Kinda debut...

Svyazinvest should not be broken up ahead of privatisation, AFK Sistema will participate in tender

Svyazinvest, the Russian, state-owned telecommunications group, needs to be privatised as as a whole and not be broken up in separate parts, AFK Sistema chief executive officer Alexander Goncharuk told dealReporter.

Speaking shortly before his resignation from the CEO position at Sistema last week, Goncharuk, whose company controls a blocking 25% + 1 share stake in Svyazinvest, said that the Russian government has already approved a privatisation plan for the company. He was, however, unable to reveal the plan due to confidentiality undertakings.

Both Svyazinvest and the Russian Federal Agency for Federal Property Management (Rosimushchestvo) that controls a majority stake in the company declined to comment regarding the future privatisation of the company.

In a formal interview in his Moscow office, Goncharuk said that it was his opinion that Svyazinvest should be privatised as a single entity rather than being broken into parts. He also said that the subsidiaries of Svyazinvest would be consolidated and then merged into the Svyazinvest holding company.

Goncharuk said that breaking up Svyazinvest would entail the separate privatisation of profitable and unprofitable regional service providers that are now subsidiaries of the overall holding. Of 18 companies in which Svyazinvest owns stake, only five are profitable and are practically used to subsidise the rest.

He said that the privatisation of parts of Svyazinvest would be difficult as prospective buyers would seek to cherry pick the company’s best assets and not the company’s loss-making operations.

He also said that the divisions of Rostelecom used for strategic government services will more than likely be separated and kept under state control. Also, there will probably be limitations set for future private owners so that the communication needs of the depressed and geographically disadvantaged regions, for instance, of the far north, will still be satisfied.

Goncharuk added that Svyazinvest has urgently to be privatised because of the company’s managerial weakness and inability to keep on track with technological advances. The company’s equipment does not get renewed and becomes increasingly obsolescent. Svyazinvest needs an efficient owner and this owner could only be a private one. Besides that, without a private owner Svyazinvest would not be able to cope with its current debts and attract new loan stock, Goncharuk said.

Goncharuk stated that AFK Sistema will definitely be among participants of the privatisation process. Among others, there will probably be interest from oil companies as they tend to show interest in high-tech and media sectors. An obstacle for them may be limits set to participants of the tender.

For instance, a limitation can be set allowing only established telecommunication companies to bid. Foreign investors may be allowed to take part in the auction but are unlikely to. Recent changes in the government and the new role of former telecommunication minister Leonid Reiman do not change the situation significantly because decisions are made on a “far more senior level,” Goncharuk said.

However, a top Russian industry source said that Reiman was a key player in the government’s planned privatisation of Svyazinvest and will maintain an important role in the privatisation process.

While he no longer has a formal position in the current government, Reiman is a direct advisor to Russian president Dmitry Medvedev.

However, the deputy director general of Russian investment bank Kit Finans, Maxim Tsyganov, said he does not believe that the privatisation of Svyazinvest is currently the best option for the company. In his opinion, the privatisation must be preceded by significant improvements of the corporate governance and an overall reorganisation.

”A simple transfer of the company to a private owner is not in the interest of the government as the current shareholder,” Tsyganov said.

Svyazinvest is a unique asset that presents a good platform for telecommunication business development in Russia.

Due to the current stable economic situation in Russia, the state budget does not need additional finance, and can even make investments in Svyazinvest to increase the company’s market value. A possible scenario of the company reorganisation should start with a consolidation, followed by a business model improvement and only then should it be privatised, he said.

Still, Tsyganov did not state the probability of the government deciding not to start the privatisation process. Kit Finans would not invest in Svyazinvest if it were privatised, Tsyganov said, but it may buy shares of the company on behalf of its clients if they show interest in it.

Svyazinvest is a Russian state-owned telecom holding company that holds a majority stake in seven inter-regional fixed line service providers (CenterTelecom, North-West Telecom, VolgaTelecom, Southern Telecom Company, Uralsvyazinform, Siberia Telecom, Dalsvyaz), and holds stake in other companies mostly related to telecommunication: Central Telegraph (51%), Dagsvyazinform (51%), Rostelecom (51%), Giprosvyaz (51%), MGTS (28%), Kostroma GTS (37%), MobiTel (100%), Svyaz-Bank (1%), United registration company (9%), StarKom (25%) and RTComm.Ru (0.5%).

// me for dealReporter
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Belarus not in CEE?

An interesting research on Roland Berger's website: CEE Headquarters: Effectively managing a fragmented growth region

Belarus is for global business as usual a Terra Incognita in the centre of Europe: no information on Belarus on p. 6 (although the GDP growth rates and population could have been found easily), and an expressive "?" on Belarus' map for wage cost relation on p. 7 (my estimate would be around 27). The country simply does not exist for westerners. Not because they want to, but because it really does not exist as a place to consider as a potential investment goal. A pity now, but - may be a great opportunity for the future, when it will finally be over with the regime of Aliaksandr Lukashenka.
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On the Social and Political Role of Audit

Audit plays an important symbolic role in the economy and society. May sound odd, but one could speak of the social and political role of the auditing profession.

