“Crisis is a chance to reform the structure of economy”

08.06.2009 | 23:06 Home / News / Articles /

Interview with Arthur Berd to Mediamax and Banks.am portal

Dr. Arthur Berd is the Head of macro-option strategies at Capital Fund Management International, Inc. (CFM), a leading hedge fund specializing in systematic investment management, with offices in Paris and New York. In recent years, Arthur Berd held senior positions in such companies as BlueMountain Capital Management, Lehman Brothers and Goldman Sachs Asset Management.

Arthur Berd was born and raised in Yerevan, was a winner of republican and soviet Olympiads in physics, and studied at Moscow Institute of Physics and Technology, and Stanford University in the USA. He is well known for his research in theoretical physics, as well as in the areas of financial investment management and risk management. Arthur Berd is a member of the editorial boards of the Journal of Credit Risk and the Journal of Financial Forecasting, and the founder of the quantitative finance section in www.arXiv.org, a global electronic research repository.

Arthur Berd is one of the co-founders of the “Ayb” educational foundation. He spoke with Mediamax about the ongoing world financial crisis and the perspectives of financial sector of Armenian economy in today’s conditions.

- Assessing the crisis consequences, people often say that it carries not only risks, but also opportunities. If we look at the crisis from Armenia’s point if view, what does it possess more: risks or opportunities?

- Undoubtedly, there are opportunities; however when striving not to miss those one should not ignore the risks. This crisis exceeds everything that Armenia or Russia have ever faced from economic point of view. Despite a certain feeling of stabilization, it will be a great mistake to assume that things will quickly go back to the pre-crisis conditions. This is why my advice to ordinary citizens, businessmen and state officials is not to miss new opportunities, but not to make themselves vulnerable to risks that are still great.

One should realize that the same situation may become an opportunity for some people, while for others it may turn out to bring a real risk. American investor Warren Buffett is famous for the fact that he always buys when everybody sells and sells when others buy. In the course of the recent years he bought almost nothing and gathered significant capital, and only recently became active in purchasing assets after they fell 50%-70% in price. For him this crisis indeed opened up many opportunities.

The same situation can have a different outcome. For instance, a businessman may see a chance to purchase various assets at a significantly lower price, as compared to the pre-crisis time. This seems to be a good opportunity. But if that businessman, lacking sufficient own means, purchases the asset with the use of borrowed means, there is a great risk that when time comes to pay off the loan, he may not have sufficient capital to do so. If, in order to repay the debt, he will need to sell the same assets, which he bought so “cheaply”, I can almost guarantee that there will be fewer buyers and the selling price will turn out to be even significantly lower.

In conditions of such a crisis, the financing mechanisms stop working. The main source of risk in these conditions is the debt, and I would recommend to pay the most attention to the management of each business’ debt obligations. This means that one should change the criteria used to evaluate business transactions. Instead of comparing the purchase price to some unknown future selling price to estimate the profit, one should instead compare this price to financing costs and should strictly manage business’ turnover each quarter to make sure that it has positive  cash flow after taking into account both operating and debt repayment costs. In current conditions, I would recommend to always keep a buffer of capital that should be sufficient to survive at least 6-12 months without external cash income, because the chance of interruptions in receiving both credits and payments for production is very high.

In Armenia it has always been difficult to receive funding, lacking a strong business and current profit. In America, it was possible form a new company, write a good business plan, outline in it the prospect of gaining profits in five years, and receive funding for such business plan. Since Armenia lacked developed capital markets, the world capital market collapse did not hit it too strongly. The only market in Armenia, which depended on capital funding, was real estate and construction, which experienced a strong growth, and now faces a strong decline.

- Armenian banks themselves and the regulator talk about full liquidity of the banking system. On the other hand, there are real difficulties in real economy: economic decline at the volume of over 9 percents, reduction of import by a quarter, and reduction of export almost twofold. How normal is such a situation, when banks collect liquidity, and the real economy continues to fall?

- I do not know all the details of how Armenian banks operate, but first of all I would ask myself a question on how liquid they are in reality. Is that real or seeming liquidity? If they have issued many credits, concerning which there is the risk of non-repayment in crisis conditions, the liquidity may turn out to be shaky. In a number of countries there is a situation, when the capital of a bank, which only a year ago seemed to be impressive, turned out to be insufficient because of a large number of credit losses. However, I think that, as compared to other countries, Armenian banks are probably in a significantly more favorable condition because they have always required strong collateral pledges and never issues risky credits without demanding sufficient income from clients.

