On June 23 at 13:00 Dr. Arthur Berd will deliver “Risky Business. How to Recognize, Measure and Manage Risk in Finance, Business and Life” master class at the Manoogian Hall of the American University of Armenia (Baghramyan ave 40).

Dr. Arthur Berd is the Head of macro-option strategies at Capital Fund Management International, Inc. (CFM). In recent years, Arthur Berd held senior positions in such companies as BlueMountain Capital Management, Lehman Brothers and Goldman Sachs Asset Management.

Arthur Berd is one of the co-founders of the “Ayb” Club and Educational foundation.

For registration for the master class please send an email to sona_k@ayb.am before June 22, 12:00 indicating your name and field of activity. Seats are limited. The master class will be given in English. Questions in Armenian and Russian will be freely responded to.

Before the master class Arthur Berd talked with Mediamax.

- You say that the global financial crisis once against emphasized the necessity of risk management at all levels: from personal and commercial to state and international. What can you advise our ordinary citizens with a medium level of income? How can they minimize their risks?

- The most important principle for citizens in current market conditions is accurate management of their family budget and its estimation at least a year ahead. The main focus should be on the monthly positive balance of incomes and expenses. There is an American expression as “Cash is King”. So, in the current market situation, this is really true.

If you have managed to balance your budget and you have some idle money left, today you will be able to get significantly more for the hardly-earned and saved cash, than you would yesterday. For instance, if you want to buy an apartment and you have cash budget and you do not need to borrow to purchase it, you will be able to easily strike a bargain on a price, profitable for you, since there are no many of such buyers and the one, who sells, knows that he/she should not let them go.

The most risky is what sometimes people do and what should be avoided: speculating on borrowed money. For instance, this is if they buy an apartment for money, borrowed from a bank or friends, hoping to resell for a higher price before they will have to repay the debt, at that knowing that their current budget will not be enough to cover the payments. This is an almost guaranteed way to go bankrupt. The problem is that your successful purchase may turn out to be very difficult to cash. And when the deadlines of the debt approach and you have to sell it in a hurry, you will almost for sure fail to get even the same “profitable” price you have paid for it, since the new buyer will feel that you are in a crisis situation and will offer you a lowered price. Thus, you will not only fail to get profit, but will also lose your investment and have an incompletely repaid debt. 

The most profitable investment, which can be made by an average citizen, is an investment, which will somehow increase his/her own capacity to earn. For instance, if you are a baker, it is better to invest in a better stove than to invest in a modern car. And on the contrary, if you are a truck driver, it is better to invest in a truck that is equipped with a gas engine, which will cut down fuel expenses, rather than investing in a very expensive oven for your kitchen. In both cases, the correct investment will immediately start giving dividends and the level of compensation will fully depend on you as a producer, and not on some unknown future buyers. 

- To what degree are the accepted models of risk management applicable for countries, such as Armenia, in which many economic processes are monopolized or are managed by non-market mechanisms?

- Undoubtedly, in Armenia, just like in other countries with not very developed market economy, there is own specificity, be it the concentration of commercial activity in particular spheres, or in particular hands, or anything of the kind. But this does not mean that the general principles of risk management are not applicable. One should simply find the correct interpretation of these principles for the local conditions.

For instance, there is a very peculiar specificity of economy in Armenia, related to a large quantity of money, which enters the country from compatriots, who have gone off in search of living or who have permanent residence in other countries. Naturally, one should take into account this significant factor in the republic’s economy and manage risks correspondingly. And the risk in this case is the AMD exchange rate. Since the larger share of money in the country is not earned inside the country, and is simply transferred to the country from outside, the extremely stable exchange course of currency leads to the fact that this money leaves the country without remaining inside it for long, since citizens spend them to purchase foreign products, and trade organizations take the received money abroad to purchase new consignments of goods. One should do everything to keep as much money in turnover inside the country as possible. To this end, it should be more profitable for citizens to purchase goods of local production, even if not basing on the quality (and we are far from accomplishing this), then at least basing on the price. Everyone will benefit from this: citizens, producers and the state, which will gain more incomes into the budget, and the compatriots, who send their money, since their relatives in Armenia will manage to live a better life due to the money sent by them.

- Local and foreign experts believe that the fact that local banks started paying more attention to introduction of risk management was the positive influence of the crisis on the financial system of Armenia. On the other hand, one gets the impression that in a number of cases, banks use risk management as an excuse for disproportionately toughening crediting conditions. How can one find the conventional “golden mean”?  

- Toughening in crediting conditions is a natural result of the crisis. Imagine a situation. Your acquaintance turns to you with a request to lend him a significant sum for certain urgent expenses and swears that he will repay you for sure within two years. You will quite probably demonstrate less readiness towards this request, than you would two years ago, because you know that he may easily find himself in a situation, when he will not have any incomes to return your debt.

Naturally, the criteria for assessing non-repayment of credits in banks have also become tougher.

“The golden mean” is in the state’s purposeful sponsorship of crediting directions, which the state considers of priority importance. This may be done through diversification of regulated levels of capital at banks depending on the sphere of the credit. For instance, if the state wants to encourage crediting of small business, dealing in the sphere of production in Armenia, and does not want to encourage import/export trade business, they can reduce the coefficient of the regulated capital for production credits and increase for trade ones. At that, if the state also assists priority industries by target orders (for instance, orders of school furniture for state schools), these enterprises will become less risky due to more stable orders, and the banks will manage to provide them with more credits without being concerned of a greater level of risk.

But just like in case of any prioritization by the state, one should make sure that credits are really used in spheres, for which they are issued. Otherwise, it is easy to get the directly opposite result. Thus, for instance, in China the large share of credits from the state to local municipal authorities found itself to be invested in non-core construction projects, since there was more profit there. As a result, they got a big debt of local authorities, lack for priority projects and redundancy of unneeded construction projects. One should avoid such unwanted results.

- Let’s imagine that you are given a carte blanche to realize in Armenia the reforms, which you consider most necessary and you have three years to do that. What steps would you take?

- This is a tempting question. I have certain ideas on this, mainly related to development of the financial market and to attracting external capital to Armenia. But I’m afraid that a short answer within the framework of an interview will not allow me correctly presenting these ideas and this is why I will refrain from an incomplete answer. Probably, within the framework of our meetings at “Ayb” Club, I will manage to discuss these ideas with experts in those spheres and later on we will talk about this in detail. 

- General meeting of “Ayb” Club members will take place on June 24-26 in Yerevan. What are your expectations from this meeting? Discussion of which issues will be put emphasis on?

- The main subject of the meeting is summing up the results of “Ayb” Club and Foundation’s work for the past years and elaborating plans for the new stage, which, in particular, include establishment of “Ayb” school in Yerevan, as ell as work over the idea of the “All-Armenian School”. Along with these main topics, there are a number of others: the work of “AybLabs”, realization of competitions, etc. We hope to manage to pay due attention to all spheres of “Ayb” activity.