Opal''''s Site Organization and Development of Russian Business_12 pot

On the asset side, long-term investments increased from 2.9% in Short-term investment Monetary assets Accounts receivable Accounts payable Bank credits & borrowings Inventories Long-term

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

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

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

1998 to 16.3% in 2005, showing a corresponding trend to that of bank 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.

bor-New trend in Russia’s financial sector

As is well known, since the 1998 crisis, several large banks have been 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

inten-a finten-air degree, instrumentinten-al in inten-ameliorinten-ating the devinten-astinten-ating impinten-act of the

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

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

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

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

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.

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

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-

interbank market operations, it aimed to use the resources for longer-term portfolio instead The bank started to show higher interest in long-term

These expanded activities, however, need to be viewed with a certain 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/

pro-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

influencing its operations is the active use of foreign funds by major 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

non-in Russia

Table 10.3 Asset structure of Sberbank (%)

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 NAPortfolio 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.

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 foregodescrib-ing sections The majority (53%) replied that the 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

relation-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

8.214.7

37.9

4.2

No such bankBefore 19921992–1995 Autumn

1995 Autumn–1998Financial crisis

1998 Financialcrisis–Beginning of 2000After 2000

Impossible to answer

Figure 10.3 Existence of a main bank relationship (Q44)

Source: The joint enterprise survey.

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

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 2.60.6

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.

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 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

credit-an importcredit-ant reason for having no access to external fincredit-ance 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

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, a probit estimation on

a qualitative selection model was carried out to serve as a proxy, taking as the explaining variable the natural logarithm of corporate loans by all financial institutions located in the area where the enterprises concerned are located

(LCREFI) For corporate performance (CORPER), the following variables were

taken as proxies: per employee sales in 2004 (in natural logarithm), growth rates of sales between 2000 and 2004, rates of wage increase during the same period, rates of increase in the number of employees between 2001 and 2005, and the prevailing economic and financial conditions extracted and analyzed from major indicators The communication sector was taken

as a dummy for representing a different sector Details on the variables can

be found in Table 10.4

The results of this regression analysis are shown in Table 10.5 (Model [1])

The analysis endorsed the hypothesis, namely that firms without external finance had little outside ownership and a small number of employees, and were located where the financial sector was underdeveloped As to their corporate performance and the type of share ownership, the numbers were too small to be statistically significant, although the signs in front of the numbers were in line with the hypothesis Accordingly, assuming that these firms were good performers, active in investment but not able to approach

external financing, two more variables were added: one (INVACT) to show investment activities, and the other (EQPINV) to show investment on equip-

ment (Models [2] and [3]) The result showed that these firms, while ing good corporate performance, were not active in investment Overall, it was shown that small firms tended to face difficulties in obtaining external finance, probably due to the underdeveloped status of the financial sector

exhibit-Enterprises with external borrowings

Enterprises with external finance are analyzed next About two-thirds of the surveyed firms had borrowings from Sberbank, metropolitan banks, or local banks We tried to determine if there were any discernible differences in the characteristics of firms, depending on the largest source of their external finance (Table 10.6) First, on the sector distributions, firms with Sberbank

as the largest creditor tended to be in the wood/paper/wood-processing and communication sectors Those with metropolitan banks as the main credi-tors occupied a relatively high share in the fuel, energy, and communication sectors, and those with local banks did so in the food-processing and con-struction materials sectors Geographically, metropolitan banks lent more

in the urban areas, and local banks in the rural areas, with Sberbank in the middle, as expected In terms of number of employees, metropolitan banks had the highest share in large enterprises with more than 1,000 workers,