All Efforts to Create a Future Investment Market

All Efforts to Create a Future Investment Market

Konstantin Stetsenko, co-founder of the investment company ICU about the investment activity in Ukraine and the prospects for attracting foreign investors to Ukraine

- ICU today is among four or five financial companies and banks that provide retail customers with the ability to buy government bonds via the government mobile app "Diia". How important is retail to you, especially during wartime?

-  ICU started a retail business in 2018‒2019 when we realised that this segment had become global, and our market needed to catch up. We started by building a technological foundation: automation of the back office, creation of internal infrastructure, and an IT platform to serve retail customers. Previously, we were a wholesale broker. Our clients were banks, corporations, insurance companies, and non-residents. To enter this new market, we strove to create a state-of-the-art investment application for retail customers where they could transact business on the phone. But this was just the tip of the iceberg. For the last several years, we have been investing in and building out technologies to support this business.

Before the war, we had many plans for what we wanted to do in retail: provide Ukrainian individuals access to international markets, introduce new types of securities to the market, and so on. Then, the Ukrainian capital markets comprised government bonds, corporate bonds, and stocks. A market began to develop in the securities of foreign companies, such as Apple and Tesla, which Ukraine participated in through the "link." We even created a Eurobond Fund and an Index Fund, but this market has gradually become saturated.

After currency liberalization was enacted and e-limits were introduced, it became possible for Ukrainian retail investors to legally buy foreign securities on foreign markets. We aimed to provide a full line of investment instruments in Ukraine and abroad, and we did. People invested both abroad, in foreign securities in Ukraine, and in local securities. 

We followed an evolutionary path: first, we launched a simple desktop application and then a full-fledged mobile application so that it was possible to complete transactions online. However, until recently, it has supported only one product—government bonds.

The entire market came to a halt when Russia invaded Ukraine, but there has been massive demand for war bonds. We were able to fine-tune our system relatively quickly. In March 2022, ICU was the first to go live selling bonds issued during wartime. Subsequently, commercial banks have become involved. All parties have helped each other: we communicated with large state banks, they advised us, and we advised them. It was tough going in the spring, though. We were worried about whether we could continue in business and have enough money to meet the next payroll.

- What is your current position in the retail market? Are you in the top three?

- I would be very interested to see the statistics. I don’t know if ICU is in the top three regarding retail trades; banks have a different weight category here. But I do know that we have grown considerably in terms of clients.

- How many?

- Somewhere up to 10,000, and there were several stages in bringing them on board. At first, we grew organically, adding a certain number of customers monthly. Then the war started, and the National Securities and Stock Market Commission promptly and effectively simplified the procedure of allowing retail investors into the market. We were well able to handle increased traffic when that surge happened. It was all done for nothing from the point of view of earnings. We all agreed that no one should make money on military bonds. Our mission was to serve the maximum number of customers and attract the maximum amount of money for the budget of the Ukrainian government.

The entrance of large banks into the market was a positive factor: Privat, Alfa-Bank (now Sense Bank), and Monobank (with a base of 5 million customers) were positioned to build the market. Next, the government introduced a mobile app, "Diia" at the beginning of September 2022, through which it was also possible to buy government bonds. Ukrgazbank, Sense Bank, and Bond.UA (BTS broker, good guys) have been selling bonds via Diia. We joined them in December, although we continue to fine-tune our proprietary technology. 

All transactions must be done on the phone. I was talking about this above, and developing the appropriate technology was critical. Having already made investments to accommodate retail customers and adjusting to the Covid lockdowns, everyone has become accustomed to using remote services, which helped.

- By the end of last year, a decline in individuals' local government bond portfolios was recorded. How is the situation now?

- The demand is still huge, as confirmed by "Diia," a sales channel with 18 million customers.

- Does your product differ from "Diia" so your clients can access the secondary market?

- Yes, using ICU’s mobile app, investors can also sell bonds in the secondary market. "Diia" does not offer this service.

We are currently working on implementing the «Diia-Sharing» and «Diia-Document» to simplify the onboarding process as much as possible since this is the main bottleneck.

- And you probably have bigger "tickets"—average volumes of transactions.

- "Tickets" were big before "Diia," but fewer customers existed.

- To what extent has the secondary market been revived?

- The secondary market has been operational since the beginning of August last year, and before then, only special war bonds were traded. The market has become more active now, as non-residents hope to exit after April 1 and are ready to buy "short" paper.

- To close the part about the retail sector, before the war, attractive corporate bonds began to appear for sale again. What is the current situation in this segment?

- Yes, the topic of corporate paper went very well in 2020‒2021 before the war: there were already many issues. ICU served as an underwriter for some of them; we also bought what others placed and gradually began to create a retail market.

It is inevitable that with the start of the war, the financial condition of corporate issuers would worsen. Businesses and warehouses were bombed, and people closed their businesses, but generally, everyone behaved with dignity. I don't want to name names, but overall, the market’s mood is favourable. After adjustment to the first shocks, most issuers resumed servicing their debt. 
- So, it's not 2008 when there were several high-profile waiver scandals?