I believe that if we choose the lesser of two evils, it is better to have the situation that we have now in Armenia than the opposite one. The banking system is the vascular system of the economy, and if there are thrombi formed in it, the real economy will collapse very soon. There is no economy capable of existing without financing. On the other hand, if the banking system is in normal condition, the chances for quicker healing of the real sector are far higher. This is why, going back to your first question, I believe that the presence of a stable banking system may open up good competitive opportunities for the entire Armenian economy.

- What do you think about the crisis preventive measures by the government, such as provision of state guarantees to developers to conclude the started projects? The critics of this decision believe that such measures only aggravate crisis influence on Armenia.

- Taking into account the fact that construction is in a way the backbone of the Armenian economy, according to some assessments making up to 40% of GDP, then probably these measures are justified. Roughly speaking, if in America, the state helps banks, then in Armenia, the state helps developers. But I would like to attract your attention to the fact that, when helping private companies in America, Europe or Russia, the states take a certain share of these businesses. This is done in order to return the money, invested by the government, in future.

The crisis is also a chance to reform the structure of economy. Perhaps the Armenian government, which considers development of IT and financial services its priority, should distribute the credits while taking into account those priorities? It is possible that even small guarantees of only $1mln to IT companies may also cause a significant economic effect. It is natural, that if we look at the economic chain, many other sectors are related to the sphere of construction. However, sometimes one should make strategic decisions. This is also one of the ways to turn the crisis from a source of problems into a precursor for new opportunities. 

- What is your assessment of the idea to turn Armenia into the regional financial center? The given idea is also an object for criticism.

- I believe that the goal is very reasonable and that Armenia has the chance to become such a center. The difficult geo-political conditions should not be an insurmountable barrier. For example, Cyprus, which is also in quite complex situation and is in fact a divided country, nevertheless has become such a center. Moreover, if Armenia succeeds in becoming a regional financial center, it will strengthen its stability and strategic position, because foreign investors will also be interested in that.

In order to achieve this goal, it is important to work on strengthening the legislative and tax conditions for the financial sector in our country. If Armenia wants to attract money from abroad, it will only come to Armenia if there is 100% reliability and transparency in regulations.

As far as I remember, there were talks on localizing geographically the financial center in Dilijan. This I consider a risky approach. If we set up the financial center in more than one hour’s ride from the international airport, this will become an additional unwanted barrier for foreign investors. One can realize many other projects in Dilijan, not related to such delicate issues, such as international financial resources.

- What do you think about the All-Armenian Bank, which is meant to accumulate means of Armenian Diaspora representatives and to become kind of a substitute for international financial institutions?

- I think that this is an interesting idea, which can bring many benefits not only to Armenia, but to the Diaspora as well. The success of this idea will in many ways depend on the services the bank will offer for Diaspora representatives. For instance, the bank may provide its customers with the opportunity to have double accounts: in the country where they live and in Armenia. They may provide currency exchange and transfer at favorable terms, etc. Existence of such services will play a positive role. Besides, such a bank will allow owners of accounts from the Diaspora to demonstrate credit history in Armenia, which is necessary for receiving credits, purchasing real estate, etc. For instance, the Moscow office of the bank may issue a credit for purchasing an apartment in Yerevan. Thus, Armenia in general will receive additional access to capital due to personal creditworthiness of our compatriots abroad.

- You are one of the initiators for setting up “Ayb” Club and Educational Foundation. What is the mission of “Ayb” according to you?

- Our mission and approach is to demonstrate, starting from the early classes in school, that education and knowledge is the main source of success in life.

Armenia has always been and remains a country where education is highly valued. The only problem is that people are striving to get a diploma, rather than to gain the knowledge. We want to show that both in Armenia and abroad there are many people, who are ready in practice to support and promote people, who carry real knowledge.

Our dream is to see in 5-10 years from now how the schoolchildren, whom we help today, will stand alongside with those, who will sincerely share their knowledge and achievements with the next generation.

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