The Economics of Anxiety and Happiness

You are well informed about the current transformation of the global economic system and the development of a new paradigm. Could you speculate on what the crisis really is, and on what would be an adequate reaction to it from your industry?

The essence of the crisis is that volatility is unusually high, the speed at which all processes are taking place has increased, and the volume of information has grown – and that no one is ready to live and work with this yet. Students of technical universities are facing the problem that by the time they have graduated, more than a third of their knowledge is already obsolete. This means that people will have to spend increasingly more time keeping themselves updated. This concerns humanities students to a lesser extent, and students of technical sciences to a greater extent.

I counted that by the age of 33, I had studied for ten years at school, five years at university, three years at grad school and three years abroad. So I spent 21 out of those 33 years studying. If you omit seven years of carefree childhood, then that’s 28 years out of 33. So by that age I had worked for only five years. And the question arose: Will I ever start properly working? Now the study-work model itself is turning into the model of being an eternal student – you learn something and then it is already out of date. Obviously this creates a feeling of instability.

Feelings are very important for a person. However, today’s system for evaluating things is based on materiality instead of feelings. We consider developed countries to be the ones that have high GDP per capita, yet GDP per capita has no relation whatsoever to human feelings.

The first time I saw a color television was in 1974, when Zorya Voroshilovgrad reached the final of the USSR Football Cup. I watched that match. The purchase of that television was a big event. Now people of my generation have televisions everywhere in their homes, from the kitchen to the corridor. Somebody has four TVs, another has eight. And are they happier as a result? No, of course not. Yet, according to GDP figures, everything is getting better.

Feelings are very important for a person. However, today’s system for evaluating things is based on materiality instead of feelings. We consider developed countries to be the ones that have high GDP per capita, yet GDP per capita has no relation whatsoever to human feelings

In Qatar they have moved on to measuring different indicators. They’re interested in the level of happiness. That is something that I truly believe in. The move away from material values in favor of feelings is a move in the right direction. Obviously they are both linked, but are in no way identical. For the past century we have believed that the more of something we possess, the better. Now, this idea is highly questionable. Judging by the people with whom I socialize, superfluous real estate is a massive headache. It’s foolish to own a house in London that you don’t even visit three to five times a year. It’s also stupid to have a house by the sea that you don’t even visit for two months in summer. In other words, the amount of freedom one enjoys is curtailed. For example, somebody wants to holiday in Mauritius, but they already have a house in France. This doesn’t add any happiness.

That’s at the top end of the scale. At the opposite end there’s a different story. Thanks to the internet, social networking and technology, it’s now possible to live in a thought-up, virtual world. This is the philosophy: As long as I have a roof over my head and something to eat, then I can live in my virtual world. If that’s what you believe in, then why work and why set yourself long-term career goals? All the more so if 40% of what you learnt for five years at university is already out of date. Perhaps it’s not worth studying? In Greece, youth unemployment has hit 60%. So who exactly is the majority and who is the minority now? In the past people used to say, ‘Why aren’t you working? There must be something wrong with you.’ Now it’s, ‘Why are you working? There must be something wrong with you.’

How does that relate to the financial industry?

In a very direct way. It’s a service industry; it gives people what they want. But the case is that, increasingly, people either don’t want anything or they want something different. That’s the reason why the entire financial sphere is going through an extremely serious transformation. This is visible in the retail sector, where many new players and possibilities have appeared. For example, non-financial institutions have sprung up that allow people to perform payments. Mobile phone operators are competing for that market. In the past five years I haven’t been to a bank once on personal matters, because I can do everything remotely.

Is the system changing? Definitely. I am not sure how this transformation will pan out, but I am certain that the significance of offices and real estate will sharply decline. Practically all the things that I have encountered in my 50 years on this Earth are now obsolete. I was 27 when I first saw a mobile phone. Now young people don’t need anything besides a cell phone. I wanted to give my children watches. Their reaction was, “What do we need them for? Our cellphones can tell the time.” These phones also have cameras and hundreds of useful programs that replace various other devices.Imagine how many people involved in producing those devices are worried about losing their jobs.

Thanks to the internet, social networking and technology, it’s now possible to live in a thought-up, virtual world. This is the philosophy: As long as I have a roof over my head and something to eat, then I can live in my virtual world. If that’s what you believe in, then why work and why set yourself long-term career goals? All the more so if 40% of what you learnt for five years at university is already out of date. Perhaps it’s not worth studying?