- This time, everything is more aboveboard. The corporate issues have been restructured in a more or less civilized manner, and the market itself has gradually been "redeemed." Will there be new corporate bond series? Some new issues will happen, but for this, the rate on government bonds will have to decline unless we are talking about those specializing in instant online loans, who lend at 100% per annum and can borrow at 30%.

However, we are again left with only one instrument: government bonds.

- According to your forecasts, the local government bond rate will not fall deep enough or soon enough to free some space for interest in today’s alternative instruments.

- At the December meeting of the Monetary Committee of the National Bank, they discussed whether it was time to reduce the key policy rate. We also actively debated this issue within the company.

The next meeting of the Monetary Committee is in mid-March; it is unlikely that the National Bank will change the key rate, although the regulator likely will do so later. However, they published a forecast of inflation for 2023 of 18.7%. Theoretically, this already creates an opportunity for a lower rate.

- First Deputy Minister of Economy of Ukraine Denys Kudin said that the ministry still keeps the forecast of 28%.

- If you believe in 28%, lowering the rate is not worth it. If you believe in the 18‒19% forecast, that's another matter.

- Ukraine’s Eurobonds—what's going on there?

- It’s frozen: prices are about 20 cents on the dollar.

- Does this mean that the market is waiting for another restructuring?

- It isn’t easy to say. The ratio of debt to GDP at the end of this year is in the range of 80‒85%. It's not the end of the world yet. But the question is: how long will the war continue? And another question: what will the donors do? When, God willing, the war ends with our victory, and it becomes clear that the economy has lost X, will they ask private creditors to take on some of the pain for what happened? There have been different precedents in history.

- And what about corporate Eurobonds?

- The good-credit issuers trade much better than the state—Vodafone Ukraine, MHP, Kernel—at 50‒60 cents per dollar. They continue to pay coupons as scheduled, not in default; some are self-redeeming. Clearly, for some, the situation is manageable; for others, it is more complicated. But even Metinvest, for example, said they plan to redeem a coupon in 2023.

In general, corporate issuers will strive to keep current on Eurobond payments, assuming there is no critical destruction of infrastructure.

- Do you see any foreign investor interest in Ukraine and its instruments now?

- There is much interest, but, as usual, there is nothing special to buy.

The Ministry of Finance, if I understand correctly, has a policy of inviting non-residents to the domestic bond market, which continues to function normally, and all obligations are paid promptly. Therefore, for investors to be sure of repayment, they trade in the local market. The Ministry of Finance now pays a rate a bit higher than before. It is good that all these rates (key policy rate, the rate on deposit certificates, and rates on the primary and secondary government bonds market—IF) have begun to converge.

The main issue is currency regulation. If repatriation is allowed after April 1, there may be interest in new investments. We have a terrible situation because of the war: domestic revenues cover only half of the government’s budgetary needs, and the other half are grants and loans in foreign currency. But we can expect that the exchange rate will be relatively stable. The National Bank has signaled that it sees no reason to re-fix the exchange rate. Nonetheless, it is being discussed. Maybe it’s time to start doing some liberalization and let the exchange rate float free. Generally, we expect the exchange rate to be relatively stable, and non-residents will invest in "short" bonds. If investors once again become confident that they can sell and repatriate an investment at a moment’s notice, then, little by little, the market will develop.

Plus, you need to understand that for non-residents, if rates in the United States rise, an outflow from emerging markets will be triggered. If rates fall, investors will again run to emerging markets for higher yields. Ukraine’s status is now complex and unique, but the Ministry of Finance and the National Bank are doing the right job.

The Ministry of Finance is now working more on building a foundation for the future. We must pay tribute to Yuriy Butsa’s team (Government Commissioner for Public Debt Management of Ukraine). They have done and are doing a tremendous amount of work communicating with the public. Even in the most challenging times, they met with investors and kept them appraised of developments. ICU, too, organized similar calls with investors during the first year of the war.

At the same time, it is necessary to develop a local market of investors. A lot revolves around digitalization, and banks and investment companies have giant jobs ahead of them. I find it heartening now that I don't see competition among the banks and securities firms. Everyone—Privat, Mono, Sense, and ICU, among others—is pulling together to create a future investment market so that later it will be possible to invest and earn more. 

Yes, today, the market is only about government bonds. But if you already have a client registered, when conditions improve, you can sell him another investment product: a state asset fund or an IPO. Life goes on, so there will be new stories. 

If you believe in a brighter future, and we do, then the entire market now being established with government bonds—thanks to the banks, investment companies, and Diia—is still a vast market. The fact that the state has taken a course toward digitalization is very positive. These days, people want to access everything on their phones. In this respect, I am optimistic. In a sense, also thanks to digitalization, the country survived: banks are working, and people have access to their money. In addition, they can make purchases online and even help the army through donations and contributions.

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