We are all used to the state having the central controlling function, meant to be on behalf of the society. But the more the society liberates itself from the state’s meddlesome “services”, the better. The state is per definition a bad and inefficient service provider, not only historically and in terms of its “corporate culture”, but also simply because of its scale: a small local enterprise will certainly be better able to concentrate on the demands of the local “small” ordinary people than a big universalized machine trying to fit all the interests of all the multiple different people at the same time. The same with the state: it has traditionally has the goal to be “everything for everyone”, grant welfare to all the people. But as a result it just wastes time, money and human resources; or is more often just an instrument of influence in the hands of certain immoral persons.

So, audit is exactly the instrument and hopefully only one of the first signs of how a society can take over the functions of the state. As far as not only the shareholders, but also the general public too, are users of the audited financial statements, here we see how a company builds its relations with the society. I don’t like the word “public control” as no one should control anything that is not his private property – and a private company is certainly anything but a “private property” of the public. But what we see here is exactly how a company communicates with the society and the society “has its eye” on the company without a slight participation of the archaic bureaucratic state in the process.

Of course, the bureaucrats are trying to put their fingers into auditing and establish their control there. Remember the stupid situation with the Russian authorities getting PwC to court for the audit of YUKOS.

At the end of the day, the auditing firm’s only real asset that allows it to do business is reputation. The auditor simply states that after having done some procedures it has the impression of the financial statements to be true and fair. Not more and not less then that, and whether to rely on the auditor’s statement or not – is up to the individual user of the financial statements. Of course one will be more likely to rely on them is the auditor is Deloitte or E&Y than if the statement comes from some unknown little audit company. But even if having trusted a brand – it’s always, always the user’s own risk and decision.

That’s how important audit is as a symbol of civil society’s self-regulation replacing the state. In some way it makes me proud to have worked in this noble profession, no matter how hard it was at some times and how much the work process itself has to be improved and will be improved as technology advances.
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Following a scandal

A strange feeling to find an account of one of the money laundering SPEs mentioned in a recent money laundering scandal at the bank currently audited. (see (1) and (2), both in Russian)

Russia is a country of thieves run by thieves. Everywhere you step in business, you can always expect something semi-illegal, and the further the more. Anywhere the state has a role - everywhere, absolutely everywhere there is corruption. Hardly a single sign of things like business ethics or simple human moral. And there is also a plenty of people in the West who take benefits from the Russian intransparent undemocratic regime and money laundering by the KGB&oligarchia-driven Russian semi-criminal economy, just like the former German Bundeskanzler Schröder.

Even if the article by Natalia Morar or the Frenkel Letters, about the Cyclopean schemes of milliards of USD flushing to unknown accounts of unknown people, are not 100% true, they do perfectly reflect Russian reality. In the wild 1990ies the criminals wore vulgar pink jackets, golden chains and sports pants, now they wear Brioni, drive Bentleys, have a "Yedinaya Rossia" party member's card and a "honorable veteran of the KGB" certificate in their pocket together with a second passport of some Maldive islands.

Every bank is surely involved in some money laundering, or "obnalichka" (something like the opposite of money laundering, i.e. hiding illegal usage of legally earned money) or at least tax avoidance schemes via bloody Cyprus. And while auditing it is even senseless to look for fraud, because 1) it is obviously there and 2) if you find something, reporting to authorities will not bring anything because some people in the authorities are most likely to have a share in the scheme themselves.

It's rational for people to violate over-strict and unlogical, or even harmful, laws that are not strictly defended by the corrupt state. And the more the laws get violated, the more strict and unlogical they become. We end up in a vicious circle that forms a culture of principal disrespect to laws and rules and value of evasion of legislation. That's the situation in Russia.
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Russian banks are fit for IPO

My article for The Deloitte Times on IPOs of Russian Banks. Yeah, IPO is a trendy topic they're really fit or it! ) It's good that their going public will at least nominally reduce the state's role in the banking system. Though, this fact is rather like a water drop in a desert...

Russian banks are fit for IPO

Russian banks must raise equity through IPO to secure their own finances. Alexander Chaichits Čajčyc argues they are fit for the challenge.

Russian capital markets are set to take a new step in their evolution this year with the flotation of the first major banks and other financial institutions. Two large Russian banks, Sberbank and VTB, are conducting IPOs this spring.

Sberbank is the largest national bank in Russia and one of the few with shares already traded on the stock market. A successor of the Soviet system of savings banks, it has over 20,000 branches and sub-branches, and the value of its assets is six times higher than that of its nearest rivals. The bank is also fourth among Russian companies in market capitalization. The bank’s share placement in March, known as the “people’s IPO” from the state’s efforts to distribute shares among the public, raised RUR 230.2bn (USD 8.8bn) by selling 2.587mn shares. Funds raised will finance the development of the bank for the next three years.

VTB (former Vneshtorgbank) has the second largest net assets among banks in Russia. Amongst debt issued by Russian banks, VTB’s bonds and Eurobonds have the highest credit ratings with Moody’s and Fitch. VTB’s IPO is the next step in a large-scale strategy to expand into the Western European market of investment services.

