How Money Makes Money

Is Be­larus’ fi­nan­cial mar­ket ready to of­fer an al­ter­na­tive to bank de­posits?

Economy of Belarus - - FRONT PAGE -

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

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.

Shares

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.

Col­lec­tive In­vest­ments

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

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