238 Organization and Development of Russian Business Some changes in financial statements of enterprises Let us look at this tendency from the viewpoint of enterprises’ financial statements. Since macroeconomically compiled data do not delineate any differences in firm size, there are certain limitations in interpreting the analyses based thereon. With that proviso in mind, the asset and liability structure of enterprises were analyzed (Figure 10.1). On the liability side, bor- rowings from banks increased continuously from 4.1% of the total assets in 1998 to 15.8% in 2005. 3 This trend is also confirmed in the manufacturing and mining sectors, where the share moved from 7.0% to 17.3% from 1998 to 2003. Generally speaking, borrowings from banks are difficult to obtain during unstable transition periods, and, therefore, firms are more likely to resort to inter-enterprise debts. The peak of the accounts payable was 22.6% of the total liabilities in 2001, but the percentage has been declining since then, reaching the level of 17.4% in 2005. Confining it to the manufac- turing and mining sectors, the ratio came down from the peak of 30.6% in 2000 to 23.6% in 2003. Unpaid debts are, in general, only a short-term measure and are unsuitable for complementing medium-to-long-term fund- ing needs. On the asset side, long-term investments increased from 2.9% in 0 5 10 15 20 25 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year % Short-term investment Monetary assets Accounts receivable Accounts payable Bank credits & borrowings Inventories Long-term Investment Figure 10.1 Trend of major asset and liability items of Russian enterprises Source: Rosstat, Finance Rossii, various issues. 9780230_217287_12_cha10. dd 238 5/14/2009 4:23:31 PM The Banking Sector and Corporate Finance 239 1998 to 16.3% in 2005, showing a corresponding trend to that of bank bor- rowings. Due to the nature of the basic data reported previously, however, this represents only an overall macroeconomic picture without discrimi- nating for firm sizes or industrial sectors. Microlevel analysis is required to obtain more detailed information based on firm sizes. New trend in Russia’s financial sector As is well known, since the 1998 crisis, several large banks have been inten- sifying their efforts to expand their lending operations to the real sectors, supported by strong economic expansion. Especially noteworthy in this regard is the behavior of the five largest banks in terms of assets. Sberbank, the largest bank, is a typical example in this regard. This bank had often been criticized as an obstacle to financial sector reform on account of its enormous size, monopolistic position in the deposit market, oblique own- ership structure, antiquated management, and majority ownership by the government. On the other hand, there is no denying that the bank was, to a fair degree, instrumental in ameliorating the devastating impact of the 1998 crisis. 4 Established as a specialized deposit taking bank during the Soviet era, 5 Sberbank had been trying to transform itself into a “universal bank” during the 1990s (Sberbank RF 1996). The fact that it had been supporting, on the strength of its enormous deposit base, several large enterprises in the face of their operational crises has an important bearing when analyzing the rela- tionships subsequently emerging between banks and enterprises (Table 10.2 for Sberbank’s financial exposure to large enterprises). In line with, and sup- ported by, the Central Bank’s policy direction for streamlining the bank- ing sector, Sberbank has also been absorbing a number of under-capitalized banks since the 1998 crisis, as a result of which it has now grown to take a predominant position. In recent years, two conspicuous tendencies have been observed in the financial sector. One is the increase in consumer loans, and the other is the buoyancy of the corporate bond market. The former is attested by entry into the consumer loan market of VTB-24 (formerly the Guta Bank, bought and reorganized by VTB 6 ) and by a significant increase in the number of credit cards issued by banks (Central Bank of Russian Federation 2005). As for the latter, although it is still at a nascent stage, the environment seems gradu- ally improving for firms to raise capital more cost-effectively than by resort- ing to bank borrowings. For instance, the tax rate was reduced for bond issuance (Lepetikov 2005). 