Global Report 4Q 2017 - Support - UFRJ
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Global Report
4Q 2017
Support
Summary
Infrastructure and Brazilian Growth – p. 3
Liga de Investimentos – Poli UFRJ
This report exposes the current economic scenario of Brazil, the
country’s infrastructural outlook and its programs for developing this
sector. A brief equity research presents the financials of Rumo, a big
railway company in Brazil.
Punishment with Sanctions: What was the
impact? – p. 9
Maxim Chupilkin, Ilya Lylin, Dmitry Petrov
This report approaches the sanctions in Russia, Foreign Direct
Investments, National Investment in Russia and how all of these
played a role in the recent Russian recession.
Private Banking & FinTech – p. 18
The past decades have proved that technology has been a key driver
of growth and change in all industries. This report will identify and
discuss the main impacts of FinTech on commercial banks
development.
Steps towards Green Economy in the UK – p.22
This report discusses the new Toxicity Charge in London, introduced
by Mayor Sadiq Khan, and analyses some of its effects on Londoners
and the economy. The main measure of “pollution” referred to is
Nitrogen Dioxide
Private Banking in Switzerland – p. 23
This report exposes the current economic scenario of private banking
in Switzerland. A brief research on the subject, will show us the
problems that they encounter and the solutions proposed.
State Capture & Political Instability in South
Africa – p. 25
Mikhil Valjee & Emma Ho
This report exposes the concept of state capture and why it has
become increasingly prevalent in discussions of the economic and
political climate in South Africa.
M&A Activity in France – p. 28
Antoine Laffont – Club Finance Paris
This report exposes the current M&A activity targeting the French
territory and briefly analyses some of the most impactful recent events
on the deal flow in the country.
Global Report - November 2017 2
Infrastructure and Brazilian Growth
Macroeconomic outlook
The approval of the Brazilian Labor
Reform and the expected approval of the
social security reform are important
measures to balancing the current fiscal
deficit of Brazil in the long-term.
Moreover, both reforms make it more
likable to approving a tax reform, which is
still under formulation.
Figure 1: Brazilian Interest Rate Evolution
Brazilian Congress has also approved Source: Central Bank
changes to the loan rates of the Brazilian Infrastructure in Brazil
Development Bank (BNDES) making
them more heavily influenced by the According to "The Global
basic interest rate. In the long term this Competitiveness Report 2016-2017"
should make the monetary policy more created by the World Economic Forum
efficient, with the downside of making Brazil ranks 78th out of 138 studied
companies dependent on such loans countries. An unexpected result for a
more vulnerable in the short term. country ranking as the 8th biggest market
in the world. But an expected result for a
The Central Bank of Brazil has reduced country where infrastructure investments
the base interest rate to 7.5%, acting in were not a priority throughout its history.
line with market expectations and giving
signs of willingness to taking it to the 7% The infrastructural deficit facing Brazil
level by the end of the year and to represents one of the key structural
maintain the same rate until 2018 as a obstacles to accelerated growth. As it is
gradual end of cycle in monetary policy. shown below, Sub-Saharan Africa, Latin
America and Caribe are the regions with
Projections indicate a GDP growth of lower proportion of infrastructure
0.7% in 2017 followed by one of 2.5% in investment, contrasting to the
2018, according to the Central Bank considerably higher proportion of the
Database, stating a reversal of the crisis GDP invested in the most developed
scenario. Inflation measured by IPCA is regions of the world.
expected to be of 3.2% followed by 4.0%,
according to Itaú BBA an increase Infrastructure Investment
provoked probably due to economic Region %GDP
acceleration.
East Asia and Pacific 7.7
The falling unemployment rate (13.6% on Central Asia 4.0
the first trimester and currently at 12.4%) Latin America and Caribe 2.8
is expected to be further reduced by the Middle East and North
6.9
labor reform as well as the creation of Africa
formal jobs is expected to expand more South Asia 5.0
intensively. Industry and the retail market Sub-Saharan Africa 1.9
also show signs of recovery in Figure 2: Infrastructure Investment Worldwide
comparison to the first quarter of 2017. Source: ADB 2017
Global Report - November 2017 3
The extremely limited extension of Brazilian’s Infrastructure Programs
railways around the country is an old
history. By the 50s the former president PAC
Juscelino Kubitschek planned to move
the country’s capital to Brasília, closer to Divided into two phases, the Growth
the geographical center of the country, Acceleration Program has invested over
with the purpose of better connecting the US$ 700 billion over it lifespan of 8 years.
nation. The chosen model to physically The main invested segments were
connect the different parts of the country housing, power generation plants, urban
and to stimulate its industry was based infrastructure and logistic.
on highways.
Despite its significant role in expanding
Although the model played an important Brazilian infrastructure through setting
role in developing the economy at that ambitious targets and a stake of over
time, focusing on highways was not 80% projects completed on time, the
enough for the 5th biggest country in the program has met with significant delay in
world. Even if there were not deficient some subsectors, such as urban
regulatory governance, a record of delays transportation, sanitation and ports.
and corruption, it would still be necessary Bureaucracy for projects approval and a
to increase infrastructure investments. less efficient management may have
Furthermore, these investments been core factors for it.
accelerate economic growth and after the
economic, political and moral crisis Recently the program has been
affecting the country since 2014 the expanded by the government under the
country has been craving growth. name of “Programa Avançar”. The goal is
to provide US$ 40 billion in order to finish
Created by the former president Lula over 7,000 projects started with PAC until
(2003-2010), the Growth Acceleration the end of 2018.
