Chairman of MDM-Bank Andrei Melnichenko spoke with Ekaterina Larina about the intricacies of banking in Russia.

Andrei Melnichenko is chairman of the board of MDM Bank, one of Russia's fastest-growing banks in the post-financial crisis period.

MDM has made the headlines with its aggressive expansion strategy. Recent acquisitions include Petrovsky Bank, a leading St. Petersburg-based bank. Then there's the ongoing battle over Konversbank, initially set up to work with the Atomic Energy Ministry's accounts. MDM fought off seemingly unbeatable rival Alfa Bank to take control of Konversbank.

Many attributed MDM's success to the connections of "Kremlin banker" Alexander Mamut, who is a former chairman of the board of MDM Bank and one of the authors of the government's banking reform proposal. But a couple of months ago, Mamut made an unexpected exit, in what is said to be a peaceful divorce. With holdings in the chemical, metals and energy industries, MDM Group is one of Russia's major companies today, and Melnichenko, who has not yet hit 30, is one of Russia's leading business figures.

THE RUSSIA JOURNAL: You have a reputation for being a tough and aggressive businessman. What does the banking business actually mean to you?

ANDREI MELNICHENKO: Banking is just an interesting business. Business isn't about lyrical feelings – if that's what you're after, you become a poet – business is about making money. You could say that MDM has a more aggressive style, but that's just because we have a greater than average desire to achieve our objectives.

RJ: What about your war with Alfa Bank over Konversbank?

AM: We're not at war with anyone. Konversbank was just one of a dozen projects, but it got more public attention than it deserved. All we did was buy shares in a lending organization we thought would make a good investment.

RJ: What do you think of the banking sector reform? What are the priorities, and what steps need to be taken?

AM: There are several aspects: First is ownership status. There are three ways in which the state participates in banks' capital. There are banks like Sberbank, Vneshtorgbank and Vnesh-econombank, which have the Central Bank participating in their capital. Then there are some government-owned banks, such as Rosselkhozbank, for example. And finally, there are state-owned banks. This last group is the biggest, with around 500 banks.

Concerning the Central Bank, there's no objective advantage in its participation, while there's huge scope for a conflict of interest. It's crazy to have a shareholder playing at once a supervisory role and implementing monetary policy. Take Sberbank's share issue plans, for example. Imagine I'm a foreign minority shareholder and I don't agree to an additional equity float. Who registers the issue? The Central Bank. And who do I fight as a shareholder? The Central Bank. The conflict of interest is obvious. This situation clearly has to be changed fast by issuing a decree that says the Central Bank has to transfer federal assets to some clearly defined structure, for example.

As for the government-owned banks, that's straightforward. There are always market sectors that are less profitable but are needed by the state. The state needs to finance infrastructure projects, for example, and someone has to do it. The Finance Ministry used to give loans for agricultural development, which nobody ever paid back. It was a mess. This is why the creation of banks like Rosselkhozbank and the Russian Development Bank is a step forward. After all, lending is part of banking activities, not that of a Finance Ministry department.

Finally, there are the small banks in which the state has a stake. I don't believe the head of a sports or cultural establishment or a transportation company can suddenly make a successful leap into investment activity. I haven't seen any successful examples, at least. But I have seen figures showing how much the state has poured in and what it has gotten in return.

RJ: What sort of figures?

AM: $60 million in Konversbank since 1998, for example, and $130 million since 1988. That's real investment. But the dividends are only $600,000 in 11 years. Something has to be done. Of course, there will be resistance: They'll say it's important to them because they've got a swimming pool there, because they have good parties or because they can get their relatives good jobs there. This is all human and understandable, but things are changing. A government decree passed in March prohibits [the state] from buying shares in banks and other financial institutions.

Now, the state should pull out of all these more than 500 banks it participates in. It won't make things any worse because it doesn't get any dividends anyway. The state has to take a sober look at the things. If there's something useful, find a manager to run it competently. If not, the state should sell.

RJ: But how will that help settle the conflict of interest in this area?

AM: There is no conflict of interest, only banal theft – or mass idiocy – when people pour money in and get nothing back. So, all these state assets should be taken away and put under competent management.

A deposit-guarantee system is another important aspect. Something needs to be done fast, but now they're complicating things again, saying it needs to be done first voluntarily, then as a compulsory measure, then with Sberbank, etc. But looking at how fast the current Duma works, I don't see why we can't do it in a few months. They say we need to think, but we've been thinking for eight years now. It's not as if we're taking something away; we want to introduce guarantees, so where's the problem? The various proposals have their pros and cons, of course, but we just need to choose one and get started. Whichever we choose will end up changing and improving over time anyway.