7 It is assumed that Russian enterprises, which are generally averse to disclosing corporate information in fear of being taken over, might prefer this mode of fund raising. Another tendency observed was that some large industries in the oil and gas sector and communications sector, in particular, were eager to raise funds abroad (Rybin 2001). These industries being considered most creditworthy 9780230_217287_12_cha10. dd 239 5/14/2009 4:23:32 PM Table 10.2 Recent Sberbank financial undertakings Date Clients Financing mode Duration Amount Purpose and other notes 7/21/2005 Rusagro Group Debenture underwriting 3 years Rbl. 1 billion Coupon rate 11.66% p.a. 7/8/2005 ZAO Delta Telecom Credit line 5 years fixed up to $21.3 million 6/27/2005 Comos Communications Euro 500 million Purchase of rockets 6/7/2005 Ilyusin Finance (Leasing) for delivery of TU-204–300 3/25/2005 Sukhoi Long-term financial cooperation program 11/3/2004 OAO Russia Telecom Net Credit line 5 years $20.9 billion 10/12/2004 OAO TAIF, OAO Kazanorg sindes Cooperation agreement 7/12/2004 OAO Russia Railway 6/9/2004 OOO Terna Polimer Credit line 5 years Rbl. 455 million New factory for mfg. const. material 6/4/2004 AFK Systema 6/3/2004 ZAO Delta Telecom Credit line 5 years fixed $60 million Skylink network 5/21/2004 Vympelcom Credit line 5 years $130 million 4th Credit line 2/4/2004 Vnukovo Airport 7 years Euro 24 million New passenger terminal 1/22/2004 OAO FSK UES 3 years $6 million 1/21/2004 FGUP Fulnichev State Cosmic Science Production Center 11/28/2003 OAO Sayansk Khimplast 8 years Euro 40 million Ecology project 11/3/2003 OAO Sezensky TsBK 7 years Euro 40.4 million Paper mfg 10/16/2003 OAO AK Transnefti Credit line 3 years Rbl. 10 billion Baltic pipeline 9/26/2003 Forestry Complex OOO Commi-Vermi $15 million Construction of new complex 9/5/2003 Sviaji Invest thru OAO RTK Lease 7 credit lines 5 years Euro 228.1 million 9780230_217287_12_cha10. dd 240 5/14/2009 4:23:32 PM 8/27/2003 Rusagrolease Credit line 3 years Rbl. 100 million 8/26/2003 OAO Siberia Coal Engergy Credit line 3 years Rbl. 3.05 billion 8/8/2003 OAO Moscow Mobile Telecom MSS Credit line 5 years $48.2 million Skylink network 8/1/2003 Megaphone OAO Credit line 5 years $300 million ditto Credit agreement $185 million equiv. 7/30/2003 Ilkt Scientific Production Enterprise Till Sept. 2005 $193 million 7/25/2003 Nort her nf lot 6/23/2003 Rusagro 6/19/2003 Baltic Factory OAO $419 million A new Flugel ship 6/3/2003 OAO AK Transnefti Rbl. 10 billion 4/28/2003 MNKTrans Lease project 4.5 years $11 million 2/28/2003 OOO Doc. Genny Technology Credit line 5 years Rbl. 66 million Seeds & nursery warehouse 2/19/2003 OAO Energomash Corp. Gas-turbine power station 2/17/2003 Transtelecom ZAO 1/14/2003 OAO Vympelcom Region Credit line 5 years $70 million 1/13/2003 Rusal 5 years $70 million 12/10/2002 Aeroflot Credit line 1.5 years $27 million 12/3/2002 Sayansk Alminium Factory 5 years $27.3 million 11/22/2002 FGUP Moscow Endclini Factory 3 years $143.2 million Investment project 9/16/2002 Megaphone OAO Credit line 4 years fixed $30.3 million Network in the northwest 8/8/2002 Rusal Long-term financial credit 5 years $49 million Factory renovation 7/19/2002 Magnitgorsk Metallurgy Combinat Long-term credit 6/18/2002 Rosnefti over $700 million Reconst. Comsomol Petro-chemical 6/17/2002 FGUP Cosmos Communications Long-term credit over $125 million ditto Credit line $239 million since 2001 5/27/2002 Sviaji Invest Rbl. 4 billion Source: Compiled by the author, based on press releases of Sberbank. 9780230_217287_12_cha10. dd 241 5/14/2009 4:23:33 PM 242 Organization and Development of Russian Business and therefore preferred customers for domestic banks, Russian banks are to that extent exposed to international competition against foreign institu- tions. Such competition is considered accountable, to a certain extent, for domestic banks’ eagerness to expand credit to the consumers (Figure 10.2). Bank loans are playing a substantive role, through mortgage loans, in the housing market boom in big cities and in increased expenditure on (mainly imported) consumer durables. There is even apprehension that such a con- sumption boom, if excessive, as it seems to be the case, might encourage imports of expensive luxuries and impair the competitiveness of domestic industries in