Program (“PAC”) was structured to start
investing in bigger infrastructure projects Concessions and PPP
between 2007 and 2014 related to power
generation, housing and logistics. The Since the coffee era in Brazil, around the
program was further administered by 18th and 19th century, there were some
former president Dilma Rousseff between cases of railway concessions related to
2011 and 2014. local transport of coffee. The lack of
public funds to develop all the necessary
Other adopted measures were based on infrastructure projects and the belief that
the models of concession contracts, the private sector is more prepared in a
production sharing, Public Private technical and managerial manner than
Partnership (“PPP”) and the Program of the public sector were decisive factors to
Partners and Investments (“PPI”), raising further opening the sector for the private
private investments for infrastructure field.
projects, especially since 2016 after the
new administration of president Temer. Since Lula and followed by Dilma
With the tight fiscal situation after the Rousseff government this model of
devastating recession private conceding the rights of exploration of
investments through PPP, PPI and certain sectors by private initiative has
concession agreements are now even been expressively more present in our
more necessary. economy. This fact contradicts the
perception of a more statist government,
Global Report - November 2017 4
as their party (“Labor Party”) is Another focus of Projeto Crescer, besides
categorized as left wing. logistics and oil exploration, is sanitation,
due to its high level of scarcity throughout
Concession contracts in Brazil concede the country and its direct impact on health
the rights of investing and providing as a basic need for life. Concessions and
services mainly in energy transmission privatizations are being evaluated for
systems, railways and highways. The taking place in the next months.
model of concession was widely adopted
for oil exploration and conceded the Some PPI projects in progress are
ownership of the oil and gas to the graphically illustrated as following:
producing company.
During the administration of Dilma
Rousseff in 2010 the concession model
changed to production sharing model and
insured the ownership of the
hydrocarbons to the Brazilian state,
conceding the producing company a
stake of the extracted oil as a payment
for the exploration.
PPI
The Program of Partners and
Investments is conducted by the
Economic and Social National
Development Bank (“BNDES”), a
Brazilian bank controlled by the
Government of Brazil aiming to providing Figure 3: PPI Projects
long-term credit to developing different Source: BNDES 2016
economic sectors. BNDES structures
Privatizations and Auctions
projects to attract private investors and
close investment deals with them. Already in 2016, as part of the Program
of Partners and Investments, the
Between the period of 2016 and 2018,
government launched a plan to privatize
PPI plan investing US$ 150 billion mainly
34 assets. In early 2017, the government
on oil exploration and production and on
of Rio de Janeiro approved to privatize its
inter-city highways through the so called
state company (CEDAE) responsible to
“Projeto Crescer” (Grow Project). And
collecting and treating wastewater and
due to Petrobras Contractor’s Scandal,
distributing water in Rio de Janeiro. A
Temer’s administration of the PPI is
measure to generate cash flow to relieve
looking even more for foreign investors to
the financial crisis Rio is going through.
explore different sectors of infrastructure
in Brazil. For instance in the last year one Attempting to contain the country’s fiscal
of the biggest Chinese infrastructure deficit and to achieve the budget target
company, China Communications for the years of 2017 and 2018, the
Construction Company (“CCCC”), has government of Brazil has announced in
closed two deals to exploring two port August the privatization of Eletrobras, the
areas in Brazil, one in Santa Catarina biggest power generation and
(South Brazil) and other in Maranhão transmission Brazilian company, and also
(Northeast Brazil). a new privatization package of 57 more
Global Report - November 2017 5
assets, including airports, ports and of Mato Grosso (one of the biggest
highways. In the Eletrobras case, this agriculture polo of Brazil) to the Santos
process is expected to happen through a Port, making it an important
new offering of stocks, a fast way to transportation route for agriculture
diminish the government participation in production.
the company, and then to enhance the
efficiency in its activities, seen that in 4 of Recent Results
the last 5 years the company presented
losses and that it has been used as a Since its creation in 2015 the company
powerful political tool so far. Related to has not been profitable. Rumo’s
the assets, the process has already concessions were in really bad
started with the acquisition of the Jaguara conditions, generating high maintenance
Power Plant (MG) by a company called costs, low capacity and high accidents
Engie, and is expected to last until the rate. Renovating the railroad required
end of 2018 to conclude the 57 auctions. high investments. They spent more than
US$ 2.2 billion with new locomotives,
Beyond relieving the country’s short-term renovating part of the railroad and
fiscal problems, selling these assets increasing capacity from 45 billion tkm
means an improvement in the (tonne-kilometre)/year to 50 billion
government cash flow dynamic on the tkm/year.
long-term. In terms of the infrastructure
sector, a new management team, with Rumo
better expertise and no government Financials 2015 2016 2017
intervention tend to benefit the sector and Revenues 1,501 1,567 1,612
to revert its huge deficit. The auction of EBITDA 598 634 693
% margin 40% 40% 43%
six airports (Guarulhos, Viracopos,
Maintenance (262) (202) (206)
Galeão, Brasília, Cofins and Manaus) to Net Interest (469) (524) (539)
the private sector, between 2011 and Net Income (123) (229) (248)
2013, is a good example of the Capex 610 602 585
improvements that can be obtained. Net Debt 2,683 3,161 3,760
Since their privatizations, the total Figure 4: Rumo Financials
amount spent on these airports has Source: Rumo
exceed US$3,8 billion and their capacity
of passenger transport has increased These investments did not have a
more than 70%, something unthinkable in positive impact on the balance sheet yet.
case they had not become private, The company registered a negative net
especially after the crisis the country has income of US$ 229 million in 2016 and
been facing since 2014. US$ 248 million in the last 12 months.
