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Following are excerpts from a CNBC interview with Geoff Cutmore and Andrey Kostin, CEO of VTB, in Moscow.
GC: So as we start this interview the Federal Reserve is currently sitting to decide whether to begin another round of hiking of interest rates in the United States. From your analysis, is the world ready? Are global financial markets ready for interest rates in the U.S. to go up again?
AK: Well on the one hand yes, because we've been discussing this for quite a while now - since the beginning of the year, maybe even before. And I think most of the investors understand that sooner or later it will happen. But on the other hand, I think, when it happens it always comes as some kind of surprise. So I think that will affect the global investment climate. As we saw recently, for example, there is a big influx of investment in the Russian bonds, rouble denominated, because there's so much money available, and because Western institutions provide the negative interest and Russia still provides quite a handsome margin on investment.
GC: So do you think that if rates do go up, either in September or in December, that will challenge the appetite for Russian paper?
AK: It might a little bit, but also very much depends of course on how the Russian economy will feel, because we very much expect that we are moving towards a better area of slight positive growth, more stability and that will help.
GC: How strong do you think the banking system is? Is it robust enough to take any repricing of money at this point, either internationally or domestically? Indeed, back in July the IMF said it was still concerned about capital levels in Russia's banking system.
AK: Well I think the key word for the Russian banking sector is stabilisation. We will definitely see the improvement in general. On the other hand, we see that the central bank is cleaning up the system by withdrawing another 80 licenses this year, I think, and altogether I think 280 licenses withdrawn in the last three years. So we very much believe that it is now healthy, that the major institutions are feeling much better. For example, the profitability of the Russian banking sector increased seven times this year in comparison with the previous year. So we have definitely see substantial improvement in profitability and the operation of Russian banks.
GC: So you reject the IMF's suggestion that you're undercapitalised?
AK: Definitely not VTB. We have an excess of capital, we're just thinking how to enlarge our activity, how to lend more money. So I think major Russian banks are quite well capitalized. With the help of the government, because the government introduced quite a big programme for full support of the capital base of Russian banks, both government and private.
GC: You mentioned the central bank. We obviously just had a cut in interest rates. But you've been a long-time critic and argued that the current rate is still too high. This was, though, a hawkish cut, if I can put it like that. Does the bank need to be doing more?
AK: I believe yes, I believe it's too little. I am a moderate critic of the central bank because I think that our expectation was that it was quite possible for the central bank to cut down the rate during this year to 9%. But the central bank, by cutting up to 10, said no more for this year, if that happens of course. But my opinion - that would be too little. But the central bank promised further cuts next year. I think there's a very good reason for this – because we see inflation is going down, this year we might expect inflation slightly more than 6 percent and next year there's a good possibility that inflation will go down to maybe 4, 4.5 percent. I think there's a good reason why the central bank should continue to cut down the interest rate.
GC: Is that holding back your ability to lend into this economy? I looked at your comparisons on net interest margins as well - they're pretty much flat on the year-on-year comparative. Is it difficult for you to make higher margin?
AK: Actually, yes - that problem, of course, that's the negative growth of the economy doesn't encourage enterprises to invest more money, borrow more money. But still, you know, we are now working on the three-year strategic plan for VTB, for 2017-2019, which we will adopt by the end of this year. We see a lot of growth of profitability for the bank. For example, last year our profit was nearly zero. This year we expect 50 billion and for next year, three years, we expect the increase to 100, 150 and more than 200 billion roubles a year of profitability, which we believe is quite a realistic scenario.
GC: And where's the growth in the economy going to come from to drive that?
AK: Well I think there's a number of reasons. First of all, they'll be moderate economic growth. Not very big, maybe 1, 2 percent for the next couple of years. But secondly, I think there's a lot of room for improvement - of the banking operations, introduction of new technologies, new products; cost savings and some other things. We are also planning to reorganise our bank, to consolidate our business, so I think there's a lot of room for manoeuvre within the existing economic environment.
GC: And as I understand it, you're adding traders in the commodities space, within the capital business at the moment. Why is that? Do you believe that we've seen the bottom for commodity prices now? Why do you think there's a growth driver there?
AK: Since the global economic crisis many banks were cutting down all different activities - investment banking. We believed it was not the right way, we were - if not increasing, but trying to preserve our ability - and moving into some new areas when we feel we can earn money and when there's not much competition nowadays, on the part of international banks or Russian banks.
GC: But, again, do you feel that we've seen the bottom for commodity prices and that's why it's now an attractive sector to go back into?
AK: It varies very much from one community to another. But we believe that, for example, for oil - probably, yes we are. We don't expect any further drastic cuts of prices to 20 or 30, some such awful scenarios. And also we see increases in certain, like coal, particularly coke coal, and some other important commodities of the Russian export or Russian production - yes, they're growing. So we believe we might expect some brighter future for commodity prices, yes.
