Welcome back to Squawkbox. Let’s get back out as well to Russia where Tanvir Gill is joining us once again with a very special guest at the Eastern Economic Forum, as we talk more about Russia’s banks. Tanvir!
Tanvir Gill: That’s right! We talk about Russia’s banks as well as Russian economy and I have with me a very special guest, Andrey Kostin. He is the president and chairman of one of the largest banks in Russia, VTB. Thank you very much, Andrey, for joining us this morning. We have a Central Bank meeting coming up tomorrow. The Central Bank of Russia has cut rates by 25 basis points twice over the last two months. Do we expect another rate cut of 25 basis points tomorrow?
Andrey Kostin: Well, it’s difficult to forecast because it is up to the board of directors of the Central Bank to make decisions. But yes, there is a quite wide expectation that the rate might be cut again by 0.25% on Friday. But we shall see. I mean, definitely the trend is to lower key rate in Russia because the inflation forecast is below 4%. And the interest is still 7.25, so there is I think room for maneuver for Central Bank. And also of course the July’s Fed cut also helps for Russian Central Bank easing in the second half of this year. Because Russia is a part of global economy.
Tanvir Gill: Absolutely! But how much do rate cuts help with lending environment, with propping up lending or essentially leading to pick up in credit demand? Is it a one-on-one correlation because another variable to that equation is sentiment, business sentiment? And in Russia corporates have gone through an extensive deleveraging cycle. Do you think rate cuts will be enough to revive animal spirits and get corporate lending going?
Andrey Kostin: Well, I think it will contribute substantially. If you ask any industrialist here, at the Forum, for example, they’ll all say: ’Oh, interest rate is too high. We will borrow much more, we will start new investment program if the interest rate is lower’. So I think partly it’s true but also I think we need some more maybe fiscal measures to ease the fiscal burden and also we very much expect the effect of the bigger government investment in the so called national projects, which might help to increase our GDP growth from 1-1.4% which we expect this year to the forecasted 3.1-3.2% in the years 2021-2022, because the government now has big surplus on the budget, but still is trying to accumulate more in the so called reserve funds. But after reaching a certain level the government will start to spend. And we expect that will substantially help to provide the domestic demand.
Tanvir Gill: Fiscal spending will also pitch in. The larger issue, Andrey, is, not just for Russia but for emerging markets’ Central Banks and the banking system here… Do you think that they are better equipped to handle the slowdown than the developed world because they have more room to cut rates and prop up growth and stimulate domestic demand and look more inwards versus the West? And so in the next economic cycle the revival will largely be led by emerging markets such as Russia, such as China, such as India, versus what we’ve seen in the past where the Fed has led the way for the world?
Andrey Kostin: Yes, on one hand, the emerging markets are more volatile probably than other markets, yes. But on the other hand, I also agree that the emerging markets are showing the strong economic growth, particularly countries like India, or China and others. There are also some threats coming from the trade wars. Everybody is now feeling it. Probably the trade war between China and the United States is one of the quite big issues which might affect not only the emerging markets but the whole global economy, and of course there is a lot of concern in Russia as well.
Tanvir Gill: Absolutely! And you know since you brought up the US – China equation, the US sanctions, the European sanctions… 5 years now… have had a hard impact on the economy and the banking system in Russia. There has been a recovery, but for how long can the system out here withstand the pressure of the sanctions, do you think?
Andrey Kostin: I think we, to a very big extent, adjusted to the sanctions already, as you quite correctly mentioned, they’ve been for 5 years now. Maybe they cut us from the international capital and debt markets. But it also helped us to focus more on domestic retail market and our funding… we have substantially changed our funding policy where we were a very big borrower from the West in dollars, in euros… not any longer. We learn how to collect money here, in Russia, and it helps in the time of crises very much actually because we are very much suffered in 2008 when we were cut off from the international borrowings not for political reasons, but purely for economic reasons. But now we feel safer. So it doesn’t help us of course. We would like to be more active in the international market, we would like to have more cooperation with international banks, but we have what we have. We have to accept this reality, I am afraid, for a long time.
Tanvir Gill: Right! And as part of your strategy you know pivot towards Asia as well as diversifying towards Asia, access capital in this part of the world, you talked about financing projects on the fiscal side, to a fiscal policy you are looking at PPP projects, public-private partnership. And you are looking to access a way from debt market, the local debt market in the region. So essentially issue bonds and raise money through other Asian countries. Is that an active strategy? And in local currency terms?
Andrey Kostin: Yes, very much so. And we had quite an experience in raising money in Chinese market, for example, but local market… yes, definitely, we are raising quite a lot, but we are looking for the international market in Asia, but it is also affected by the sanctions because many banks in Asia are still afraid of working in this area, because of the so called secondary sanctions on the part of the United States.
Tanvir Gill: Ok, my final question to you, Andrey, is… broadly for the banking sector in Russia will margins come under pressure because of easing rates?
Andrey Kostin: It does. That’s a funny thing that I’m arguing with our Governor of Central Bank, when I am saying: ‘Look, you need to bring down, you need to bring down’. And they answer: ‘Look, if we bring down to zero like Europe, what margin you will have?’ So yes, there is quite a big pressure on margin, and we are fighting very hard to keep it, because it was in the area of 4%, which is quite high. Now it’s under pressure but we will still try to introduce particularly things like digitalization of the bank, introducing new products and this kind of thing. And cost-cutting reform which we have to help us to keep the margin, which is quite important.
Tanvir Gill: Yes, it’s not only a problem in Russia. It’s a problem with the banking system across the world. But Andrey, thank you so very much for your time!
Andrey Kostin: Thank you very much!