How Money Makes Money
Is Belarus’ financial market ready to offer an alternative to bank deposits?
Money has to work. Thanks to the efforts of commercial banks and financial awareness campaigns of the National Bank these words have become an axiom for the majority of Belarusians within a very short time. Respectively their interest in various investment instruments has risen. By the way, the choice of investment instruments has substantially expanded over the last few years. While bank deposits still enjoy a massive lead, today’s market is ready to offer all kinds of supplements.
Bonds issued by the Finance Ministry and commercial banks (in particular, Belarusbank, Belagroprombank, Belgazprombank, Bank BelVEB, Priorbank, and MTBank) can become a viable alternative to deposits. Visiting the websites of these banks is the easiest way to learn about the available bonds. The websites of the Finance Ministry, the Belarusian Currency and Stock Exchange as well as the National Central Securities Depository also offer information.
Bonds are nominated in national and foreign currencies with different maturity terms (from less than one year to over five years). Interest rates are, as a rule, higher than those on bank deposits (for instance, 7% and more on foreigncurrency government bonds). The face value of bonds also varies, allowing a wide range of investors to use the instrument. Interest is paid several times a year.
Holders of bonds can get their money back nearly any time by selling them to another entity or to the issuer if early redemption is part of the deal. Since bonds can be traded on the secondary market, they represent a faster moving investment instrument than bank deposits. The fact that the interest income is not taxable is also important. For private businesses the fact is a powerful advantage over bank deposits.
“Legal entities are entitled to tax deductions on income earned on bonds issued on the home market before 1 January 2015, while interest from deposits is subject to an 18% profit tax. Thanks to the absence of taxes legal entities can get higher revenues from bonds in comparison with bank deposits,” noted Lyudmila Kovalenko, Head of the Securities Office of Belagroprombank.
Bonds sold to natural persons represent bearer securities. Operations with bonds do not require personal identification and legal registration except for transactions exceeding 1,000 base amounts. Taking into account these considerations several banks offer securities storage services for a very modest fee (for instance, Br10,000 in Belarusbank).
At present government bonds seem to be the best alternative to deposits for those who prefer steady revenue stream. The large number of options, including early redemption and zero taxes add to the appeal of this investment instrument. The fact that the law on protecting deposits of individuals does not apply to bonds is pointed out by some experts as a drawback. However, the complaint is rather hypothetical. The law on securities and stock exchanges obliges bond issuers to refund the face value of bonds to bond buyers within the established period. The bond issuer also has to pay a fixed interest rate. Apart from that, interest payments on the Finance Ministry bonds are prioritized by the state budget.
By the way, in 2014 the government intends to borrow about $500 million from individuals and corporations on the home market using foreign currency bonds. The Finance Ministry intends to announce its proposal to natural persons this autumn.
The people’s IPO by Minsk Sparkling Wines Factory brought forth a true investor instinct in Belarusians. Many considered buying the assets while some bought them thanks to the massive advertising campaign. The shares were sold via Belarusbank and Belagroprombank. Both individuals and corporations were able to take part in the twostep privatization in 20122013. As a result, the public jointstock company attracted a major investor – Triple Company – and a lot of new minority shareholders. The shareholders were able to appreciate their investments one year later when the value of the shares rose by 65% by the second
phase of the people’s IPO. The government was also satisfied with the results. Gomel Fat Factory was next in line for the people’s IPO. The company is the largest enterprise of the Belarusian fat and oil industry and a leading soap manufacturer.
On the whole, the list of companies which shares are available for sale in Belarus is rather long. The information about issues of securities, the procedures for buying and selling shares and other matters is available on the websites of the National Central Securities Depository, the Belarusian Currency and Stock Exchange, and the Finance Ministry. One can also contact the banks that provide brokerage services, in particular, Belarusbank, Belagroprombank, and Belinvestbank. Taking into account the rising demand for operations with securities in late 2012 Belarusbank decided to establish its own brokerage company – ASB Broker.
By the way, it is possible to become a shareholder by trading property privatization vouchers. Through 30 June 2016 vouchers can be redeemed in exchange for shares of public jointstock companies, which list is available in Belarusbank’s outlets and the website of the Minsk City State Property Fund.
Future investors will have to sign a contract with a broker for the sake of making transactions that involve shares. It is also necessary to remember that income from shares is taxed. Natural persons have to pay the income tax. Various rebates are available. The brokerage company operates as a tax agency in charge of calculating and paying the tax.
“Investments in shares and bonds of individual Belarusian enterprises can provide higher profits in comparison with bank deposits. Their inclusion into one’s investment portfolio allows increasing the profitability of investments,” noted Alexander Mukha, a BusinessForecast.by analyst.
According to the expert, from 1 January and through 21 July the Belarusian Currency and Stock Exchange registered the highest boost in the following stocks: OAO Staryi Univermag (11.6 times),
Investments in shares and bonds of individual Belarusian enterprises may secure higher profits in comparison with bank deposits
OAO BelNordStyle (7 times), OAO BelATEP (2.1 times), OAO Lesohimik (34.5%), OAO Voskhod Minsk (30%), the managing company of the holding company Belorusskie Oboi (21.7%), OAO Keramzit Novolukoml (19.9%).
The analyst believes that despite the skyrocketing prices for the shares some Belarusian companies still seem to be undervalued and have the potential for higher capitalization in the medium term. It is particularly true for shares of industrial enterprises and creative economy companies, which are geared towards exporting merchandise and services.
