January 2014
Forbes met an investment banker, head of the Concorde Capital Company Igor Mazepa in a few days after the “Black Monday” – the collapse of stock indexes in the international markets, which experts call the forerunner of the 2008 financial crisis.
Igor Mazepa responds to international turbulence in a low key – his business is not associated with risky operations, so the fall of market quotations will not affect Concorde dramatically.
Meanwhile, banker has other concerns. Mr. Mazepa is one of the most influential financiers of the country, having the great portfolio of successful transactions, who has friendly and long-term partnership relations with the first decision-makers of the state.
But actually, a recent major scandal in the United States threatens Mazepa’s unchallenged reputation: Concorde was involved into the proceeding of manipulations in the stock market with the use of hacked information.
In his interview to Forbes Igor Mazepa gave his opinion on events in the US, commented developments of the Ukrainian economy, and explained why today is the best time to buy assets in Ukraine.
– How did you meet the “Black Monday” and how processes in the international stock markets may impact the situation in Ukraine?
– We do not have any risky positions abroad, so events in world stock markets did not affect our operations to a great extent. But it increased the volatility and nervousness in the markets.
Consequences for Ukraine will be linked with the continued falling of commodity prices. Over the past two months for some product groups it was as follows: carbamide in July cost $ 300, and now – $ 265. It turns out – 10% of the cost. Corn cost $ 430, and prices have dropped by 15%. Wheat – lost in the price of 18%. Ore – slumped by 25%. The steel slab – 10%. These are the main export commodities of Ukraine.
In the first six months of 2015, exports have fallen by $ 10 billion, of which $ 5 billion we have lost as a result of shutdown of some enterprises in the Donetsk and Luhansk regions, and the rest – because of lower commodity prices on external markets. Also, exports are affected by the reduction of industrial production. In the first quarter it decreased by 18%. The second quarter gave the 14% reduction. This implies that we are still below zero, but the lowest point has been passed.
GDP fall by the end of 2015 may be, most likely, about 10%, which is very painful. These macroeconomic indicators affect the lives of all citizens of Ukraine.
– Please explain what triggered the collapse of stock markets on Monday, August 24, 2015?
Psychological theories may explain the phenomenon showing how collective players in the market are subject to panic or euphoria. After all, everyone knew that China’s economy would slow down. And many private investors have invested in the stock market having no understanding of the business trends.
– Situation with the collapse of the Asian markets reminded me 2007 and the first half of 2008, when the Ukrainian companies made presentations across Europe, focusing, in particular, on the retail segment. When, for example, taxi drivers in Stuttgart bought the Ukrainian securities, any German, Austrian or Swiss magazine published the investment research – including those of our company, as well as our Western colleagues – on the stock market of Ukraine and other emerging markets.
It means, on the one hand, the investment culture in the West is very developed, and on the other – the market was greatly overheated. To invest in securities, people brought their last money, withdrawn deposits from banks, took credits or simply borrowed from relatives. Such a situation is always exaggerates the stock market collapse. There is a domino effect, everything falls.
A similar situation occurred in China and other Asian countries in the “Black Monday.”
– And was it possible to predict the dramatic turn of events on Friday, on the eve of the collapse? Predictions about the coming new crisis were made a long time ago…
– On Friday, before that, as well as a few months earlier, it was clear that every “match” thrown into this “fire” would have a dramatic effect. A “match” was the study of some analysts saying China’s economy slowed further. As a result, general negative background occurred, against which the whole country felt the instability, millions of investors who invested in the stock market even their future earnings.
The situation in Asia spread to the European and American markets, although they were already falling for five weeks in a row. That fall was additionally intensified by instability in commodity markets, which was observed at the beginning of the summer, and relevant risks for investors and producers were forecasted at that time.
The Chinese Central Bank has quickly reacted to the situation, significantly reducing the interest rate that added money to the system and gave a good sign for investors. As a result, volatility, for example, in the US stock market was 10% on August 26. It was trillions of dollars!
Psychological theories may explain the phenomenon showing how collective players in the market are subject to panic or euphoria. After all, everyone knew that China’s economy would slow down. And many private investors have invested in the stock market having no understanding of the business trends.
Igor Mazepa, “We are passing the bottom”
Photo: Alexandr Kozachenko for “Forbes Ukraine”
– Can Ukraine benefit from such instability? After all, investors are still looking for objects to invest in?
– 5-7 years ago I would definitely said that Ukraine would have won for sure. Then the country was on the investment map of many investors. Ukraine could be a place where investors transferred the money all other things being equal. But now we have a furious exchange controls, there is no investment climate, no stock market, so is technically impossible to realize some investment idea, no matter how hard you try to do so.
