MOSCOW - Concerns over low fee levels, high costs and government corruption are deterring foreign money managers from opening Russian offices, despite recent reforms paving the way for a privately funded retirement system.
And, at least one with an existing operation, Franklin Templeton Trust Co., Fort Lauderdale, Fla., has pulled out. Mark Mobius, the firm's head of emerging market operations, would only say: "We just realized that we'd have to invest far more resources and money into the business to make it worthwhile, and after consideration, we decided not to continue."
Elizabeth Hebert, chief executive officer of Pallada Asset Management, Moscow, a subsidiary of State Street Global Advisors, Boston, said a substantial number of primarily U.S. money managers that researched the Russian market after the new pension law was passed in July decided against opening offices.
"There were a number of different issues, some to do with fee structures and costs, and concerns about corruption and the level playing field," she said.
Executives at Genesis Investment Management Ltd., London, were attracted to Russia by the recent reforms, but ultimately decided not to launch a local operation. Evgeny Kuznetsov, the firm's head of emerging markets, wouldn't give any details.
Growth vs. difficulties
Firms are weighing Russia's growth prospects against the difficulties in operating in what most people still see as a "Wild West" marketplace, said Ms. Hebert.
Government officials regularly attempt to solicit bribes by denying or slowing license applications; officials with pecuniary interests within the industry they are charged with regulating are quite common as well, she said.
"There's no doubt it (corruption) is a problem. The rules are vague enough to allow that to happen," said Tim McCarthy, chief investment officer at Troika Asset Management, Moscow, one of Russia's largest domestic money managers. "I can see how that would be an issue for foreign firms coming in."
Pallada encountered difficulties with the Federal Securities Commission, which regulates money managers and the Russian stock market. Last year, the FSC canceled Pallada's money management licenses, saying only that Ms. Hebert's business degree from Columbia University did not constitute "tertiary education" as required under the rules. Pallada was given a temporary license, pending a court decision due next month.
Igor Kostikov, chairman of the FSC, is a shareholder in AVK, St Petersburg, a rival investment firm.
Courts deter firms
The courts themselves also are a deterrent for firms, said William Browder, chief executive officer of Hermitage Capital Management, Moscow, a firm specializing in managing money for high-net-worth individuals in Russia.
"Anyone who knows the legal system in Russia knows it's like a Middle Eastern bazaar - it is completely corrupt and decisions routinely go to the highest bidder," Mr. Browder said.
Still, the growth prospects are alluring. Mr. McCarthy estimated about $5 billion is expected to flow from the state pension scheme's new individual accounts by the end of 2003.
"From next year, we hope to be managing a big slice of the state pension pie. It's tremendous growth for a country of this GDP size," he said.
Under the July legislation, Russians will be allocated individual defined contribution accounts funded by contributions of 2% of salary. The rules give them a choice of either the Russian Pension Fund, which invests in Russian government bonds, or private providers.
"But how will the state pension fund select or `bless' the managers on the approved list?" Ms. Hebert asked. "That's one of the major concerns. Those rules just haven't been made clear enough, and the firms I've talked to are scared about committing and then finding themselves locked out for some obscure technical reason."
Mr. McCarthy said the rules are "sufficiently vague to allow firms to be rejected on an arbitrary basis."
The Russian bureaucracy has factions of officials opposed to allowing retirement savings to be invested by private money managers and foreign firms. Mikhail Zurabov, chairman of the Russian Pension Fund, is publicly opposed to liberalization.
"There is some hesitation about whether those people will make the process biased," Ms. Hebert said.