forward, Russia will be a key market and cornerstone in both Deutsche Bank’s and its clients’ BRIC strategies, especially if you take into account that it will be the world’s fifth largest growth economy by 2020. Our strategy for the upcoming years will be to develop new financial solutions, explore new niches, and grow with this market.
R.P.: Deutsche Bank’s operations in Russia tend to rely on financial services for the corporate sector – loans and credits, syndication deals, mergers and acquisitions, initial public offerings (IPOs). Does this reliance on investment banking result from the specifics of the Russian market?
J.B.: Generally speaking, Deutsche Bank Russia mirrors DB’s global set-up, with one exception: we do not offer any retail business. In short, our strategic focus on investment banking has proved to be the right choice also for Russia. |
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