The foreign exchange market is under heavy restriction – no free market. Often, applications for purchase of foreign currency are manually processed. Often we see the manual control by fluctuations of hryvna to the dollar. The hryvna is under the same pressure as all emerging market currencies.
Over the past 2-3 years, Americans left the power market. Chevron has gone. RusAL has gone because prosecutors seizure their Zaporozhzha Aluminum Plant by court action. All western banks have gone – who could. At that, courts contributed to the general chaos. Therefore, Ukraine has been completely isolated from the financial markets.
Currencies of countries that depend on commodity prices, have devalued. This applies to the post-Soviet economies, New Zealand, Canada and so on. But in Ukraine, the Central Bank is keeping the hryvna rate, because they lack the purely market arguments.
– What and who will benefit of the NBU policy to retain hryvna exchange rate?
– Devaluation is normal for the free market, but there is another party. Measures intended to support the country’s shaken currency would allow maintaining the consumer market and the banking system of Ukraine. Devaluation of the national currency from 8 to 23 hryvna for 1 dollar has led to impoverishment of the people. Let alone the fact that people lost money in the banks. Purchasing power has fallen, consumer basket increased in price by 60%. And hryvna revenues remained the same. Respectively, consumer markets collapsed. Investors traditionally were interested in Ukraine’s consumer markets. 45 million people having revenues – it was who attracted global leaders of many industries. Energy, Western banks, commodity companies that contributed to development of the consumer market. It was those rich and happy years that have already ended.
Over the past 2-3 years, Americans left the power market. Chevron has gone. RusAL has gone because prosecutors seizure their Zaporozhzha Aluminum Plant by court action. All western banks have gone – who could. At that, courts contributed to the general chaos. Therefore, Ukraine has been completely isolated from the financial markets.
If we expected the payment account deficit of $ 1.6 billion, the current situation will worsen up to $ 2 billion. The cost of ore, grain and other commodities has fallen, although we began to buy oil and gas at lower prices.
– What is going on in the banking system of Ukraine?
– The Ukrainian economy in the period of 2004-2008 grew at a record pace. Annual rate of GDP growth was 7-10%. Living standards significantly improved, wages of leading specialists increased from $50 to $500 per week. The whole world perceived Ukraine as a new “Asian tiger”. During this period, many of the largest international financial institutions, including Russian ones, entered the local market. Foreign investors expected the growth of the Ukrainian consumer market.
All that allowed everyone, from a taxi driver, with all due respect to the profession, to large corporate clients, to get access to the overwhelming credit resources. So people got into a key to the sweet life with no way to pay the bills. But all this sweet life ended in 2009, when GDP fell by 15%, and the banking system collapsed.
In this situation, banks bumped into their problems. Some MPs and industrial lobbies, which, in fact, got to their feet thanks to these credits, instead of real action to support the banking system, not only induced the public to not repay credits, but also consolidated such practice in the respective bills. As a result, for a decade Ukraine received the banking system, the functionality of which was reduced to the payment transactions only. No accumulation function, no investments, no support of the consumer market and economic growth.
– What are you doing at the supervisory board of Ukreximbank?
– Currently, we are building the normal management structure within the state corporation, with a supervisory board, which balances the management and does not allow it to go beyond the scope of authorities. At the Ukreximbank, we create a normal history of corporate governance. I am an independent director of the Bank, and my most important task is to build the monitoring procedures that will allow us to manage the bank effectively, not to steal, to build the risk management procedures and so on.
– According to Forbes, you consider purchasing assets of Forex Trend, which used to be one of major brokerage service providers in the financial markets. Please tell me why you buy assets of Forex Trend?
Some MPs and industrial lobbies, which, in fact, got to their feet thanks to these credits, instead of real action to support the banking system, not only induced the public to not repay credits, but also consolidated such practice in the respective bills
– We do not buy anything. As the largest operator in the stock market, acting within our strategy, we expand our presence in various segments, and specifically, by following orders of our clients. Although Forex is often associated with the currency exchange, they also trade in securities, spreads and so on. And we want to cover the whole world with such transactions by providing a wide range to our customers. It determines our interest in this business.
These companies are popularly called Forex, but de facto they are brokers on over-the-counter securities markets. We have well-versed co-investors in this business. We saw various inefficiencies and opportunities in the market after the collapse of some companies due to their loss-making operations.
We, in turn, will launch a new company in fall, in October, to attract clients of fallen colleagues. It will be a Forex broker that will perform risk-free operation only. We count upon clients of Forex Trend, MMCIS and others.
– How would you comment on the scandal in the United States dealing with hacking the insider information, which was laid to charge of Ukrainian companies, including Concorde?
– First, Concorde has not been accused. Second, our investigation showed that we not party to that scandal, as all transactions were performed upon orders of customers, not initiated by us. And many accusations, to put it mildly, are not true. Our task is to explain this to the US regulator.