The 2016 result was partly compromised
Equity Research – Rumo (Rail3:BZ) by the 2015/2016 crop failure, which
reduced exportation and decreased
Overview volume transported. They operated on an
average capacity of only 80%. A very low
Rumo is one of the biggest railway rate, compared to the full capacity
companies of the country. They operate operation in 2015, causing a low fixed
more than 12 thousand kilometers of costs dilution and compromising the
railroads concessions. Their main company margins.
concession is “Malha Norte”, which
represents 73% of the US$ 1,567 million Still, the operational result was not so
in revenues made by the company in bad; Rumo registered an EBITDA of US$
2016. It connects the South-east region 634 million, with a margin of 40% in 2016.
Global Report - November 2017 6
What transforms this fine result into Projections
losses are the poorly diluted maintenance
cost and the high leverage, cause by their The US$ 812 million raised by the
high capex. Rumo has a total debt of company will probably be used to reduce
US$3.8 billion, with a DEBT/EBITDA of its debt. We estimate that if Rumo
5.4. This generated a net interest of US$ anticipates some high cost debt, they can
539 million, representing 32% of the reduce their average interest rate by
company total cost in the last 12 months. around 50bp, generating an estimated
Maintenance cost has shown some saving of US$ 78 million per year. This
improvements due to the upgrades made number could become even higher if they
in the railroad. It decreased from US$ get an investment grade status as to the
262 million in 2015 to US$ 206 million in deleverage of Rumo`s balance sheet.
the last 12 months but it is still poorly
diluted, representing 12% of the total We also expect good results in the
cost. operational level. Due to the record crop
registered in Mato Grosso, the company
Serial periods of negative results and a is operating in full capacity, generating
high Capex led the company to an fixed costs dilution and improving their
uncomfortable position. Regarding margins. The railroad improvements
liquidity, its current liquidity index reached should also start showing results, such as
a worrying level of 0,68 in the end of higher capacity and lower maintenance
2016, indicating that they could have and operating costs. We expect Rumo to
troubles to maintain its financial register profit in the second semester and
obligations. In 2017 they managed to in 2018. We estimate a US$ 875 million
issue US$ 234 million in bonds, bringing EBITDA in 2018 and the deleverage of
their current liquidity index to 1 and the balance sheet will allow them to start
softening the situation. Recently Rumo registering yearly profits.
has taken leverage of the optimism in the
Brazilian stock market to raise US$ 812 Conclusion - Rumo
million in a public offer of shares. This
capital raise ends any liquidity problem The company remains on track to fulfil its
the company could suffer and gives them ambitious long-term plan. Their increased
the opportunity to anticipate some high capacity should allow them to register
cost debts, deleveraging their balance strong profits in the next years, and once
sheet and reducing the net interest. Rumo finishes its capex plan, around
2020, they have the potential of
Capex Plan becoming a strong dividend stock.
OBS: All the results have been taken from the Company's
The company plans to invest US$ 2.7 DFP. The maintenance cost was considered as the equivalent
billion in the next six years. Their main of the recurrent capex and it is part of the depreciation and
amortization cost.
target is to increase capacity, aiming a
transportation volume of 70,000 million Conclusion
tkm by 2020. This growth in capacity
gives them the possibility to increase the The current scenario of economic
transported volume, generating a fix resumption, the great potential of the
costs dilution within the next years and infrastructure sector growth associated
they want to open a US$ 1.1 billion line of with the various infrastructure programs
credit with BNDES to finance this and the privatizations offer a great
investment. opportunity not only for the already
established companies in Brazil but also
for the entrance of new players in the
Global Report - November 2017 7
Brazilian Market. Once the political situation in the country becomes more stable the economy will display not only higher infrastructure investment growth rate but also a much greater GDP growth than the predicted 0.7% for this year. Bibliography https://www.itau.com.br/itaubba-pt/analises- economicas/publicacoes/revisao-de-cenario-brasil/um-pouco- mais-perto-do-fim-do-ciclo https://www.export.gov/article?id=Brazil-Transportation http://www.sciencedirect.com/science/article/pii/S1062976916 300540 http://blogs.worldbank.org/latinamerica/close-infrastructure- gap-brazil-needs-spend-better-not-necessarily-more https://ppi.worldbank.org/snapshots/country/brazil https://www.export.gov/article?id=Brazil-Transportation http://agenciabrasil.ebc.com.br/economia/noticia/2016- 05/especialistas-pedem-clareza-nas-regras-do-programa-de- parcerias-de http://www.projetocrescer.gov.br/sobre-o-programa http://www.bndes.gov.br/wps/portal/site/home/transparencia/d esestatizacao/ppi Rumo financials Global Report - November 2017 8
development of democracy and to the
Punishment with Sanctions: technological development.
What was the Impact?
In this report we are going to explore
Introduction what exactly was an effect that Western
Economic Sanctions had on investments
While since the start of millennia Russian in Russia. We are going to see both how
economy was considered a strong the behavior of foreign investors and
developing market with high prospects what were the changes in the decisions
and stable growth rates (even the crisis of of Russian investors. This report will go
2008 didn’t fatally hit the economy) after into judicial and cultural reasons that
the year of 2014 the verdict of influence the behavior of Russian
«recession» was imposed on the country. business. Without taking these factors
Different reasons came together: into account we could not properly
business unfriendly governance, being interpret the data.
unprepared to make a transition from
extensive to intensive economic growth, This report will be useful for both scholars
the slump in oil prices, but mostly and business leaders as it allows seeing
discussed in the business circles is the the real effect of economic sanctions and
deteriorating relationship with the West. it also outlines the new investment
opportunities for potential investors. We
Everything started with the Ukraine crisis see this analysis as important on the
in 2014 when Russia made a decision of global scale as sanctions are now being
ceasing Crimean Peninsula which is imposed on countries such as Venezuela
condemned by most of its’ Western and North Korea. The historical analysis
counterparts. The war conflict in Ukraine of Russian data gives new insights on
and harsh rhetoric from both sides lead to how to properly impose economic
the creation of joint USA and European sanctions and what are the
Union economic sanctions imposed on consequences of this policy.
some of Russian corporations and
politicians who actively participated in the Sanctions
Ukrainian crisis.