GC: There is another opportunity for sanctions to be reviewed coming up at the beginning of next year. Do you think that this may be the time where, ultimately, the bank is able to escape from this pain of sanctions?
AK: We hope, but we very much believe in this, because if sanctions - you know, the sanctions is not something which is related to the bank, it's something that relates to the geopolitics. And at the moment I don't see too much changes in geopolitics, and with American elections coming I think we will have to wait a little bit longer in order to see any improvement in the relationship between Russia and the United States, for example. As far as Europe is concerned, yes there's a different opinion among European members for vis-a-vis, in regard to sanctions, but I don't know. I mean, it's very hard for me to predict. At the moment we proceed from the fact that the sanctions will stay for another year or so.
GC: But you say, obviously, that the American election cycle is important here. Do you think that there would be more likelihood of removal if Donald Trump is elected president?
AK: It's hard to say. We know very little about Mr Trump. You know, we know much more about Mrs Clinton, of course, because she was indeed with the government. So it's hard to say. At the moment, of course, we feel that Mr Trump is using less anti-Russia rhetoric in his campaign. I think it is good because I don't think any leader should be should use anti-Russia rhetoric because it doesn't help when they becomes the president, I think. But it's hard to say. I don't think that, believe me, in spite of the fact that the mass media in America has many discussions about Russian influence, frankly speaking, normal people - ordinary people like me - don't very much care who will be the president of the United States. You know, don't make any preference. We shall see - it's up to the American people to elect. And then I think to build up a relationship with Russia. I think any president should deal with Russia. And we shall see.
GC: Is this just American paranoia, then, focusing on the hacking of political parties and finding a trail back to the Kremlin somehow?
AK: I don't think paranoia. But for us it sounds a little bit funny, at least, you know, that Moscow can influence one way or another the elections is a little bit strange for us and I don't very much believe in these. Of course some hackers may come from Russia or China or America, I don't know, but I don't think seriously anybody can say that these kind of people can really influence elections. I think that it very much now depends on the candidate themselves, how they will cope with the media debates and other things. And I think that they are coming neck-to-neck at the moment. So it will it will be decided probably in the very last moment.
GC: I mean it's interesting you bring this up because in a way VTB is being pulled back into this whole issue of anti-Russian sentiment. And again, people looking at the amount of money that the government has given you, to support you through the financial crisis and again making the claims that you are too closely connected to the Kremlin and you personally are too closely connected to Mr Putin. Can I ask you a very direct question here: is there a problem with this relationship?
AK: No, I think this is the wrong impression and I was trying to describe it in my previous interviews to the Financial Times, for example. First of all, government is not giving us support for free. I mean, this year we're going to pay one billion in dividends to the government for different kind of stocks, they invested in our stocks. Secondly we are systemically important institutions for Russia. And even if we are fully privatised I'm quite sure that the government will continue to support leading banks because they're quite important for the Russian economy. And thirdly, I'm trying to convince that this year will be 20 years since I was appointed to the chairman of the other government bank... and for these 20 years I never had a call from a Russian president saying you should give a loan to this or that person, or this enterprise. And my relationship with the government is just a relationship with a majority shareholder. I respect very much, I have to deal with the government, I should convince the government, but I think if there's a private shareholder instead of the government, I'll be doing the same job. It's quite important.
GC: So very clearly for the camera, you're not hiding Mr Putin's 2 billion dollars that's allegedly in the Panama Papers?
AK: I would say many times, I don't believe that Mr Putin has 2 billion. Because even if he wanted to have, I don't know how he's going to spend them. And I think those people, they are doomed for the rest of their life, to live their life when everybody will be screening them or watching them. And I don't think that he's this kind of person. He's really dedicated to his job, he really wants to change Russia. And I don't think that earning the private wealth is something among his priorities in life. I'm quite sure it's just vice versa. And that's why nobody ever, ever saw these billions or even millions of Mr Putin's money. You know, there was money found of other leaders - from Britain, from Ukraine - but never of Mr Putin.
GC: It's interesting, isn't it? And it's very much about the perception that people have of Russia. The anti-corruption head has obviously just been arrested and claims have been made about money involved - hundreds of millions of dollars. Do you think that this is still creating an image problem for Westerners putting capital into this country.
AK: I was also saying not once that corruption is a huge problem for Russia, for the Russian economy, for Russian business. Things are improving, if you compare Russia from 10 years ago, 20 years ago. But not quickly enough and the level of corruption is still unacceptable. So we would very much like to see more fight against corruption and the cleaning up the Russian economy from corruption. That's for sure. I would put it as one of the priority for any government, for the development the Russian economy, and Russian society in general.