the long run. In any case, it is noteworthy that the banks, having been deprived of opportunities for speculation in foreign currencies and purchase of govern- ment bonds, are becoming more assertive in extending loans to enterprises and that the two government-owned giants, Sberbank and VTB, are leaders in that direction. As is evident above, it seems that waves of monetization have been stead- ily spreading in the Russian economy since 1998. Our next task is to look at the relationships between enterprises and financial agents, in particular 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 Trillion rubles 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 To individuals To banks To enterprises and corporations Figure 10.2 Composition of bank credits in Russia Note: Sum of credits both denominated in rubles and in foreign currencies. Sources: CBR, Bulletin of Banking Statistics, various issues. 9780230_217287_12_cha10. dd 242 5/14/2009 4:23:33 PM The Banking Sector and Corporate Finance 243 banks, at the microeconomic level. This exercise would help clarify the financing activities of enterprises. Sberbank – “the Ministry of Cash” for the Russian economy Tompson, who called Sberbank the “Ministry of Cash,” argued in a 1998 paper that it was a cash machine for the Russian economy (Tompson 1998). At that time, the bank was a big purchaser of federal government bonds on the basis of its abundant deposit base from the citizens, thus functioning as a de facto financier of state budget deficits. At the same time, the bank had also been extending corporate loans in a move toward “universal banking,” as reported earlier. This maneuver resulted in a very high ratio of delinquent loans (Sugiura 2005). 8 It was, however, the crisis of 1998 that triggered a rapid increase in its corporate lending resulting in its current prominence (Renaissance Capital 2003). The bank had started lending aggressively to big enterprises such as Gazprom, Transaero, UES of Russia, and MPS and had also begun relationships with Rostelecom, Baltika, LUKOIL, Vimpelcom, and Rosvoordgenie. The number of large enterprises thus assisted exceeds 20, extensively covering various sectors, such as energy (including oil and gas), metallurgy, communication, and transportation (Renaissance Capital 2002). The major borrowers in recent times, compiled on the basis of the press release, are shown in Table 10.2. The upheaval reported above was closely linked to the banking sector reorganization, occasioned by the proliferation of crises in many large insti- tutions in the aftermath of the 1998 financial crisis. The Promstroibank, created during the Soviet regime as a specialized agency for financing the needs of heavy industry and a major provider of credits to the sector even after the regime change, had its banking license revoked in July 1997. The SBS Agro bank, a successor to the Agroprombank, specializing in the agricul- ture and food-processing sectors, was also closed. Several big banks belong- ing to “Financial Industry Groups,” likewise, underwent crises, although some were rehabilitated by so-called “bridge banks.” In short, the major players in the banking sector had undergone substantial changes. Such changes provided Sberbank with ample opportunities to expand its activities. As if to fill the gaps left by defunct banks, it expanded the loan portfolios with major enterprises within a short period of time. In paral- lel, the bank undertook internal organizational changes with the objective of enhancing the management efficiency. For instance, the branch offices, which used to be grouped in such a way as to correspond to the local admin- istrative units of the government, were consolidated into 17 regional head- quarters with a view to facilitating internal resource transfer. 9 By curtailing interbank market operations, it aimed to use the resources for longer-term portfolio instead. The bank started to show higher interest in long-term project finance. 