Sanctions against individuals,
But what was the real effect of sanctions businesses, and officials from Russia
on the Russian economy? The changing were imposed in 2014 after Russian
in GDP, unfortunately, can’t be the military intervention in the Ukraine and
answer to the question as sanctions annexation of Crimea. The sanctions
came together with the fall in the oil were approved by the USA, which was
prices, economic recession and low world the main initiators, the EU, Canada,
growth rates. The effect of sanctions Australia, Norway, Switzerland, and
themselves can’t be easily distinguished others.
from everything else.
The sanctions were imposed in several
However, economic sanctions, which stages. First one was approved on 17 of
included barriers to providing loans for March 2014 due to Vladimir Putin
Russian businesses, clearly influenced recognizing Crimea as an independent
investments in the economy. Investments state. Since then the list of sanctioned
are especially important for a developing individuals and companies has expanded
economy; they are the main reason for significantly. While in the beginning, the
the economic growth. Investments have a sanctions have affected individuals and
spillover effect to the education, to the companies who had a direct impact on
Global Report - November 2017 9
the war in Ukraine and crisis in Crimea, 24, VEB, Gazprombank etc.), their
by the end of 2015 they included the foreign subsidiaries (e.g. Sberbank
majority of Russian state-owned banks Switzerland AG) and about hundred
and companies. Russian companies (e.g. Rosneft,
Gazprom, Rostec, Kalashnikov concern
Sanction from the USA and EU were the etc). The effect of American sanctions is
most painful to the Russian economy similar to the European ones. Russian
thus they will be further reviewed in this financial organizations and banks are
report. We will also focus on economic shut out of American financial market by
sanctions. the prohibition of equity and bonds
trading. State controlled companies have
lost access to technologies and finances
from abroad.
It is widely considered that economic
sanctions have significantly weakened
the Russian economy. Sanctions and
rapid decline of oil prices combined were
the reason of significant pressure on the
Figure 1: Russian GDP ruble value and on the flight of capital out.
Without access to foreign financial
The EU sanctions are less strict than the markets due to the sanctions, the
USA's are as the economic connections Russian government had to use its
are tighter between European countries reserves to revive the economy. Russian
and Russia. EU nationals and companies central bank had to stop supporting the
are not allowed to buy or sell new bonds, value of ruble and increase interest rates.
equity or similar financial instruments
issued by five major state-owned Russian Foreign Direct Investment
banks: Sberbank, VTB, Gazprombank,
VTB 24 and Russian Agricultural Bank In mid-2014, as a result of Russia's policy
(Rosselhozbank) or by Russian three in Ukraine, sanctions were imposed
major energy companies: Gazprom, against Russian Federation. More than
Rosneft, and Lukoil. Assistance in 30 countries rolled them out, the largest
relation to issuing of such financial of which are the United States, the
instruments is also forbidden. EU countries of the European Union, Great
nationals are also not allowed to provide Britain, Canada, Australia, Japan and
loans with a maturity exceeding 30 days New Zealand. The main provisions of the
to the entities described above. sanctions are: limiting the financing of
certain Russian companies, limitation of
the supply of dual-use technologies,
limitation of the number of financial
services provided to Russian companies.
The graph shows that the introduction of
sanctions significantly reduced the
amount of direct investment from the first
group, while countries that did not impose
Figure 2: Russian Interest rates
sanctions invested in Russia in 2014-
2016 even more than in 2012-2013.
Sanctions by the USA are more broad
Certainly there was a substitution of
and diverse. They affect more than thirty
European capital with capital from such
Russian banks (e.g. Sberbank, VTB, VTB
Global Report - November 2017 10countries as Singapore, Bahama and deterioration in the indicators. So,
Bermuda. Moody's consistently lowered the rating
of Russia from Baa1 to Ba1.
Figure 3: Inward Foreign Direct Investment
Let us consider how these restrictions
affected direct investments in Russia.
First, the list of major investor-countries
for Russia (by direct investment)
changed. So, in 2013 it included:
Luxembourg, the Netherlands, Ireland,
Germany, the Virgin Islands, the
Figure 4: Russian Investment Rating
Bahamas and Cyprus. In 2016, the list
was as follows: Singapore, Bahamas, The impact of sanctions on the Russian
Bermuda, France, the Virgin Islands, economy was much more profound than
Austria and Switzerland. In general, the a simple reduction of foreign direct
center of gravity has shifted from the investment. People doubt about the main
European countries to the countries of reason for the Russian economic crisis,
Asia and the Middle East. This pattern which was accompanied by capital flight,
can be traced by examining how the high inflation, a depreciation of the
volume of investments from countries that national currency, the exclusion of the
introduced sanctions against Russia has country from international markets and a
changed and how changed the volume budget deficit. So, the two main reasons
from countries that didn't impose that experts underline, speaking about
sanctions. On the chart, they are marked the Russian economic crisis, are the fall
as «sanctions» and «no sanction». The in oil prices and sanctions. In any case,
first group includes such important as a result, GDP growth slowed to 0.7%
countries (regarding to investments) as in 2014 and -3.7% in 2015, which
all countries of the European Union, USA affected both the country's investment
and Australia. rating and the volume of investments.
IMF estimates that the imposition of
There was a great outflow of the capital
sanctions slowed the country's economic
from group of countries called
growth by at least 1.1%.
