THE BACK SIDE OF THE MOON

One of the most successful actions, held lately by Armenia's Central Bank, has become the process of financial recovery of Armsviazbank (now "Ararat" Bank) and the giant of chemical industry, Nairi plant, concerned with it. It was the only case of recovery of an insolvent bank for the whole history of Armenia's banking system. The reanimation process was controlled by a recognized management specialist in the country, Harutiun Mesrobyan, who kindly agreed to give an interview to ArmInfo Agency concerning the current issues of the financial market and the banking system development.

From the beginning of the year, the Central Bank had saddled itself with a heavy burden of a Unified Supervisory Body for financial markets or a so-called mega-controller. One of the reasons of transfer of supervision and regulation functions to it was the necessity of increasing the plank of development of all the market segments and reducing it to the banking system level. In your opinion, is it difficult to argue about this necessity?

Creation of a Unified Supervisory Body will, undoubtedly, assist to the "tightening" of the whole financial market to the banking system development level. The decision about centralization of supervisory functions within CB is strategically justified since, compared with other economy sectors, the banking system of Armenia has a high degree of observability and, as a result, a comparatively decreased level of shady processes. Nevertheless, it is necessary to use a system approach in any task solution, especially of such global ones, if the matter concerns centralization of the functions of supervision and regulation of all the financial market segments. However, I do not see, as yet, where this system character lies in. It is yet at the level of idea, namely, an idea of the necessity of complex development of the Armenia's financial market. It is quite another matter, what is the approach to the task solution, namely, which are its solution components, how they are interrelated and in which sequence they must develop. Yes, there are separate ideas but no systematization. In these cases we face a problem, which continuously pursues us: availability of a good idea and absence of a complex method for its solution and realization.

That is, a big presentation document must exist, which …

Such scaled projects must always start from a pilot stage, without which a risk of the whole system destabilization increases. It is necessary to create a mega-controller in several stages. The first stage is the concept development, its discussion, presentation, a pilot regime, after which its scaled implementation can be started.

In my opinion, the experiences in the financial sphere are fraught, to put it mildly, with troubles

I do not agree, if to make approbation on any limited segment of the financial market in the beginning. It can be chosen and limited to carry out a pilot project. We can run the situation and see what final modifications are to be made to start a scale application. In particular, I can give an example of why our equity market, namely the secondary stock market, cannot start working many long years. Like, there is everything - legislation, the corresponding licensing procedures, Institutes, at last, however, it does not succeed to get the market moving ever since the midst of 90th. One of the reasons is that the methodological approaches, which are developed, then are put in the legislation and are in no way materialized, have nothing common with the Armenian reality. The more these methods are moved away from the reality, the longer years there will be no practice results. It's OK if the matter is not simply set afoot, but it can be even worse, when it slides downhill.

That is, you think, the decisions can be applied as per situation, as if fragmentarily and sometimes not interconnected without such a system approach? Is there a danger here?

Well, if there is no concept to be necessarily analyzed at some stage for the degree of its adequacy to the real situation, the risk actually exists. By the way, different model approaches are quite often used in the economy without their evaluation for the degree of adequacy to the real situation, which is inadmissible according to the management theory. One should remember that the management decisions are made based on the model, and influence is made on the real object, the real life. If there is no evaluation of the model complex deviation from the object, it is impossible to purposefully influence the reality.

A real problem of considering the interests of all the interested parties and of the transparency in the solution of issues exists in the country. For example, the insurance market. It's not a secret that many so-called "great figures" keep the money and the charters of future companies ready in expectation of a tasty pie, CIACL (Compulsory insurance of autocivil liability), to be served up.

On the contrary, I am sure that insufficient transparency of preliminary procedures only alerts the real players and opens a way to the latently affiliated, so-called, VIP structures. That's why, there must be a transparency. The mist is to be cleared away to involve a greater number of potential players in the process, at the concept discussion stage.

If we have already touched upon the insurance market, how much is it justified to admit the foreign companies, in the person of their branches, to this pie? Anyway, the branches of foreign companies are mentioned in the new draft Law on Insurance. As I recall, a correct decision had been made at the beginning of the Armenia's banking system formation to forbid the possible opening of branches of foreign banks.

Generally, this issue is to be examined. The organizations, directly connected with the collection of financial resources, must be treated unambiguously: opening of foreign branches, activities of which cannot be fully controlled, should not be admitted. The banks in the form of contributions and the insurance companies in the form of dues gather the financial resources from the population, and so, they must be under permanent control, with minimization of risks.

Let's go back to the systematization issue, in view of the absence of which we have mentioned the problem of the organized stock market development. If you remember, the commercial Yerevan stock exchange, more or less normally functioning in the midst of 90th, was scattered to please the ICF and USAID, which insisted on the creation of a new exchange, operating on the principle of a self-regulating organization (SRO), and huge means were put up under this program. Nothing had worked and the market did not move forward. Now, 10 years later, the Central Bank returns to the past commercial model of exchange, advancing an idea of its making a stock one and possible transfer to a serious institutional foreign investor. In my opinion, an important conceptual decision is made, according to which any public companies, the capital of which reaches 500 mln drams, can refuse, of their own free will, from being registered at the exchange. That is, a fiction, economically unjustified, is removed. Isn't it a system approach?