10 9780230_217287_12_cha10. dd 243 5/14/2009 4:23:34 PM 244 Organization and Development of Russian Business These expanded activities, however, need to be viewed with a certain pro- viso. From the viewpoint that the bank had had little experience in extend- ing corporate credits and, consequently, inadequate institutional capability for risk assessment, it was likely that the decisions on credit extension were mainly made on the basis of the sheer size of the enterprises concerned and/ or their connections with the government. The asset structure of the bank is shown in Table 10.3. The aggressive posture of Sberbank was a reflection of the fact that it was supported by a very large deposit base of more than one half of the citizens’ savings. Behind it laid an implicit guarantee of the state on the deposits. With the introduction of a new deposit insurance scheme in 2005, however, the privileged status of the bank was lost. In contrast to its lend- ing operations, its position in the deposit market started to decline, from 59.1% of the market in early 2005 to 53.8% a year later. 11 Another factor influencing its operations is the active use of foreign funds by major non- financial enterprises, which has become more pronounced lately. Some of the large customers of the bank have been successful in a Eurobond issue. Aided by BRIC’s boom, major Russian firms have been actively exploiting direct relationships with European and North American financial institu- tions. Such development does not allow Sberbank to be complacent with the former business model of confining its loan operations to large firms. The bank has been trying to extend credits to individuals as well as to medium/small industries (Korzhov 2005). Although owned by the gov- ernment and, therefore, influenced by the state authorities for decision- making, the bank is trying to survive, along with private banks, in an ever competitive environment on the strength of its unique character. Needless to say, it has an immeasurable importance in corporate finance in Russia. Table 10.3 Asset structure of Sberbank (%) Year 1998 1999 2000 2001 2002 2003 2004 2005 Cash and balance with Central Bank 10.7 9.8 10.1 14.1 9.9 6.8 5.6 6.9 Federal Government bond 53.7 54.6 38.9 31.7 27.4 NA NA NA Portfolio investment 0.8 0.5 0.3 0.5 0.3 14.0 19.0 14.4 Outstanding loans 20.6 20.0 40.0 47.6 52.1 52.2 55.9 69.6 Physical assets 8.8 7.4 5.3 3.9 7.7 6.1 5.1 4.5 Other assets 4.2 2.0 1.7 0.8 1.5 0.5 1.4 0.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Compiled and calculated by the author based on the accounting data submitted by Sberbank to and published by the Central Bank of Russian Federation. 9780230_217287_12_cha10. dd 244 5/14/2009 4:23:34 PM The Banking Sector and Corporate Finance 245 Findings from the joint survey Our first point of interest was to find out the relationships between firms and banks, which, although still far from maturity, have been steadily develop- ing. The first question asked was whether or not enterprises had designated main banks, and, if so, we wanted to know when such relationships had started (Q. 44, Figure 10.3). The result endorsed what we have been describ- ing in the foregoing sections. The majority (53%) replied that the relation- ship had started after the 1998 crisis. Ten percent of the firms replied that such relationships had existed before the collapse of the Soviet regime and had been maintained thereafter, and 17% said they had no main banks. The former shows that the relationship established during the Soviet era between state firms and specialized banks lingers. The latter suggests that they have been unable to build solid relationships with banks despite the general economic boom. The next question referred to borrowings obtained from banks during 2001–2004 and their maturity structures (Q.45, Figure 10.4). The maturi- ties between 6 months and one year showed the highest share at 38%, fol- lowed by those between 1 and 3 years at 19%. Because investment-related loans normally carry maturities in excess of one year, the survey results tes- tify that the bank finances are in a transitional stage. A follow-up question ascertained which bank was the largest lender in respect to the 2004 loans (Q. 48, Figure 10.5). Excluding those firms that had no borrowings in that year (1/3 of valid respondents), Sberbank turned out to be the largest lender (27% of respondents), followed by local banks (22%) and by major banks located in Moscow and St. Petersburg (except Sberbank) (11%). In sum, one- third of the firms had no external borrowings, one-third borrowed from Sberbank, and the remainder, just under one-third, borrowed from local 17.1 10.1 7.9 8.2 14.7 37.9 4.2 No such bank Before 1992 1992–1995 Autumn 1995 Autumn–1998 Financial crisis 1998 Financial crisis–Beginning of 2000 After 2000 Impossible to answer Figure 10.3 Existence of a main bank relationship (Q44) Source: The joint enterprise survey. 