«sanctions». If we look at the whole
situation, then due to sanctions, Russia Now the Russian crisis is no longer felt so
lost a significant part of direct investment sharply; all key indicators for Russia have
in 2014, namely 70% of the level of 2013, gone up. Nevertheless, the level of
and investments in 2015 amounted to foreign direct investment as of 2016 is
only 10% of 2013. Of course, rating only 47% of the level of 2013. Rating
agencies paid attention to such a sharp
Global Report - November 2017 11agencies have noticed improvement of a Foreign direct investment in the banking
situation and have replaced forecasts sector decreased catastrophically after
from stable to positive. These forecasts the rolling out sanctions (in 2015 they
are very important for our analysis since amounted to only 7.5% of the 2012 level),
they reflect the average level of since the main direction of sanctions was
confidence in the Russian economy by precisely the restriction of financial flows
foreign investors. Nevertheless, Russia's of Russian companies, the restriction of
investment rating remains rather low, financial services indicated outside
given the level of public debt (about 13% Russia, and limitation of long-term
of the GPD) and the cost of its financing of Russian companies.
maintenance. Moreover, the main problem of this sector
was that there was not such a rapid
Fitch explains this by saying that despite recovery as in all others. Thus, foreign
the fact that the introduction of a flexible direct investment in all sectors of the
exchange rate mitigated the economy, except banking, amounted to
consequences of sanctions and a decline 72.3% of the 2012 level in 2016, while the
in oil prices. Russia's problems are banking sector accounted for only 20.6%.
corruption, high inflation (7.1% in 2016, Judging by the results of the first half of
4.1% in 2017), a budget deficit of 3.4% in 2017, there is still no recovery in foreign
2016. To restore the previous level of direct investments in the banking sector.
investment in Russia it is necessary to
reduce uncertainty about the ruble
exchange rate, as well as to stimulate the
banking sector by easing monetary
policy.
At the same time, the economic situation
in Russia is getting better: foreign
investments increased by 4.7 times in
2016 compared to 2015. This trend
actually continues in 2017. The main
reason for that is the price of the oil. It Figure 6: FDI in percent, basis 2012
rebounded to the previous level and now
it costs more than 60$ per barrel. For
Russia, it is a key indicator, as the share
of oil and oil products is approximately
9.34 percent of the GDP.
Figure 7: Foreign Direct Investments
Conclusion: The sanctions significantly
affected the Russian economy, according
to IMF estimative they reduced the
Figure 5: Inward Foreign Direct Investment
growth of Russia's GPD by 1.1%. At the
Global Report - November 2017 12same time, foreign direct investment at the Saint Petersburg International
reacted to an unstable situation in the Economic Forum 2016 where political
country even more sharply – a fall of and business leaders came together
more than 90% at the lowest point of showed that 6.5% of respondents
2015 relative to the level of 2013. To answered that sanctions and geopolitical
overcome the current situation in Russia, risks are a barrier to invest. The most
first of all, it is necessary to reduce popular answers were instability,
economic instability, that is, to reduce inconsistent government policy and
inflation, a deficit in the state budget, and uncertainty of economic growth levels.
the volatility of the national currency rate.
Other weaknesses of the Russian However, the western sanctions have a
investment climate are corruption and a strong indirect effect. As the head of MSU
fairly tough monetary policy. The banking Economic Policy studies think tank Oleg
sector suffered the most from capital Bukmelishev said: “There is no lack of
outflows. investment resources — you can’t even
say that there are high institutional
National Investment in Russia barriers, in all the cases in the last 5
years the situation hasn’t worsened. The
As Western sanctions and economic main reason for the fall in investment is
crisis in Russia have made the country the lack of belief in the strengthening of
unattractive for foreign capital, the main Russian economy”. Economic sanctions
hope of the economy lies in the national have a serious emotional impact on the
investment. Large amounts of money on Russian population, as they are actively
the deposits, underinvested pension discussed in the news and business
funds and huge corporate profits are a forums. These discussions create an
huge source of potential investment. even bleaker image of Russian economic
However, instability of the economy and prospects and negatively influence the
the lack of trust in the consistent growth beliefs of potential investors.
lead to the unwillingness to invest. Both
people and business prefer to hold In this part of the report we are going to
money at deposits rather than invest in look more in the today’s situation with
risky projects. national investments in Russia and its
prospects.
Concerning western sanctions, there is
no direct effect. The questionnaire filled
Figure 8: Questionnaire about sanctions – International
Economic Forum 2016
Global Report - November 2017 13Investments Structure incentives to invest their money in other
instruments, everything goes into bank
We see that the main sources of deposits.
investment are corporate profits and the
federal budget. The traditional However, the western sanctions have a
mechanisms of national investment as strong indirect effect. As the head of MSU
bank loans and capital market aren’t Economic Policy studies think tank Oleg
working. The data of Russian National Bukmelishev said: “There is no lack of
Statistics Agency from August 2017 investment resources — you can’t even
shows that bank loans are only 8% of say that there are high institutional
total investment, debt capital 2%, equity barriers, in all the cases in the last 5
less than 0.5 %. years the situation hasn’t worsened. The
main reason for the fall in investment is
the lack of belief in the strengthening of
Russian economy”. Economic sanctions
have a serious emotional impact on the
Russian population, since they are
actively discussed in the news and
business forums and these discussions
create an even bleaker image of Russian
Figure 9: Russian Investment Structure
economic prospects and negatively
influence the beliefs of potential
This situation illustrates what was said in investors.
the beginning of the section: there is no
trust in the Russian economy. Private In this part of the report we are going to
investments are profits of companies look more in the today’s situation with
reinvested in their own businesses. There national investments in Russia and its
are almost no loans. These are especially prospects.
bleak prospects for Russian startups and
small businesses. In the following
paragraphs, we will outline why each of
potential sources of investment isn’t
working as it should.
Bank loans investments aren’t big in any
economy; bank loans usually play the
function of substituting turnover money
for the corporation. However, there are
two important specifically Russian Figure 10:
Comparison of
problems connected with the health of the Long-Term Interest
banking system. Rates
The first barrier for investments is bank The second potential barrier is the
deposits. Deposits are extremely economic policy of the central bank. Here
attractive for the population. The rates is the policy summed up by the World
are several times higher than in any Bank: "The Bank of Russia has
developed economy, they typically vary maintained its focus on cleaning up the
from 6 to 8 percent yearly, moreover, banking system. The number of banks in
deposits of less than 24 thousand dollars Russia has fallen from 733 at the
are fully insured by the central bank. This beginning of January 2016 to 616 as of
creates for the population almost no March 1, 2017, as the regulator continued
Global Report - November 2017 14to withdraw licenses from problematic capital markets; in the US 40% of equity
banks, including some among the top 100 are in the hands of the population, in
by assets. In parallel, the central bank Germany — 20%, in China — 13%, while
announced initiatives aimed at tightening in Russia it is only 4,5%.
banking-sector supervision, reducing
fraud and strengthening its bank Investment Potential
resolution framework.
