How do you see the sector developing in Armenia?

Three things are needed to bring the financial sector up to a level where it can dynamically develop—good regulation, a country rating, and a sensible tax scheme.

Some changes are afoot in terms of regulation that should have positive consequences. As of January 1, 2006, CBA was set on course to become a super regulator—taking over the regulation of the securities and insurance markets, on top of the banks. This makes logical sense due to the small size of the market. In addition, CBA is expecting to receive a substantial technical assistance program from USAID in order to bring it up closer to the level of the United States and Europe on regulatory functions and improve its management of the sectors. CBA is already good in the context of CIS regulatory bodies. Those of us in the industry hope that this assistance could help Armenia move toward eventually becoming a Liechtenstein or a Switzerland, if it can become good by international standards. We anticipate and hope that the USAID program will aim to teach the regulator and private sector to work in harmony—so that the result can be capital inflow, rather than regulating the companies out of existence.

The fact that Armenia does not have a country rating is also problematic for the banking sector. However, two international agencies are reportedly working on it and may come out with a rating in the near future.

What are the strongest sectors in Armenia for trade and investment that will help drive development in financial services?
 
Armenia has been experiencing double-digit growth rates over the past few years, but trade has not been as robust as it might. Currently, a lack of understanding and opportunity are keeping people from exporting, but there are some good prospects and it is getting easier to do these deals.

Some promising sectors include:

What is Cascade’s vision for development and expansion in the market?

Cascade is the only group in the country trying to push all the financial buttons and represent a broad spectrum of financial interests. Cascade is already working with USAID and EBRD, is negotiating with IFC, OPIC and the World Bank, is looking to cooperate with KfW and others—so we have solid resources and backers to point to that we have gotten interested in the Armenian financial services market.

Eventually, we would like to be able to say to our initial target market, the Armenian Diaspora in the United States and Europe, that there are options for helping Armenia through investment rather than through charity. We would start by trying to attract small investments to newly created investment vehicles, such as mutual funds, and then diversify the products once interest has piqued and some investors have shown up. Other investment vehicles would include government securities in Georgia and Armenia, venture capital funds, bonds issued by Cascade and others—we would offer perhaps 10 different places to spread money and diversify risk just like any Western investment bank does. This is perhaps six months away.

In about a month, we will issue the first ever private sector notes in Armenia with a 50 percent guarantee of principal from the U.S. treasury (with USAID assistance) with a one-year maturity. We believe that other Armenian banks will follow in our footsteps in terms of these notes, if the issue proves successful for Cascade.

Cascade is also looking at opening offices in the provinces, but wants to make sure that it is able to install good management systems before expanding.

Surveyed Investors Bullish on Russia

Foreign investors in Russia are successfully meeting their business objectives, with year-on-year sales and profits increasing dramatically in 2005, according to the Russia: Investment Destination 2006 survey released in May 2006. Conducted during March-April 2006 by The PBN Company (www.pbnco.com) for the Russian Ministry of Economic Development and Trade and the Foreign Investment Advisory Council, the survey asked the opinions and attitudes of 155 well-known foreign companies, including 102 current investors and 53 potential investors. The current investors surveyed are engaged in the consumer goods sector (20%), production of industrial goods and machines (12%), professional services and consulting (10%), oil and gas (10%), telecommunications and IT (10%), retail and wholesale sales (10%); and banking, insurance, and financial services (10%). Of these, four in ten said that sales increased by more than 30 percent, one-fourth reported that profits grew more than 30 percent, and eight in 10 said that they successfully achieved their business plans in Russia over the past two years. More than 90 percent of companies surveyed plan to increase both their business operations and investment during the next three years.

Survey respondents cited the size of the Russian market, the country’s sustained economic growth, the high quality and low costs of human resources, overall political stability, and macroeconomic stability as attractive features of the market. The main problems mentioned by investors are bureaucracy and red tape, corruption, inadequate legislation, and selective interpretation and application of laws.