Are these ideas perceived and understood? Is it true that someone can understand what is happening as you describe it?

My view is based on my experiences. At the age of 30 I wouldn’t have believed in what I am talking about now. In the position I am in now, it is easy for me to understand that the phrase ‘money can’t buy happiness’ is correct. Some will think that this is banal; others will say, ‘Well, that’s easy for you to say, you already have everything.’ That’s also true. During the time of perestroika I worked as a university lecturer. Students would tell me that things can’t get any worse, but I tried to instill in them the idea that things can always be worse. For example, do you have running water? It could stop running. Does your apartment have an electricity supply? It could be otherwise.

The human mind is not capable of taking in all the changes that are happening. The traditional study, work (plus a house and a car), pension (plus comfortable old age and travel) model that the middle class has accepted as a template for life has changed. It’s impossible to finish studying or find a stable long-term job because no one knows what industries will arise in seven to ten years’ time. Comfortable old age is also not guaranteed. In other words, there is a very short planning horizon and it is extremely volatile.

This is volatility crossing over into your life, and not the market. It’s not the same as the price of copper rising or falling. Rather, it’s the feeling of vulnerability and neediness. The feeling of anxiety has grown severalfold, and this in turn creates a great deal of mental discomfort. Yet this isn’t what I’m feeling. It’s what my acquaintances are experiencing, the people with whom I often socialize. They’re on the verge of depression. People only worry about what they have to lose. If you have nothing to lose except the possibility of not achieving your goals, then you have nothing to worry about. But they have something to lose, and they see these trends and admit that they don’t understand, can’t manage to get things done, and hate their work. So stop doing it; who is forcing you? You’re part of the richest 0.001%, the people that everyone envies. So just quit doing what you don’t like doing.

What must the service-oriented financial industry do to adapt to all of this?

Follow the client. We’re currently working on our strategy. One of its key ideas goes like this: By changing ourselves, we change our clients. You can’t get people to go where you aren’t willing to go. You can’t speculate on harmony and happiness if you yourself are totally unhappy.

You have said that the client is changing you, and not the other way round.

It’s dialectic. It’s not a question of either/or; it’s always both, because there is no medal that has only one side. Obviously we are following the client, but instead of just moving, we should be in charge of the movement.

I think that people must want that. You probably recall that Steve Jobs expressed himself in a similar way: That doesn’t exist yet, but I’ll create it. He had a vision which he brought to life. I want this thing to be slim, simple and button-free. It shouldn’t require any instructions at all. Also, it should look nice, in a way that invites people to touch it. I don’t care how you make it or what internals it has. That’s how the iPod, an innovative product, was born – and how the whole thing got started. What’s so unique about it? It’s small, simple, and pleasant to hold. That’s all.

This is why in the financial industry we must know what clients want and respond to their needs. If we are to set ourselves the most ambitious task, then we must lead and articulate these needs. We need to say, ‘This is the right way to do it.’ However, we will only have the moral right to do this if we indeed act in that way. Otherwise we will be in the same position as a smoker who tells people about the dangers of smoking – no one is going to believe him for a second.

In which sector is this transformation more obvious, and where is it happening at a faster rate: corporate or retail?

I think that the speed of change in the retail sector is more obvious, although significant changes are happening in the corporate sector too. Two opposing tendencies are at the heart of these changes. On the one hand, there is unification and simplification of standard products. Ten years ago these products could be very complicated. Now they are very simple. For example, the securities trading business is currently faced with a tough situation, as there is no margin anymore. Why pay a broker if you can trade directly via your tablet? I admit that the securities placement business could rather quickly find itself in a similar predicament. Why not hold a Eurobond placement or conduct an IPO using iPads? It’s entirely possible from a technical point of view. Of course there are regulatory restrictions, but besides that, what’s stopping someone from building up a fan club and announcing his own IPO using social networking? No bankers necessary. A current trend is that technology is used to the largest possible extent.

On the other hand, the speed and complexity of the world is increasing. This is taking place against a backdrop of a frantic fragmentation of knowledge. Many people have an in-depth knowledge of something in their sphere of activity, but know nothing beyond it. Everything is developing so fast that it’s rather difficult to keep track of your own area of expertise alone.

There’s also the issue of access to information. Now it is so much easier to gain access to information than it was in the past. When I ask my children when a specific event took place, they reply that there’s no point in memorizing dates because you can look it all up online. And that is true – you can find everything there – but as a result your head is empty because you aren’t actively using the information. In this situation the value of integrators rises infinitely. These are people who take knowledge from various spheres, put it together, and deliver a finished product, i.e. they turn raw data into information. Information is the foundation upon which decisions can be made.