At the same time, Russia has a
The policy of cleaning up the banking significant investment potential. Lots of
system will surely improve the financial spare money lie on the deposits, in the
climate in the long run, however, at the corporate profits and in the pension
moment, it can create bad incentives. funds. Concerning the latter two, central
Senior managers are seeing the bank states that corporations tend to pay
turbulence in the banking sector and unprecedentedly high amounts of
prefer not to engage in any risky projects dividends and shareholders don’t invest
in other not to get under the tight the money.
supervision of the central bank.
Moreover, a company has less potential During the conference on the topic of
investors: the data shows that in the last national investments as Saint Petersburg
12 years the number of credit World Economic Forum representatives
organizations has contracted twice. of businesses and government came to
the conclusion that in the country there is
Russian equity market is quite high; a lot of money that can be invested.
however, its participants are almost only Potentially the economy of Russia can
companies which made an IPO during show high levels of investment even in
privatization in the 90s. Today the market the situation of the lack of foreign capital.
isn’t working. The reasons are the same:
lack of trust and lack of financial culture. The problem lies not in the lack of funds,
The history of the 90s made Russia a but in the lack of good working
reputation of the country where the rights mechanisms which were discussed in the
of a minority shareholder are consistently previous section.
violated. Dmitry Shevzov from Russian
central bank has recently told that: What should be done
“Today, IPOs are not a macro significant
As every developing economy, Russia
factor of attracting investments. In order it
has to work on the institutional
to become a real source of money we
development. Bureaucracy, unpredictable
need to develop a quality of corporate
government policy and the lack of good
governance and create institutions of
judicial system are high barriers to
minority shareholders protection. Today’s
investment. Long run prosperity depends
shareholders don’t trust the board of
on the fundamental changes in the
directors — this is the main problem”.
economic policy and, what is even more
The second problem of the Russian important, in the ways “the rules of the
capital markets is again connected with game” are constructed. Long-term growth
the deposits. High rates and safety of requires the change of culture and
deposits kill all the incentives to invest in traditions, as the strong preference of
the capital markets. In Russia there is no Russian population towards deposits.
buy-side, people don’t give their money to
As we discussed in the beginning of the
investment funds. As the chairman of the
section — the main barrier to investments
Moscow Exchange stated, in Russia we
is a bleak mood and the lack of trust in
have no tradition of investing in the
the power of the Russian economy. This
Global Report - November 2017 15barrier is not rational, it is emotional. The of events increased the deficit of the state
Russian government has power to budget, caused a fall in the ruble
influence the spirit of investors. If the exchange rate and an increase in the
government shows the signal of working level of inflation. The impact of sanctions
on changing the judicial system, on was the limitation of Russian exports, as
formulating clear goals of the government well as the reduction in the financing of
policy, on cutting the red tape — it will be Russian companies. All this significantly
possible to change investors’ worsened the investment climate in the
expectations from strongly negative to country, what was also reflected in the
somewhat positive. ratings of foreign agencies, for example,
the downgrade of Russia from Baa1 to
The impact of sanctions Ba1 by Moody's. The decrease in foreign
investment could be partly offset by the
The analysis shows that main problems volume of domestic investment. But this
of Russia lie in the specter of didn’t happened by the following reasons.
expectations. While economic sanctions First of all, as Oleg Bukmelishev points
have no direct effect on the national out, the problem of falling investment in
investment, they are a big part of the Russia is the lack of confidence in
crisis atmosphere in which Russian improving the indicators of the national
business lives at the moment. Instability economy. Moreover, high interest rates
in the government policy, downgrading of on deposits from 6 to 8 percent kill
the country’s grading by the ratings incentives to invest. Finally, as noted by
agencies and sanctions go together and Dmitry Shevzov today's market in Russia
start the vicious cycle of negative is not working and to solve that problem,
expectations. institutions of minority shareholders
protection should be created and
The potential effect of EU or US giving up corporate governance should be
the policy of economic sanctions can be improved.
seriously positive. This move will lighten
the mood of investors; it will give people At the same time Russia has great
the hope of the growth in international investment potential as in the short term
trade and consequentially economic prices for oil are rising and in the long
growth. We see the cancelling of term, there are lots of spare money on
economic sanctions as a potential trigger the deposits that could be invested. The
that will result in the actions of rating improvement of the situation can be
agencies, in the rise of foreign investment already seen now. So investments in
and reviving the spirit of Russian 2016 grew more than 4.5 times compared
investors. to 2015. The ruble exchange rate also
stabilized relatively. A good example of
Conclusion an improvement in the situation can be
the opening of the factories in Russia by
The introduction of sanctions against
such corporations as Mars and Daimler in
Russia made its economy much more
2017 and 2018.