– Are there any elements of policy in this scandal?
– I think no. This is a regular civil process, hundreds of respected companies in the US and Europe took part in similar proceedings every year.
Investment climate
– Please give your recipe how to rescue the investment climate?
– We all know that a shock may trigger revision of the well-established way of life. Starting to solve a problem, you realize that you need to tackle more global issues. For example, an idea to fix a ceiling may lead to the home remodeling.
And the shock always promoted change for the better. In Georgia, it happened – war and poverty made people got up and said they wanted to change their lives. At that, Georgians had a leader, strong-willed and principled.
We have a similar situation here. But, unfortunately, we did not remodel our home. Nothing happened. There was no liberalization of the foreign exchange market, because the stable currency is a matter of political expediency. There was no pension reform, although both the government and the population suffer problems with the Pension Fund, but no one even moves a finger to make a difference.
The land reform did not go through, although everyone knows that only the free purchase and sale of land can upgrade ineffective relations of a farmer and the land owner, a farmer and a lender, and give impetus to the labor productivity and financing of the agricultural sector. An opportunity to take land in pledge will protect a creditor, and the unsecured creditor will not finance a farmer.
– It turns out, that problems of Ukraine relate to the decision-making?
– Many decisions are taken. For example, deregulation has simplified the lives of many businessmen. The gas market changed fundamentally; the Naftogaz management has established reverse gas supplies from Europe. It turned out that it is feasible, although for 25 years, all pretended it was impossible.
A shock may trigger revision of the well-established way of life. Starting to solve a problem, you realize that you need to tackle more global issues. For example, an idea to fix a ceiling may lead to the home remodeling. And the shock always promoted change for the better.
They have finally raised tariffs, which was painful, but correct decision. And before, all had an illusion that one could buy gas for $ 500 and sell for $ 50, and work normally for decades.
There are some changes. But there is no critical mass of changes. And we cannot say that the country has changed the track and runs in the right direction. Judges, officials, law enforcers and prosecutors enjoy the same impunity as before. In our country, more kids want to become prosecutors than honest businessmen.
– You say that judges enjoy impunity. But why not to enter the impeachment of judges, as required by international partners of Ukraine and the government?
– Authorities say a lot, but, for example, judges are still the most secured caste in the society.
– Meanwhile, the international investment community is still interested in Ukraine. What are major concerns of foreign investors?
– Yes, it happens. For example, Western gas producers recently discussed the rent reduction on gas production. Unfortunately, twofold reduction of the rent is not enough to attract new investors capable to bear political, operational risks in Ukraine. As a result, we do not see new investors.
I should add that Ukraine has failed privatization. Until now, about a third of GDP is accounted for the public sector. However, it is inefficient; it is always stealing, always – the element of corruption. This problem was not solved for years – no Yushchenko nor Tymoshenko nor the current authorities. Although there is a civil consensus, but the government fails to make the relevant decision.
Yanukovych left the country the year and a half, but we have not got the minimum progress, just populism. Along the way, they should have developed and introduced conditions for privatization.
– Among other things, did you take part in the privatization of Odessa Port Plant?
– This is a good example. In June, we held a conference for foreign investors in New York to present the opportunities of Ukraine; on September 21, we’ll have a similar conference in London.
Judges are still the most secured caste in the society
By the way, we conduct such events on a regular basis in order to attract the Western capital to Ukraine as much as possible. And these efforts have yielded the first results – some foreign investors declared their interest in the tender for the sale of 5% OPP.
In order to participate in the process, it was necessary to make a deposit. I have exchanged 4 million dollar for 90 million hryvna. But the tender was not held. And now I cannot exchange that 90 million hryvna back to 4 million dollar. I even cannot insure against this risk, for example, through an option, as I do not have an investor in Ukraine. We do not even have a spot market…
Later on, the Cabinet canceled the privatization in two business days before the tender. They did not want to sell 5% stake in OPP. I agree, it is better to privatize 99% immediately. But the problem is that the same people authorized the sale of 5%. They offered some rules of the game for investors, investors accepted it. And then they canceled all in two days. But an investor has already undergone an expensive process.
– What do you think, from the point of purchasing the Ukrainian assets, did we hit the bottom? Is it time to buy?
– Definitely. GDP fall in the first quarter – 18%, in the second – already 14%. It’s still falling, but not so significant. We are passing the bottom.
– What is a source of optimism in the economy for you?
– For me, a source of optimism is a few people who came to different positions, and who really push something. Valeria Gontareva at NBU, Andriy Kobolev at Naftogaz, Abromavičius at the Ministry of Economy. The presence of such people is very motivating.
http://forbes.net.ua/business/1401317-igor-mazepa-my-uzhe-prohodim-dno