The second trend is the strengthening of everything related to in-depth research. We’re seeing serious demand for this product. Even the owner of a small business requires information about more than just his region. It is important for him to understand that the world is interdependent and that he is a part of the wider world – for example, that global GDP is $65 trillion, give or take, and that the U.S. accounts for $14–15 trillion, China for $8 trillion, and Russia for $2 trillion. Or that $1.5 billion tons of metal are produced, with $700 million made by China and $71 million by Russia. If I want to build a plant with an output of 2 million tons, then I’m going to need to know where demand is coming from. You can’t limit yourself to your city or region. Today you are part of a globalized world.

In conclusion, it can be said that there are two tendencies in the corporate business: simplification of everything that can be simplified, and complication – the search for global links and the analysis of them when it is necessary to get a bigger picture.

How does all that impact on the current performance of your investment banking business?

The global economy isn’t growing. We see that the U.S. is growing, although it is far from impressive. Chinese growth rates are high, but it’s clear that a slowdown is happening. It’s worth keeping in mind that if Chinese GDP falls by a mere percentage point, the global economy will start decelerating uncontrollably. In Europe, weak growth has only just been recorded, and on top of that it is unstable growth. Russia is practically experiencing stagnation of industrial production. If it weren’t for oil the situation would be very tough. Not surprisingly, the financial markets are in bad shape. At the same time, the capitalization of leading American banks has grown considerably because a certainty has taken hold that financial institutions will survive. If they don’t survive then there’s no point in discussing the future because it will be a different future.

This isn’t the best year for investment banking, especially in Russia. Our country isn’t exactly flavor of the month with investors. The multipliers are almost at their lowest for the last 20 years. Nevertheless, Sberbank CIB is making good progress this year. We’re continuing to take an optimistic view and predict that this year’s results will be considerably healthier than last year’s.

At the same time we’re continuing to build our team. Our current task is to complete the integration of Troika, which was acquired over a year ago, and create a full-fledged corporate and investment bank on its basis. It’s a very difficult and ambitious task, as the two companies have different cultures and management systems. Global experience shows that integrations turn out to be failures more often than successes. However, we understood all the risks already at the discussion stage. It’s better to run the risk and do your utmost to achieve a positive outcome than do nothing at all. If you don’t take any risks, then it’s guaranteed that you’ll lose, yet victory is always possible if you do take risks. Right now I’m talking in a rather general way, although I can back up every statement with figures. From the start we treated Sberbank CIB as one of the key areas of activity of the international financial group that is Sberbank because our clients are growing and we are developing together with them. If today our clients are complex, international, multi-layered corporations, then we need to be the same.

So far we have completed the first stage of creating CIB. Fifteen to 20% of the road has been travelled.

How long will it take you to go the remaining 80%?

We’re currently approving a five-year strategy. In my opinion, a minimum of three years is needed to shape a stable and capable corporate and investment banking business. We are newcomers on the market and although we have made a lot of noise, competitors and potential clients are still being surprised by what we can do. This is a normal reaction – no one should have any illusions, as we are currently playing catch-up.

In the past, Sberbank was a savings bank and only dealt with retail. Then corporations appeared. Now we’re progressing to the next level and we understand that corporations make up an extremely demanding and advanced segment. It’s impossible to lead if you don’t work with that segment. However, no one has changed our one and only goal: to be a leader in everything that we do.

Like any team that is setting out, we have our share of brilliant successes but sometimes not everything goes to plan. The task is to complete all deals in a stable and predictable manner so that our clients’ expectations are met and our promises are fulfilled.

We’ve talked about global problems. Let’s move on to Russia. What competitive advantages does Russia enjoy as a location for private equity and portfolio investment?

Russia is a key player on the global capital market, although its economic role is much more significant. We account for around 3% of global GDP but less than 1% of the capital market. However, one should understand that there are two fundamentally different models in the West. The American ratio is 80:20 – 80% capital market, 20% commercial lending; in Europe it’s the other way round. Russia is closer to the European model. But money makes its way to the Russian portfolio market simply because global players can’t ignore such a market. Emerging market funds can’t bypass Russia, in the same way that funds investing in oil, gas or telecoms cannot avoid this country. This is despite the fact that Russia is not, I repeat, flavor of the month, and Russian assets are traded at a significant discount.