In particular, the establishment of the Eurasian Economic Union on 1 January 2015 and the expected establishment of the Customs Union’s free trade zones with a number of countries and regional associations will bring about new export and investment opportunities for Belarusian companies. Finally, one can expect that in the foreseeable future Belarus will join the World Trade Organization and the move will increase the volume of Belarusian export thanks to the removal of the customs and administrative barriers that exist now.
“Integration of the Belarusian Currency and Stock Exchange with stock exchanges of Russia and Kazakhstan within the framework of the emerging Eurasian Economic Union looks advisable. The move will contribute to the liquidity of the Belarusian stock market and higher volumes of trade in Belarusian securities,” believes Alexander Mukha.
Thus, the possibility of a considerable and rapid increase in their value is one of the main advantages of shares as an investment instrument. Many are probably aware of the staggering success of Skype, Google, and Microsoft. However, the high volatility is the main disadvantage of this kind of securities since profit margins directly depend on the economic performance of the company. Specialists also mention the lack of “blue chips” on the market or, in other words, interesting offers that could attract the attention of potential investors. Meanwhile, integration prospects are part of the portfolio of Belarusian companies. Many believe that integration prospects can seriously enhance the capitalization of Belarusian companies.
The creation of collective investment instruments such as investment funds, hedge funds, and private pension funds has been discussed in Belarus for a long time. The laws regulating them are still in the nascence in Belarus while abroad these instruments have become an inalienable part of the financial market that provides quite good revenues.
According to Alexander Mukha, the top five unit investment trusts in Russia in H1 2014 included the First Algorithmic Fund of Funds (managed by the company
Nord Capital), which return on investments in Russian rubles was 22.46% in JanuaryJune. It is followed by Sberbank – Actively Managed Fund (ZAO Sberbank Asset Management, 20.4%), Gazprombank – World Food Basket (ZAO Gazprombank Asset Management, 16.25%), Global Real Estate (the managing company Otkrytiye, 15.49%), UralSib Zoloto (the managing company UralSib, 15.25%).
Meanwhile, the first steps for the emergence of new financial institutions in Belarus have been made already. In 2012 the National Bank did an experiment to create bankmanaged funds. Priorbank and Belinvestbank took part in the experiment. In May 2014 Priorbank was the first bank in Belarus to register foreigncurrency bankmanaged funds. Unlike individual trust management funds, startup investments in the new funds can be as low as $1,000 or € 1,000. Other Belarusian banks are now considering the possibility of establishing bankmanaged funds.
Collective investments via the fund allows buying shares or bonds, which are unavailable to the majority of investors due to the complexity of the work with these securities and the high cost of sale and purchase transactions. The bank that manages the fund will invest money of the fund’s participants in securities, interbank deposits, precious metals, and foreign currency. As a rule, those are mediumterm and longterm investments. Depending on the size of the assets handed over to the fund, the bank will determine the share of each participant and will issue a participation certificate. Participation is measured in nominal equity units.
“Profit of a fund participant is represented as a difference between the value of the equity unit on the day money is handed over to the fund and the day money is returned. Income is driven by the growth of the exchange rate of securities, accrued interest income and dividends, increased prices for precious metals. Income is distributed between fund participants in proportion to their shares,” explained Oleg Leontyev, Head of the Investment and
Banking Operations Department of Priorbank.
Thus, these funds offer no fixed income. The revenue depends entirely on the return on the investments the fund makes. If money is invested for a long term – two years and more – the risk of losses is small while the rate of return exceeds the rate of inflation and deposit interest rates.
Bankmanaged funds are widely used in the USA, Asia, Europe, and Russia. Yet the attitude of the general public to the funds varies. While the assets poured into investment funds increase by 10.6% per annum in the USA and 9.1% in Western Europe, in Japan the assets lose 0.8% every year. The fastest growth of assets accumulated in bankmanaged funds is registered in Central and Eastern Europe (25% per annum). Yet figures in the region vary a lot. While people in Slovakia keep 26.7% of their savings in funds, in Russia the percentage is only 5.1%. The differences are easy to explain. In countries where revenues from bank deposits exceed revenues from bankmanaged funds, clients prefer deposits. If revenues from deposits are as low as 15%, then money is invested in funds.
In Belarus the capacity of the new market is estimated at 15% of the total volume of fixedterm deposits of individuals. By September Priorbank managed to accumulate two funds in U.S. dollars and euros with the total equivalent of over $1.5 million. The investors are natural persons. In order to offer foreigncurrency bankmanaged funds to corporations, it is necessary for the Finance Ministry to clarify the taxation of revenues. It is supposed to be done by early 2015. The situation is simpler as far as revenues of natural persons are concerned. These revenues are subject to income tax, which is calculated and paid by the bank that acts as a tax agent. Apart from that, the bank is entitled to 1.6% per annum of the value of the fund’s net assets as remuneration for operating the foreigncurrency bankmanaged fund.
“As far as nationalcurrency bankmanaged funds are concerned, there are plans to offer these resources to the interbank market. The demand for this instrument will emerge when the interest rate on ruble deposits will drop below interest rates on the interbank market. For now interest rates on the interbank market are close to 20%,” noted Oleg Leontyev.
So a bankmanaged fund is an instrument for those who seek bigger profits compared to conventional deposits and are ready to risk their assets by relying on competence of bank managers. While the Belarus government guarantees the return of bank deposits, investments in a bankmanaged fund are deprived of these guarantees. Investors are invited to guide their decisions by the performance of similar foreign funds, which are admittedly rather positive. For instance, the profitability of some Raiffeisen equity funds, which are managed by Austrian specialists, was 10.523% in the last few years. Still investors are advised to be patient. Experts recommend investing in funds for a period of two years and more to reduce investment risks. Anyway, foreign currency savings are the target. It is still more profitable