Tag Archives: wealth

How Central Banks Have Made Wealth Inequality Worse

Bloomberg, Mar 10, 2016

euro money

The rich getting richer.

How Central Banks Have Made Wealth Inequality Worse – Bloomberg Business

Central banks’ attempts to kick-start advanced economies following the financial crisis have made the gap between the rich and poor wider, suggests the Bank for International Settlements.

In the BIS’ Quarterly Review, Analysts Dietrich Domanski, Michela Scatigna, and Anna Zabai studied the evolution of wealth inequality in France, Germany, Italy, Spain, the U.K. and the U.S. was influenced by monetary policy since the recession.

On its face, this conclusion may be intuitive: the collapse in financial markets disproportionately hurt households in which financial assets make up a greater portion of their net worth (which tend to be the richest ones). To the extent that central banks aided a reflation in financial assets, they contributed to a dynamic in which wealthier households became richer than less affluent ones. Yet conventional economic wisdom holds that the net effect of central banks on wealth inequality is neutral, the BIS explains.

“Notwithstanding the range of channels through which monetary policy may affect the distribution of wealth, the traditional view holds that such effects are small,” the authors write. “As a by-product of the pursuit of macroeconomic stabilization objectives, they net out over the business cycle.”

But this time might be different: The length and nature of the stimulus provided by central banks suggest that distributional effects of monetary accommodation have been particularly acute during this cycle.

One of the key transmission channels through which quantitative easing is thought to buoy real economic activity is through the wealth effect: as owners of assets see valuations rise, they feel wealthier and increase spending.

With monetary policy across developed nations remaining stimulative more than seven years after Lehman Brothers filed for bankruptcy, the marginal benefit that accrues to owners of financial assets has persisted for an especially long time.

“All asset classes—houses, stocks, toll bridges, commercial real estate—should trade at higher multiples to cash flows in an era of low interest rates,” wrote CIBC World Markets Chief Economist Avery Shenfeld.

The BIS’ trio also theorizes that the monetary stimulus’ impact on wealth inequality has been enhanced in light of changes to households’ balance sheets.

“Households may have become more sensitive to changes in interest rates and asset values over the past decade,” they wrote. For one, household balance sheets in advanced economies have expanded much faster than GDP, with total household assets and net wealth growing in tandem. In addition, the share of capital income has been rising steadily since the 1980s and now accounts for about 30 percent of household income in advanced economies.”

The primary conclusion from the analysts’ report is that “monetary policy may have added to inequality to the extent that it has boosted equity prices.”

“Since 2010, high equity returns have been the main driver of faster growth of net wealth at the top of the distribution,” they wrote.

Central bank asset purchases designed to push investors further out the risk spectrum have fostered a decline in the equity risk premium, which is positive for stocks.

Increases in home prices tend to serve as a moderating force on wealth inequality, as poorer households have a higher portion of their assets in real estate than the rich.

Bank for International Settlements

But no central bank has a mandate to target wealth inequality; indeed, while monetary policy may be exacerbating inequality, it’s an ill-fitting tool to directly reduce it.

“The main contribution that the Fed can make to inequality, given that we don’t have policies that target particular groups in the labor force, the main contribution we can make is to make sure that the labor market is performing well, that we attain Congress’ maximum employment objective,” Federal Reserve Chair Janet Yellen said during her semi-annual testimony before Congress.

Trends in financial markets, however, undoubtedly factor into monetary policymakers’ decision-making process. For instance, the Federal Reserve indicated that financial market turmoil was a reason to refrain from raising rates in September.

But declines in stock prices disproportionately hurt the wealthiest individuals—ones who have a lower propensity to consume any extra dollar they receive.

If anything, the BIS’ analysis may imply that if monetary policymakers want to help reduce wealth inequality, they ought to actively lean against the notion of a ‘central bank put’—or the idea that a decline in equity prices to a certain level would inevitably trigger an accommodative response.


Half of Russia’s Richest People Are Planning to Cash Out

Bloomberg, Nov 13, 2015

* The country’s 22 wealthiest own companies worth $115 billion
* Business owners’ exit strategies could spur Russian M&A boom

It’s been a quarter century since the fall of the Soviet empire triggered one of history’s greatest wealth transfers. Now bankers are preparing for another as Russia’s first generation of capitalists makes way for the next.

Confidential surveys of dozens of millionaires and billionaires conducted since European and U.S. economic sanctions began last year show Russia’s wealthy are finding little support within the country’s legal framework to pass down businesses. A majority say they’re taking the issue of succession seriously for the first time.

“Owners of major enterprises are basically hostages,” said Alena Ledeneva, a professor of politics at University College London, who has studied the workings of power networks in Russia for two decades. “They can suggest their kids as hostages to take their place, but only Putin’s system will decide whether to incorporate them or not.”

Family Dynasties

The result could be a surge in transactions for Russian businesses in coming years, according to Phoenix Advisors, a Moscow-based investment firm that helps entrepreneurs navigate succession and transition planning challenges.

