Robert von Rekowski who has more than 23 years of experience in asset management and who is the Vice President for Emerging Markets Strategy of the Fidelity Investments, that manages assets worth $1.4 trln, is in Yerevan. He is also the independent member of the Board of Directors of Armenian Ameriabank.

Before taking up his current position, von Rekowski has managed American, Canadian and international institutional and retail investments foundations in developing markets. Among other positions, he is also a member of Boston International Relations Committee, Boston Economic Club and World Boston.  

Banks.am discussed with the international expert the urgent issues and challenges of the Armenian capital market.

- Mr. Rekowsky, we know that you have enormous experience in asset management. Armenia is on the edge pension reforms now. From the beginning of the next year Armenia will implement compulsory accumulative pension system. There is little experience in asset management in our country and the main concern here is “what will happen to our money in 30-40 years?”. What has to be done in order to maintain confidence in this issue?

- I think this is a very important subject that you bring up. And the way you characterized one of the biggest reforms since economic transition. First of all I think this is a very important step in development that’s been taking to move forward to do this and thankfully there are number of other countries to look to for models and I know you have very strong kind of regulatory framework in Armenia, lot of professionals in terms of oversight from the Central Bank, Ministry of Finance and all other relevant officials that are dealing with the economy. So pension reform can often be very complicated and contentious issue but the fact that it’s being addressed now is important.

The development of domestic portfolio management professionals, I think again I’m not sure what kind of professional requirements are going to be mandated for people who will manage people’s pensions here I’m sure as plans become more detailed, people will have to be informed about what types of instruments will be in those pensions.

I just came from Russia yesterday, and they’re also looking at making additional steps to reforming their pension system, because right now most of the state pension funds own dept obligations of the government. So they want to look like more to other countries that eventually have either corporate dept or even equity from companies – stocks. So, I’m sure that the Government regulations will make it as safe as possible first.

- Does it mean that all the money that is going to be accumulated in pension funds will go to the government bonds and corporate bonds market and the stock market would not benefit from the pension reforms at all?

- In a way perhaps it’s not something to worry about but to discuss. In Russia at the end of each year they analyze the performance and the pension fund managers are very worried if it is any loss on return. They have to make up the difference. So, right now they’re very happy to stay in government bonds because they’re safe.

The government understands that’s not good for the long-term prospects for the development of the capital markets or to returns in those pension funds, so they’re working with the private sector and other officials to make changes.

So, in short-term, the government debt is a good area of investment but on the long term when we look to either systems in Germany, Poland, Russia, as an example for the proper mix of government and corporate debt, and public equity as well.  

- Corporate bonds market, which was evolving dynamically in Armenia before the devaluation in 2009, is stagnant since then. These securities are much less attractive now than government bonds because the latters have bigger yield. What has to be done in order to restore the attractiveness of corporate bonds in our country?

- I think you’ve analyzed the situation that probably happened in other countries as well some times. So when government debt securities offer a greater yield as you mentioned, a lot of times those are perceived as a simpler of safer way to invest than having to do additional work of due diligence analyzing the company, dealing with management investing in those bonds. So I think from a rational point of view, most times investors whether they be professional pension fund managers of individuals, will simply invest in government securities. They’re liquid, they’re usually guaranteed, and they seemed to be perceived as more safe. I guess perhaps it was unfortunate that the devaluation of the currency as you mentioned, impacted the liquidity of those  markets, are listed here, and they could may be enjoy second life as things normalize. Around the world it’s true that a lot of governments have been restructuring their debt and a lot of companies have been taking advantage of low interest rates to place more corporate bonds, so I think in the next year there will be more opportunities for Armenian companies to either come with corporate bonds and bring the market back to life. But the way you analyze it makes sense right now it’s just too easy to invest in government paper than do the extra work. Maybe things will normalize after a while. I suppose we are facing crowding out effect, when government obligations are more attractive.

- And the last question on our capital market, more precisely – the stock market: the market value of the publicly traded shares in Armenia is one of the smallest in the world. Even postwar Iraq enjoys nearly $3bln of stock market capitalization, meanwhile in Armenia it’s only about $30 mln. When we address local experts on the issue, they say that it’s the matter of either local mentality or the lack of corporate governance culture. But it’s not convincing, because, for example, when we take the neighboring Georgia with $1.5bln market cap of publicly traded shared, we don’t see much more progressive mentality there or more widespread corporate governance. What’s your opinion on the real reasons behind this issue?

- In many countries, and Armenia is among them, businesses often use internally generated cash flows, so they're just funding themselves. And their growth might be slow because they've cash flow issues. Then, when growth starts to pick up, they need to go to the banking system and so people's savings get redeployed in the economy, so that the economy can grow through the normal banking channels. And then hopefully as the banking sector here consolidates and grows, companies will not only use loans from the bank but use the banks to help them place corporate bonds as you mentioned already. The next step will probably be on equity markets.

As an analyst I was always trying to understand for example, how could Germany use German companies seem to rely on their banks more than their equity markets for growth and it could be strong cultural aspect of how things are done. They're still very efficient in working capital markets so there was always interesting to me as the US was much more driven by either syndicated loans or public equity markets.

Regarding Georgia I did have some experience and I should note that there are not many companies there either where you can make long-term investments. On the whole, the stock markets of the countries of the region do not have high liquidity so as things stabilize here and Armenia moves forward with reforms, this things can change very quickly. So if local businesses become more confident that the stock market can help invest and grow their companies and be rewarding, then maybe everyone can benefit. I think your question is very perceptive with the situation.

- The fact is that Armenian businesses are more reliant on bank loans than on stock market.  Here in Armenia we are used to be confident in our banking sector, but from time to time we hear fearful news, take Greece or Cyprus. Can one believe in our financial system's sustainability these days?    

- Fortunately, there is a strong regulatory infrastructure and oversight of the banking system in Armenia. As long as there is transparency to what the appropriate governance framework is. I believe Armenia is in between Basel 2 and 3 in terms of standards, so again the players in the market understand what the rules are in terms of capital adequacy, loan to deposit ratios, all those risk measures. It's absolutely truth, you can see what's happening in Cyprus, overall Europe, and even a couple of years ago in United States, where they increased the minimum sum of ensured deposits.

So this confidence things do come up. The first thing you can see there is that banking sector assets were larger than those countries' GDP. But Armenia is a different case. Besides, the regulators should be very proactive on the market.

- And the final question: tell us about your cooperation with Ameriabank. What's your mission as an independent board member of the bank and what's your vision on the bank's future?

- I worked with some of the management team when we volunteered for the “Armenia 2020” project a number of years ago. Ruben Vardanian was the chairman. My interest toward Armenia grew during this project. So after we delivered the “Armenia 2020” research, we just kept in touch in different ways.

And as the bank grew here and we reconnected, they asked me if I’d consider joining as an independent board member to bring my experience from being an investor in emerging markets, knowing how other companies in emerging markets compete for attention and knowing what the best practices in corporate governance are.

I think the vision of the bank is very customer-focused, they want to offer financial solutions of almost cutting edge in terms of bringing solutions that can help people manage their personal wealth, as well as business community to grow and prosper. So I applaud that vision for them, and hopefully, what I can bring, are the examples of world's best practice.

Robert von Rekowski was interviewed by Ruben Harutyunyan.