unattractive for foreign capital. For
instance, the volume of direct investment
fell by 90% in 2014-2015, which was
reflected by a significant decline in the
country's GDP growth. The introduction
of sanctions coincided for Russia with a
significant drop in oil prices from $ 110 in
2014 to $ 32 in 2016. This development
Global Report - November 2017 16Bibliography https://www.treasury.gov/resource- center/sanctions/Programs/Documents/ukraine.pdf https://europa.eu/newsroom/highlights/special-coverage/eu- sanctions-against-russiaover-ukraine-crisis_en http://www.gks.ru/free_doc/doc_2017/rusfig/rus17.pdf http://www.gks.ru/free_doc/doc_2016/fin16.pdf http://www.gks.ru/bgd/regl/B12_39/IssWWW.exe/Stg/14- 14.htm https://www.export.gov/article?id=Russiaforeign-direct- investment-statistics www.cbr.ru/statistics/credit_statistics/direct_investment/21- dir_inv.xlsx https://www.cbr.ru/statistics/credit_statistics/CDIS/CDIS_Inw_ 17.xlsx https://www.cbr.ru/statistics/credit_statistics/inv_in-country.xlsx https://www.cbr.ru/statistics/credit_statistics/direct_investment/ 08-dir_inv.xlsx https://www.fitchratings.com/site/pr/1029591Transcripts of Saint Petersburg InternationalEconomic Forum 2016 taken from: https://www.vedomosti.ru/economics/articles/2016/06/17/6458 43-pochemu-vrossii-padayut-investitsii http://tass.ru/pmef-2016/article/3353331 Data compiled by Russian Federation Federal State Statistic Service From Recession to Recovery, Russia Economic Report May 2017; World Bank Group Investment climate in Russia — Foreign investor perception; Ernst&Young Doing business and investing in the Russian federation 2017; PWC report https://www.kommersant.ru/doc/3441634 http://www.interfax.ru/business/545238 Global Report - November 2017 17
Private banking & FinTech FinTech startups to rely on banks'
resources and compliance support when
Introduction offering new products. Essentially this
report will identify and discuss the main
The past decades have proved that impacts of FinTech on commercial banks
technology has been a key driver of developments following three axes: Task
growth and change in all industries. We Automation, Adoption and Trust, and
are reaching a point where not only Profitability. The focus is directed at ways
technology is a tool for humans but it can FinTech establishes itself in the banking
also replace them in tasks which requires industry and issues still to be addressed.
training, intellect and creativity.
Technological transformation will have Task Automation
strong implications for both consumers
and businesses. Despite being subject to Task automation in the banking industry
increasing regulation, new financial could be impacting both back-office and
technology firms now have the power to front-office processes. According to
disrupt financial services through faster Citigroup former CEO, 30% of banking
and better service delivery to clients. jobs could disappear within the next five
Commonly labelled FinTech, and years, and threats from artificial
referring to the integration of technology intelligence will “change the back office."
in the field of Finance, FinTech has a (Rapier, 2017). Compliance accounts
tremendous potential, with a reach now for 10 percent of banks operating
virtually encompassing every aspect of costs and major savings can be achieved
the financial value chains. A significant through tasks automation in this
share of investments into FinTech are department. Citigroup report digital
focused on collaborative technologies disruption states that there was a 'huge
advancing the financial institutions. In cost take-out opportunity for financial
2015, Accenture measured that 35% of institutions' from the fast-growing area of
Fintech investments were made in such regulatory technology, or regtech. Other
partnerships, which are essential to the back-office departments such as HR, IT,
future of FinTech. If implemented and and accounting with distributed ledger
scaled well FinTech innovations will technology are threatened by emergent
support savings, improve payment technologies. Back-office tasks are easier
execution and will enhance credit issues. to automate, but the main source of
(JPMorgan Chase, 2017). This rise in future cost savings involve front-office
FinTech is partly due to the growth of tasks, according to McKinsey.
millennials participation in society, a
customer base that is more technology
savvy and attracted to more independent
and digital sales mechanisms.
Nevertheless, there are surely some
threats to the prosperity of FinTech,
namely complex regulations, and large
base costs and hence the necessity for
economies of scale in a novice area.
Accordingly, collaboration between
FinTech startups and mature banks
Figure 1: Projected savings from digitization for banks (2016-
looking to modernize their operations and 2020)
products are becoming more frequent. A Source: McKinsey
combination of the two allows promising
Global Report - November 2017 18Electronic onboarding of clients can
achieve the major part of front-office cost
savings (McKinsey, 2016). Enabling
consumers to open accounts remotely
and automatically would free remaining
staff to spend more time on tasks that
cannot yet be automated.
Nevertheless, tasks automation does not
necessarily mean job destruction.
Looking back at all these facts and
numbers, it is important to differentiate
from tasks and jobs. A job may require a
number of different tasks, some are Figure 2: Reasons (%) why Millennials prefer Fintech
routine type and others need more critical industries compared to traditional banking system (2017)
Source: EY
thinking. The routine types of tasks are
more likely to be automated than others, Nonetheless, only 23.6 per cent of the
leaving free capacity for banks and customers claim that they trust their
employees to concentrate on tasks that Fintech providers. The traditional banking
add more value (e.g. research). system is seen as more reliable when it
comes to safety and fraud protection
Adoption & trust in AI
(Olavsrud, 2016). A report (2017) from
HSBC found that customers are
According to the World FinTech Report
concerned to use artificial intelligence (AI)
(2017), financial technology is now
in their daily financial statement. Over
gaining prominence among the younger
12,000 interviewed people from 11
generation. This is mainly because
countries, only 7 per cent of them would
Millennials want new financial services
trust artificial intelligence to open a bank
that provide both automation and
account. As a comparison, 20 per cent
financial guidance. As a matter of fact,
would let an artificial intelligent open their
Millennials generation’s savings are the
parachute on a skydive.
lowest in history. They are being
overwhelmed by debts and they will on The head of the American Bankers
average postponed their retirement of 13 Association, Rob Nichols, (2017)
years (Kassin, 2016). Hence, Millennials pretends that Fintech and traditional
aim to easiness and cheapness in private banks must work together as there are
banking. Fintech industry is enhancing complementary. "Establishing and
transparency and delivering growing customer relationships is the
communications styles that can be largest challenge for [Fintech
understood better by younger companies]". In the meantime, the trust in
generations. A survey conducted by EY traditional banks "is backed by a strong
(2017) states that 43 per cent of culture of compliance and a regulatory
Millennials find it is easy to set up an framework designed to protect
account through a mobile application. customers." said Nichols. Both could
Furthermore, attractive fees play a major increase banking system’s efficiency and
role in Fintech’s attractiveness. The main make the customers better off by
reason is that the model is mostly P2P providing safety, straightforwardness and
based and due to less administration cost affordability all in once.
these Fintech companies tend to have
lower expenses.