9780230_217287_12_cha10. dd 245 5/14/2009 4:23:34 PM 246 Organization and Development of Russian Business and large metropolitan banks. This pattern agrees with what was reported earlier. An effort was made to determine which enterprises used bank credits, which did not, and how they differed. We determined whether firms with a potential for growth, and, thus, with a high demand for funds, had their 16.8 6.3 11.0 38.5 19.1 4.6 3.7 No credit borrowed Up to 3 months 3 months–6 months 6 months–12 months 1 year–3 years Longer than 3 years Impossible to answer Figure 10.4 Maturity structure (the longest) of borrowings made during 2001–2004 (Q 45) Source: The joint enterprise survey. 32.9 27.1 10.6 22.0 1.1 0.7 2.6 0.6 2.4 No external fund raised Saving banks (Sberbank) Metropolitan banks, except saving banks Local banks National finances or extra-budgetary funds Investment funds or nongovernmental pension funds Nonfinancial group companies Other nonfinancial companies Others Figure 10.5 External funds raised in 2004 and banks that offered the most (Q48) Source: The joint enterprise survey. 9780230_217287_12_cha10. dd 246 5/14/2009 4:23:35 PM The Banking Sector and Corporate Finance 247 demands met by the banking sector. A determination was made regarding any possibility for further improvements. These issues are examined in the following section. Empirical analysis In this section we develop our testable hypotheses and empirically verify them using the results of the joint survey. Enterprises with no external borrowing One-third of the firms surveyed had no record of external borrowing. The purpose of the following analysis was to clarify whether this was due to low growth potential of these firms (thus, not much demand for resources) or to inadequacy of the financial sector to meet the demand. Before doing so, certain peculiarities regarding corporate finance in Russia at this stage of development should be noted. Generally speaking, the size of enterprises tends to correspond proportionally to their perceived credit- worthiness. Large employees, even when inefficiently managed, are more likely to be bailed out in times of crises by government intervention to fore- stall any social instability resulting from mass unemployment. Financial institutions, in passing judgment on credit extension, tend to place higher value on the size and the political clout of firms than on the purpose of demand for funds or their repayment capacity (Kumo & Sugiura 2006). Another important point relates to management attitude on information disclosure. Access to external finance requires a fair degree of information disclosure. The more receptive a firm is to disclosure, the easier the access to finance is, and vice versa. As reported in Chapter 3 of this book, in Russia, the overwhelming majority of firms have chosen a closed-type corporate structure, a clear deviation from the basic concept of a joint-stock com- pany, which is the precise mechanism for wide democratic mobilization of capital among the masses in modern times. The closed nature is considered an important reason for having no access to external finance. These firms tend to be owned by insiders with a small number of employees, and, even if they happen to be performing efficiently, they tend to have little external finance from financial institutions due, presumably, to immaturity of the latter. Thus, a hypothesis to be examined can be stated as follows: Hypothesis H1: Companies with no external borrowing tend to be small and to have unfilled demand for investment resources, even if well managed. They tend to be joint-stock companies of closed-type ownership, and the managers, in fear of losing control, are averse to information disclosure. To examine the hypothesis, the survey data were analyzed as follows. The variable to be explained (NEXFIN for no external financing) would be shown by a discrete quantity, where 1 corresponds to no external borrowings 9780230_217287_12_cha10. dd 247 5/14/2009 4:23:36 PM [...]