RJ: Do you think retail banking in Russia is profitable then?

AM: We've always thought so. It's not the most profitable business now, but as a rule the sectors where there are monopolies are always underdeveloped. Banking services for individuals isn't such a profitable sector now, but the monopoly share is decreasing. We'll end up with a system of equal deposit guarantees for all players in the market.

RJ: Will Sberbank be able to handle the competition?

AM: With an 80 percent market share, there's no talk of competition at the moment. But this share will decrease to a more reasonable level, say, 30 percent of private deposits. Sberbank isn't under a threat; it's just that it's too big a player for a small market.

RJ: Would you agree that it's ineffective?

AM: I wouldn't say that. Sberbank's management is far better than it was two to three years ago. For the market, this isn't a good thing. Sberbank's management is good and is using all the advantages the bank has. But even so, you can't go against the current. Another two to three years and everything will become more normal. We'll get a deposit-guarantee system and equal conditions for access to clients' resources. If we had the right management working on this every day, the process would move quicker. But we don't have a manager like this.

RJ: Most of the banking reform talk is about introducing international accounting and reporting standards and increasing banks' capital. What do you think of these discussions?

AM: I don't understand all this talk. This isn't even reform. When these standards are introduced, nothing will change. As for raising a bank's capital, competition should decide. Bigger banks will develop, smaller banks will disappear on their own accord, though if they have a market niche, let them stay. There's probably a cause for raising the minimum level, but only for new banks. For existing banks, the problems will sort themselves out.

RJ: How do you rate the prospects for foreign investment in the Russian banking sector?

AM: I don't see the point in dividing investment into domestic and foreign. Investors go where there's money to be made. The more different investors around, the better; it's a sign a sector is profitable.

RJ: Would you consider attracting outside investment into MDM?

AM: It all depends on the price. But the reasonable selling price today doesn't reflect market opinion. Assets cost less, and we don't have such a great need for money. But the arrival of normal investors, as opposed to bureaucratic organizations like the EBRD, would show there are profits to be made. No one was investing in machine-building, for example, then the sector became profitable, and now everyone's trying to get in. The same will happen in the banking sector.

RJ: Are you saying that banking isn't profitable at the moment?

AM: Not especially. It was when we began in 1993; it was one of the best investments. If you compare the returns you can get by opening a bank or a brewery, the brewery is more profitable. But I think the banking sector will become more profitable.

RJ: Are you the main shareholder or the only shareholder in the bank now?

AM: You could say I'm the only shareholder.

RJ: And if you were to become a minority shareholder?

AM: I'd be happy because it would mean I had sold it to someone, and if I sell, it's becau

se I profit from it. I'm always happy when I profit.

RJ: What assets does MDM-Group hold?

AM: The group is a separate organization from the bank. I'm one of the shareholders in MDM-Group managing company, and of course it matters to me whether my investments are making a profit or not. I'm involved from this point of view, but I'm not involved in the day-to-day management.

RJ: Why did your bank not get into the oil business when there were privatizations, as other banks did?

AM: We've never risked the bank's money, that is, depositors' money. MDM-Group hardly borrows anything from MDM-Bank. The problem in 1998 was that a lot of organizations calling themselves banks invested clients' money in assets that looked promising. But everything is relative, the situation changed and what had looked promising turned out to be a loss. We tried not to take these risks. That was probably the right tactic. Now, we do have some funds we could invest.

RJ: You like to point out that 40 of Russia's 100 largest companies are your clients. Is this a matter of prestige?

AM: Prestige isn't our business. Our business is making money. Big clients simply represent another one of the niches we want to occupy.

RJ: When Alexander Mamut worked with you, he was called the Kremlin banker, as were you…

AM: There was a time when that was useful, it helped us develop some relations. Now it's not useful. It's like with any brand, you have to create this or that image to attract this or that group of potential clients. If the image strategy loses its value, it's time to change it.

RJ: Coming back to your acquisitions, will you follow up on your acquisition of Petrovsky and build a large retail network?

AM: Retail isn't the most profitable investment today. Our priorities are profitability and a clear market share. We want to be among the two to four main players in this market and have a clear share in each sector. There is a trend toward increasing profitability in the retail sector. If this trend continues, we'll put more emphasis on developing this sector; if not, we'll develop more slowly. We do put part of our profits into developing our branch network. But we have quite strict criteria for return on investment – a maximum of two to three years. We know how to invest our money effectively.