Global Report - November 2017 19Profitability Association of Financial Professionals
survey indicate that more than 80 percent
Artificial intelligence in private banking of firms consider electronic payments as
could affect many aspects of profitability. a cost saving tool. Although most the
On the cost side, task automation will area of improvement lies within the B2B
decrease operating expenses in the long business, in which half of the payments
term. Cognitive automation, or the use of are still made in paper checks, manual
robotic process automation provides intervention is necessary for 60% of B2B
banks with a virtual workforce that is rule- payments. Secondly, FinTech is
based. Administrative and office promoting and supporting global
expenses such as salaries would expansion by offering solutions regarding
significantly drop in private banks that will cross-currency payments, real time
adopt robotics. According to Citi research reporting and reconciliation needs as well
estimates, there could be another 30% as FX risk management. Given middle
reduction in staff between 2015 and market companies increasingly raising
2025, shifting from the recent 2% per their exposure to the globalization trends
year decline to 3% per year. These FinTech can play an important role.
estimates apply to retail banking as well Lastly, cyber threats will constitute the
as private banking. most prominent challenge to digital
payments. Serious fraud and cyber-
attacks prevention will have to be
elaborated in order to gain trusts among
organizations and consumers. So far
Blockchain technology is the most
promising advance in countering these
threats. Instead of holding the information
in one location Blockchain uses blocks of
records distributed over a network,
thereby presenting less vulnerability to
hackers.
Figure 3: Full-Time Employee Reduction (million) Source: Citi
Research estimates
Conclusion
On the revenue side, AI can unlock new
revenue streams. Cognitive engagement, It is therefore clear that Fintech will
an application domain of artificial disrupt the banking industry both
intelligence that employ cognitive positively and negatively by offering
technology to engage with people, could customers an overall better user
unlock the power of unstructured data experience. Customers will begin to gain
(e.g. financial news & reports) offering a trust in AI technology as it progresses in
personalized engagement between other business sectors where
customers and banks with tailored automatized tasks are more socially
product offerings, concerning current accepted. As Fintech progresses
revenue streams. exponentially, it will allow a wider range
of people to access financial services
Developments of FinTech on the than ever before through more accessible
payments side are driven by three main customization. It is therefore important to
trends and may contribute to both understand the importance of Fintech for
facilitating and enhancing business the future of financial services given the
operations. Firstly, electronic payments affect it will have on the tasks done by
enable organizations to drive costs down employees within banks and how it will
and achieve greater efficiency. The contribute to increasing the development
Global Report - November 2017 20of more advanced AI technologies. https://www.dropbox.com/s/ghmc194euwwpmge/ProQuestDoc
uments-2017-10-27.pdf?dl=0
Fintech just as most AI technologies will
contribute to increasing drastically social https://www.dropbox.com/s/u98ia3fu3diyna5/ProQuestDocum
inequality making an important financial ents-2017-10-27%20%282%29.pdf?dl=0
and political concern in the world we
https://www.dropbox.com/s/77ld1wq39dv1o8w/ProQuestDocu
know today.
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Global Report - November 2017 21Steps towards Green Economy accounting for the negative externality of
in the UK congestion and pollution. Despite
criticism, the expected value of cars on
Overview the road – 10,000 – was recorded at
6500 yesterday – suggesting that the T-
The T Charge – Toxicity Charge – came charge has had an effect on its first day.
into effect yesterday; it is Transport for
London’s new initiative to reduce the However, negative effects can be
number of cars emitting toxic fumes on expected from the charge – with the
the road. Owners of “toxic” vehicles will Federation of Small Businesses saying
have to pay £10 above the Congestion that it will make London less competitive.
Charge, a fine already present in London This ties in with the main criticism that the
for people travelling into the center during charge will disproportionately affect small
any weekday. businesses and poorer people. Economic
agents without the money to invest in
Although the T-Charge initially sounds more “clean” technology will have to face
like a mundane piece of London-specific heavy charges, which in the long-run may
news, it actually signals a new epoch of affect their ability to live or operate in
thinking applicable not only to the UK, but London. Smaller businesses, which may
the whole world. Similar pollution charges have branded their own vehicles will face
are expected in Newcastle; Bristol high costs whether they attempt to pay
discussed “clean air zone” charges this the charge continually, or invest in new
summer, Birmingham’s councils are vehicles and marketing once again. With
looking into pollution charges for diesel London’s recent Uber scandal, people
cars. The Paris Agreement further shows may fear London’s uncompetitive
the international weight of this issue. In transport will begin to affect its economy.
this way, London is leading a direct
approach in dealing with pollution, but The T charge attempts to tackle a key
also following a nationwide and global issues but faces the negative that more
trend in addressing pollution and balanced policy is needed to create a
sustainability issues. truly Green Economy.
Economic Analysis
The economic effects of these new
charges on pollution are interesting
because they vary by location. Critics of
Sadiq Khan may doubt the motive for this
charge – “demand” for driving into
London is most likely inelastic, with more
people doing so to go into, or come back
from work. Analysis shows that TfL Figure 1: pollution from across London
expects to make upwards of £3 million a Source: London Air, Kings College London
year due to this charge, but this figure is
unrealistic as it assumes that the drivers
of toxic cars experience no change in
behavior at all as a reaction to this policy.
Furthermore, it is important to remember
that the core aim of this policy is to
reduce the amount of pollution created by
vehicles in London. This is one way of
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