GC: So you're working for VTB and its shareholders - you're not working for the Kremlin?
AK: No, I'm working for the bank and I am not the paying any money to anybody... We're big enough and strong enough not to increase corruption in this country. And I very much believe that I'm servicing the interests of the Russian economy and all shareholders, 40 percent of whom are private investors, and 20 percent of stocks belong to foreign investors.
GC: Do you think that that would help with that perception if the privatization programme ultimately takes the government's holding down below 50 percent? And when will it happen?
AK: Basically when we first had the privatisation in 2007, that was the idea. Of course the global economic crisis changed the perception of investors to a very big extent, because after the crisis we've heard from many of our investors that we better stay with the majority government stake because investors thought that the government would provide better support in the time of uncertainty. As soon as we leave this time of uncertainties I think we are again quite ready to raise the question of the full privatisation of VTB, which is quite possible. But I don't think that today the conditions for this is very good, for a couple of reasons. You mentioned sanctions - which definitely create problems for foreign investors to participate, or actually forbids them. And secondly, of course, the economic situation, the negative economic growth. As I mentioned to you before, in two-three years time we expect a much higher profitability of the bank, which will be I think by this time hopefully, the sanctions can be removed. Of course this will be a much better situation for privatisation. But we are ready for this. We don't think it will change very much whether the government has 60 percent or 30 percent, but we're quite ready for this and we are working towards this direction.
GC: Clearly President Putin's party has increased its position within the Duma in the elections. Do you see that in any way changing the economic programmme that included reforms like privatisation of key stakes including VTB? Will it move it up at all? I mean what is the time frame?
AK: I think the level of support came as a little bit of a surprise even to members of the party itself. Because the economic situation is not very favourable, because the real income was decreasing. But probably geopolitics helped and because Russians feel a little bit in an unfriendly environment. You know, they're sticking together and trying to support the ruling party. So it's definitely a very clear victory with the constitutional majority; quite big support for President Putin, as well as for Prime Minister Medvedev. I would rather have hoped that we might have, in some new stage of reforms, probably after presidential elections. That's my feeling. That's why the President ordered some programs to be developed by different economists in Russia - I think he is getting ready for some package of some reforms. Whether they, in the next two years, will be used for this, I'm not quite sure. I don't know. Maybe some changes, but very drastic changes or any structural reforms - I'm not quite sure about this.
GC: Would you expect there to be a a reshuffle that will remove some key economic ministers? Or would you like to see it given that the economy has had two very tough years?
AK: No, I think the government is very able in coping with the problem. Secondly, of course, the prime minister just received huge support as being the leader of United Russia, and I would be very much surprised if somebody had a question of removing a prime minister who had such a big support. And secondly, I think basically, particularly the economic ministers, I think they're doing quite, reasonably well and the Minister of Finance and I don't think there was too much criticism on the part of the President, or even the public, for the Minister of Finance or Minister of the Economy. So if there's any reshuffles I think they will probably be more with - not the economic bloc. Definitely. As you see recently we had a change of the Minister for Education. So I don't expect that the Minister of the Economy, or Minister of Finance will be reshuffled. That's my personal opinion. I think they're doing quite good under the circumstances.
GC: There is some worry here in the business community that we might get a quite strict 2017 government budget, given concerns about the level of public sector spending. Are you worried at all that that might be the case and that actually reduces some of the opportunity for growth next year?
AK: A strict budget is something which is very much appreciated by our foreign investors because it's keeping the government expenses under control, keeping the macro economy in Russia in good shape and improving inflation. Of course it's not enough to attract a lot of investments because geopolitical changes to the better and also the economic growth I think are vital to invite foreign investors. But still, it's been it's quite an important element that the Russian economy is doing well. I think a strict budget, particularly when we have the oil price at this level of 44-43, I think it's quite essential. But of course Russia needs more sources of earning money for the government as well. I think there should be some economic growth and other mechanisms, rather than just cutting down...We should earn more, not only saving on expenses, that's true.
GC: By the scale of the fines levied against Deutsche Bank and others, the 5 million that the CFTC has fined you is small change, but it does obviously raise a couple of questions about regulation and the way your businesses are being run in the United States. Is there anything that the market should be concerned about?
AK: No, we believed that we were conducting our operations very much in line with existing practices. Then the regulations were changed and some backwards, and there was a fine which applied to us. But we were cooperating with the commission from the very beginning. We have no hard feelings. I think you're quite right, I mean American and European banks - of course, bigger size, but much, much bigger bigger fines. We probably should be more clever and more cautious in the future but we continue to conduct our business there. We don't make a very big deal out from this situation.
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