Well, in view if this, I would like to give some examples. One example, indicated already, was an exchange, closed for some reasons. Moreover, the currency floor was closed, motivating it by the fact that the Interbank currency market will solve all the problems by itself. From the end, 2005, the currency tenders had to be started and the Central Bank tries to return the currency operations to the exchange. A decision had been made in its time that all the banks must close the dollar accounts in the CB, while an inverse process have started several years later, connected with the fact that there must be a compulsory currency reservation, i.e. the time is lost again. Just the same happened to the exchange stations. A decision was made at first for them not to be in the bank structures, now the exchange stations are under fight, and the beginning of the inverse process is not ruled out now. That proves once more what I have stated above, i.e. absence of a system approach. And what indicates that today's steps are systemically verified and there will be no need to correct the mistakes tomorrow?

To be unbiased, I cannot fully agree with you, though I do not intend to make curtsies towards the CB. Within the last several years, the main bank of the country have successfully fulfilled a number of important, conceptually checked programs. I will not list them, but their implantation, to say so, have actually put the banking system on its feet.

I agree, however, it does not disaffirms what I said. In general, I carefully treat any limitations and requirements, which are materialized only in a digital field, contain a problem in the two planes. One plane is by what method to make calculations, as different methods can give a different numerical effect. On the other side, the strive to solve the issues through the prism of rigid quantitative parameters, which has a danger of monopolization of one or another economy spheres. In other words, the requirement is made not to the quality but to the size only and some other parameters, it vastly reduces the number of players and actually promotes those "faults", which exist in Armenia, when whole economy segments are simply monopolized. In this context, the danger is on hand. Moreover, the quantitative requirements do not entail a consideration of the human factor.

Yes, the equity market must be somehow influenced and forced to be developed. But again, it should be considered that it is impossible to make the market adequate by such mechanisms and procedures in a society, where the transparency is not of honor. And again unfair deals will be made, especially as the number of players will be no so great and there are no management subjects in the country. This is, to say, the effect of "the back side of the moon".

It means that the CB is right when it enables many issuers "to go out of exchange"?

Then CB is right, but partly, since the following happens in fact: the child, who cannot be brought up, is left in the street with the words "do what you want". I do not know how much it will promote the civil economy development.

However, they owe the status of public companies and they have to follow the Law.

Naturally, they will remain as joint-stock companies, but the essence of market is, first of all, in step-by-step increase of the quantity and quality of organizations, the securities of which has turnover in the free organized equity market, i.e. on the exchange floor.

With some reservations, the CB has become the winner in the fight with the banking market players regarding the corporative management concept implementation. What is your attitude to this victory?

A corporative management, as an idea, is a good one. However, as an application method or at the stage of its application, it can give unexpected results as regards a hidden affiliation. I am sure, the corporative management, in principle, cannot solve the problem of a hidden affiliation. This is the first moment to be given a heed, the second one - where to find so many literate council members? That is, the professional quality of boards falls and the rights of a less competent organization body enlarge, on the other hand.

The primary background of the board members in the corporative management concept is an availability of specific conflicts of interests, which, in a balanced manner, leads to the improvement of the bank management and reduction of risks, and availability of a highly qualified staff in the board is a concomitant problem. Òhat is, the priority is given to the interests but not to professionalism, in this case.

The bank Board, in a corporative management, is a controller, i.e. whether you like it or not, the bank Board is to be professional when becoming a controller. The point here is if the Executive Director is a very experienced professional, it is difficult to find the ways to avoid the conflict of interests of the Board members, especially as they are non-professionals. On the other hand, if the Board members are hiddenly affiliated by the real bank owner, then the executive bank managers will be also "its people". Thus, the corporative management frame is maintained, while only the number of people in the management increases.

What can you offer for this problem solution?

In general, a management crisis exists in Armenia for a long time, caused by the absence of literate and honest managers. It is necessary to build a system of preparation, generation of such schools and managers. Our Institutes of higher education, both private and state, advertise that they prepare specialists in management, but the point is that high professionals are necessary to teach the management whom Armenia have never had. I always wonder who are the teachers to prepare good managers if we have never had a management school? In fact, the corporative management remains without literate and honest managers, and it is unimportant where they are engaged, either in the Board or in the executive part of the bank, either in a state or in a commercial management. Just absence of management specialists can bring any good undertakings, such as a corporative management, to naught.

A traditional question. What's your appreciation of Armenia's banking system? If everything is OK and there are no distorting mirrors?

I am anxious about the reorganization and overregulation of the banking market, which is fraught with a hidden tension and signs of a system crisis. The matter concerns more number of formal claims made to the more number of formal settlement of these claims which, in its turn, drives the existing problems far in depth, making them less visible. The latter supposes the danger itself. If a real fight against the economy monopolization begins…

It is doubtful…

It is doubtful, but different international organizations periodically emphasize in their reports that many segments of Armenia's market are monopolized. Somehow or other, sooner or later, under the pressure from without, the fight against the monopolistic market will start, as a result of which all the banks , which are put on one or another monopolists, will get problems in view of a hidden affiliation. This indicates that the system contains danger and risks inside it, which go deeper and deeper and become less visible. Here we may face again the effect of "the back side of the moon", especially as a considerable shady turnover of the economy's real sector negatively affects the banking system development and is one of the reasons of system misalignments of Armenia's financial market. Any system must be observable, at the least, as to become controlled.

Emmanuil Mkrtchyan, ArmInfo, September 9, 2006