... demand is membership of entrepreneurs in a number of nongovernment organizations, such as guilds, unions, and organizations that are provided for in Article 121 of the Civil Code of the Russian Federation (RF) for the purposes of coordination of their entrepreneurial activity as well as representation and defense of common property interests Before the start and at the very first stage of market-oriented... the first decade, Financial Markets, Institutions and Instruments, 12: 15–16 9780230_217287_12_cha10 dd 255 5/14/2009 4:23:39 PM 256 Organization and Development of Russian Business Central Bank of Russian Federation (CBR) (2005) Financial Stability Review 2004 (Moscow: Central Bank of Russian Federation) Central Bank of Russian Federation (CBR) Bulletin of Banking Statistics (Moscow: CBR) (various issues)... regions of Russia (Golikova et al 2003), and the results of a survey of 147 firms of different legal forms conducted in two Russian regions in 2005 (Tikhomirov 2005).1 In addition, we incorporate the results of in-depth interviews with business association officials, company CEOs, and representatives of regional and local authorities.2 9780230_217287_13_cha11 dd 259 5/12/2009 5:38:11 PM 260 Organization and. .. result of costs-benefits calculus and a review of their preliminary testing The third section is a discussion of the determinants of membership in associations The fourth section is an evaluation of the benefits from being a member of an association(s) and demonstrates the reputational capital of different types of associations from the viewpoint of their members The fifth section is a summary of the... for decrease of 1–19%, 0 for no change, 1 for increase of 1–19%, and 2 for increase of 20% and above); Growth rate average wages (Ϫ1 for negative growth, 0 for no change, 1 for increase of 1.5 times or less, 2 for 1.5–2 times, and 3 for over 3 times); Financial and economic conditions (Ϫ2 for worse, Ϫ1 for slightly worse, 0 for normal, 1 for slightly better, and 2 for better) The ratio of contribution... efficiency Acknowledgments This chapter is the result of a study with financial assistance from the Ministry of Education and Science of Japan (Nos 16530149, 17203019, and 17730157) and from the Foundation of Japan Legislation Society This paper benefited greatly from various comments offered on the author’s draft by the members of the Institute of Economic Research at regular meetings as well as by... interests The transformation of the BAs into institutions of a civil society in Russia was not a straightforward process Empirical studies have shown that, at the initial stage, seizure of power, dependence on authorities, favoritism to their “closest circle” of members, and discrimination against rank -and- file participants were typical of leaders of newly established unions and associations (Golikova... the incentives of owners and CEOs to participate in associations, the factors behind their choices, and the benefits they gain for their businesses within an institutional environment A brief review of empirical studies of BAs is presented in the first section of this chapter as a part of the evolution of state business relations in modern Russia The second section contains the main hypothesis regarding...248 Organization and Development of Russian Business and 0, to external borrowings The explaining factors were the size of the company (COMSIZ), the corporate performance (CORPER), the corporate form (CORFOR), and the share of outside ownership (OWNOUT) As for the constraining factor for obtaining external financing,... groups of business people who gathered around individuals striving to broaden their personal and political influence (Kubicek 1996; Zudin 2006) At least one half of the associations were headed by former officials of a ministry of the USSR or Russia (Recanatini & Ryterman 2001) Some of them developed these associations as individual projects (Pachenkov & Olimpieva 2005) The majority of existing Russian . Markets, Institutions and Instruments, 12: 15–16. 9780230_217287 _12_ cha10. dd 255 5/14/2009 4:23:39 PM 256 Organization and Development of Russian Business Central Bank of Russian Federation (CBR). statistics, and sources of variables used in regressions. Source: Author’s estimation. 9780230_217287 _12_ cha10. dd 253 5/14/2009 4:23:39 PM 254 Organization and Development of Russian Business Concluding. 9780230_217287 _12_ cha10. dd 247 5/14/2009 4:23:36 PM 248 Organization and Development of Russian Business and 0, to external borrowings. The explaining factors were the size of the company