In terms of private equity, the answer to the question of why money comes here is the same: it’s a big market and an important country. From the Browder and Magnitsky affair to the business with Pharmstandard, many recent developments on the securities market are scaring away investors instead of enticing them.

Russia is currently not perceived as a very appealing place for private equity, due to a number of reasons. The risk of political instability is on the rise. I’ll elaborate on that: When you keep the exchange rate stable for a long time, the risks grow that it will become unstable. That is happening here simply because the situation has been under control for a long time. This is spooking a lot of investors.

The change in the country’s economic trend is even more important. Investors would turn a blind eye to various problems if the Russian economy were to grow by 8% every year. In China, investors couldn’t care less about who is in power, Communist Party or not. Good growth could neutralize the importance of the political situation, but as this growth isn’t present, we have to review our economic prospects. And they aren’t looking very good.

What about specific sectors?

The infrastructure sector has enormous potential. At the moment we are studying it carefully. Around a trillion dollars needs to be invested in Russian infrastructure. Half of this should go into transport infrastructure, and the other half into different spheres. The main problems are that Russia is located in rather difficult climates, and some of the regions where infrastructure is needed are so sparsely populated that the economic feasibility of such projects is highly questionable. It’s a vicious circle: Why build infrastructure in an area where there’s nothing? But how will anything appear if you don’t build there? Someone has to take a risk and say, ‘OK, we’ll invest in this region. It doesn’t matter if our investment makes losses to begin with (or doesn’t bring in any return at all). What’s important is that we’re trying to turn the tide.’ At the moment things are positive, the Russian President has come up with some good initiatives, and we will gladly take part in their realization as both a financing bank and as experts. It’s clear that transport corridors need to be created in Russia. It’s also clear that our country is uniquely situated between Europe and China. This potential can and should be used to our advantage but, to begin with, certain risks need to be taken, from an economic point of view. The government will have to agree to them, although we are ready to share the risks. I believe that Sberbank will be able to generate a good deal of investor interest in these future projects.

Sberbank is the organizer of The Russia Forum. On the one hand, it’s quite an important discussion platform for economists, investors and businesspeople. On the other hand, it’s far from the only event of its kind, even in Moscow alone. Are you of the opinion that your forum, and forums in general, create some sort of ‘added value’? What do you expect from future meetings of The Russia Forum?

I am a big fan and an advocate of forums. Be it the World Economic Forum in Davos, the St. Petersburg International Economic Forum, our forum, or any other, a forum is always a good opportunity to compare notes, exchange views, and get an overall understanding of the situation. You get to see to what extent you are lagging behind, running level or striding ahead of the rest. And, of course, forums present you with the chance to gain experience firsthand. On the internet you can see how, for example, Angela Merkel speaks at conferences. But when you’re sitting in the hall and listening to someone speak, it’s a completely different experience: you can literally feel the energy. Overall, forums enable you to learn from some of the most intelligent, educated and professional people. This is an area where The Russia Forum 2013 excelled. It was rich in terms of intellectual content, discussions were of a high standard, and clients showed a great deal of interest. The decision to hold the forum in April instead of February turned out to be a good move.

Russia is currently not perceived as a very appealing place for private equity, due to a number of reasons. The risk of political instability is on the rise. I’ll elaborate on that: when you keep the exchange rate stable for a long time, the risks grow that it will become unstable. That is happening here simply because the situation has been under control for a long time. This is spooking a lot of investors

No one assumes that unexpected breakthrough deals will be made at forums. Any deal is a semi-finished product. In accordance with Parkinson’s Law, work on a deal takes up all the time allotted to it, and so a forum is a fitting occasion to wrap up negotiations before a clear deadline. It’s a useful mission, and we were also successful in that regard.But the bar has been set; next year, as always, we will have to outdo ourselves. We’re already thinking about how to do that.

Participants from countries all over the world have shown that they are very interested in The Russia Forum. This includes investors, corporations, leading economists, academics, and politicians. The goal of our event is to gather all these audiences together at one venue, hold an open dialog, and discuss the investment opportunities that Russia is opening up for the world. Judging by the number of new projects that are being realized in the non-commodities sphere – telecoms, agriculture, chemicals, machine building, and several other industries – our economy is gradually changing. It’s nice to know that we have contributed to this, not only as the country’s largest bank, but also as the organizer of productive dialog between each and every side. This dialog brings tangible results and is yet another reason for us to be proud of our work.