The current major shareholder of Sberbank and VTB is the Russian government, with a 99.9 percent share in VTB. The bank’s IPO will decrease the Government’s stake by to 75 percent plus one share. The state’s majority ownership of Sberbank fell from 63.7 percent to 60 percent in its March offering.

The media and business communities are keeping a keen eye on Sberbank and VTB to see who will secure a more successful IPO. Analysts predict that the stateowned banks’ IPOs are just the beginning of a future IPO boom for Russian banking.

The advantages of a public offering for banks are generally the same as for non-financial institutions. As the bank grows, it becomes unfeasible to sustain the debt/equity ratio required by the Central Bank by simply regulating loans raised. To have its two feet firmly on the ground, the bank needs to increase its equity. This may be done in three ways: by raising funds from existing shareholders, by selling a stake to a strategic investor, or by issuing equity or debt on public markets.

All three capital raising initiatives have their pitfalls. Existing shareholders are not always ready to absorb the complete issue, especially when it is a large amount. The sale of a large stake to a strategic investor requires care and precision in the search for an investor, which will in turn result in the emergence of a new power balance among shareholders, and changes to the management structure. Again, a strategic investor’s resources may not be large enough to cover the needs of a fast-growing bank.

The most reliable tool in this respect is an initial public offering. First, the market is more able to cope with a large issue than a strategic investor. Second, capital dilution through an IPO does not necessarily result in the emergence of a new major shareholder which challenges the existing power balance.

Floating a Russian bank on a stock exchange and complying with tough issuer requirements on reporting and transparency can demonstrate its business management standards. Publicly traded shares are liquid and quoted in real time, making them sensitive to the continuing performance of the bank. All this makes a positive impact on the bank’s reputation, which should potentially allow it to raise additional capital at a lower price.

2005-2006 saw the IPOs of three Chinese and three Japanese banks, as well as others in Austria, France, Greece, and the Netherlands. In 2006, two new world records were set for IPO capital raised. Both the world’s largest IPOs were from state-owned banks.

On 1 June, the Bank of China placed its stock on the Hong Kong Stock Exchange, raising USD 9.7bn. In the six months following this, the record IPO volume was beaten again, also by a Chinese bank. In October, the Hong Kong and Singapore Stock Exchanges started trading shares in the Industrial and Commercial Bank of China, which managed to raise almost USD 22bn.

Sberbank is one of just a few Russian banks currently traded on the stock market. Last year, AKB Rosbank prepared for an IPO, but the whole package was sold to a strategic investor at the last minute. Many large and mid-sized banks intend to go public, encouraged by The Central Bank of Russia. All this is evidence of a potentially massive inflow of banks’ shares to the stock market: Russian banks are considered fit for IPO. Much of the preceding IPOs’ success will depend on the pioneers, Sberbank and VTB, which explains the particular interest in their placements. Hardly anyone doubts that the first fry will be far from a flop.

Alexander Čajčyc, Deloitte
Rosbank, Russian Banks and Brokers Reports

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Amazing

KPMG in the UK has rented its new office in London for the period of...
...999 years! %)
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Accounting and Philosophy

It gets interesting when you try to put principles of accounting and corporate governance on a human's life.

For every debit there is a credit, every asset has an amount of liability as its shadow. Profits are credit and losses are debit. The financial statements always balance.

All you have in your life comes from something you have given for it or from something you'll have to pay for one day, or was invested into you by the shareholder God. To get something you have to loose something. Debit equals credit, and that is like the Harmony of the Universe. At the end of the day, not your assets do matter, but the profit or loss you bring to the Shareholder.

If you see God as your ultimate shareholder, the stewardship concept and the priority of shareholder wealth maximisation suddenly gets a deep Christian meaning! :) You haven't actually done anything to be born into this life, to get the opportunities you got. It's just that the General Meeting of your plc takes place only twice: at your birth and after your death.
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Bank departments and genders

Testing many business cycles of a bank at the same time can be really fascinating. This giant mechanism consisting of dozens of people, information, orders flowing from side to side; this giant organism you feel yourself inside of.

One can compare the allocation of functions within a traditional family, as it is since the Stone Age, with the structure of a bank. The man traditionally serves (served) as as the family's "front office" by bringing home food/money from the external environment and representing the entity on the "market". The woman, to the contrary, had traditionally a "back office" function in the family, being responsible for managing and processing the resources brought in by the man, concentrating on internal issues of keeping the houshold.

Similarly, the bank's front office is the most masculine department of the bank, especially if we take its activities on the fund market. Aggressive adrenaline addict traders taking high risks for high returns, with cold coffee in the cup and an unfinished Counter Strike battle one Alt+Tab far away. The back office is the feminine opposite of it. This cosy place is usually, although not always, inhabited by calm 30-years-old-girls chatting about men and TV series and listening to oldies-radio.

A big pity that this exciting adventure is coming to its end, back to much less interesting substantive tests.
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