Half of the respondents to a PricewaterhouseCoopers LLP study released in 2014 said they plan to sell their holdings, more than double the global average. More than half the respondents to a survey from the Moscow Skolkovo School of Management Wealth Transformation Centre that was released in February believe that “large Russian companies will not become family dynasties.”

Andrey Guryev Jr
Andrey Guryev Jr

The PwC study surveyed 2,484 executives and directors in 40 countries, including 57 in Russia. The Skolkovo survey surveyed 39 Russian business leaders. The center is based in a tech and educational hub in Moscow championed by Prime Minister Dmitry Medvedev and supported by billionaires Viktor Vekselberg, Roman Abramovich, Alexander Abramov and Petr Aven, who are part of its affiliated experts group.

President Vladimir Putin’s spokesman Dmitry Peskov didn’t respond to requests for comment.

Expensive Problem

For the country’s richest people it’s a pricey problem. The 22 Russians on the Bloomberg Billionaires Index daily ranking of the world’s 400 wealthiest people control about $200 billion combined and more than half of that — $115 billion — is tied up in closely held or publicly traded companies operating in Russia.

The problem they face is one that’s unique to the country’s particular brand of capitalism. Russia’s tradition of dynastic wealth ended when the Bolsheviks swept to power a century ago, and the post-Soviet economy that has been shaped under Putin favors cultivated personal relationships and a mastery of rules that are for the most part unwritten.

Power Ties

“The combination of an aging generation of entrepreneurs with the tendency to exit rather than pass on to the family is a specific characteristic of the Russian market,” said Ilya Solarev from UBS Wealth Management, which manages nearly $500 billion for high net worth individuals.

As a result, the vast majority of wealthy Russians have had to nurture ties to people with various kinds of power — from lawmakers and tax officials to regulators and other owners — for years and even decades. This creates a form of “intangible capital” that can’t be “automatically transferred to the next generation,” the Skolkovo center said.

“The most important thing is law enforcement,” one respondent is cited as saying in the survey. “Why earn another billion if the first one will be seized?”

Contrast that with the rest of the world, where the rich have long benefited from legal structures that safeguard the transfer of wealth between generations.

In the U.S., people have used the ever-growing sophistication of the legal system to safeguard the transfer of wealth between generations for decades. Sam Walton, for example, handed ownership of Wal-Mart to his four children in the 1950s, creating the world’s largest family fortune. His offspring use charitable annuity trusts to maintain control of the retailer through a family investment vehicle.

One-third of the 400 billionaires on the Bloomberg index inherited the fortunes they control. A quarter of the 125 billionaires from the U.S. in the ranking inherited their wealth while half of Europe’s 106 biggest fortunes were passed down at least one generation.

With little of the legal framework in place to protect their assets, at least two wealthy Russian businessmen are attempting to pass their hard-won aristocracy to an heir, including Andrey Guryev, who is currently the only billionaire among the country’s richest who has appointed a child as chief executive of his core business.

Political Consequences

A former partner of Mikhail Khodorkovsky, once Russia’s richest man, Guryev helped expand Phosagro OAO into Europe’s largest maker of phosphate fertilizers, and did so while sitting in the upper house of parliament for more than a decade.

Guryev controls a fortune valued at $4.5 billion. Khodorkovsky, the former main owner of Yukos Oil Co., was convicted of tax evasion, money laundering and oil embezzlement in 2005. He has maintained his innocence, saying the charges against him were retribution for financing political parties that opposed Putin, an allegation the government denies. He spent a decade in prison and now lives in exile in Switzerland.

Guryev declined to comment. Olga Pispanen, a spokeswoman for Khodorkovsky, said he declined to comment.

Passing Control

Guryev quit politics in 2013 as a series of measures designed to force officials to repatriate overseas assets was being debated and passed control of his London-listed company to his son, Andrey Guryev Jr., appointing him to be its chief executive officer. To ensure a smooth transition, Guryev, 55, became deputy chairman to oversee the company’s strategy.

“I talk with my father very often,” Guryev Jr., 33, who graduated from University of Greenwich in London, said in an interview. “It would be difficult for me if he didn’t supervise the company’s management.”

David Yakobachvili is taking a similar approach. The 58-year-old businessman sold a majority stake he held with three partners in juice producer Wimm-Bill-Dann Foods to PepsiCo in 2010 for $3.8 billion. His son, Mikhail, moved back to Moscow after graduating from New York University last year to learn the nuances of investing from his dad.

Real Life

“The university of real life is the most useful,” Yakobachvili said. “The more my son sees, the better.”

He said his son helped negotiate the sale of 49 percent of his energy company, Petrocas Energy Group, to state-run Rosneft for $144 million last December.

David Yakobachvili
David Yakobachvili

“I am looking at how my father talks with other people,” Mikhail Yakobachvili said at the family’s headquarters, where the pair have neighboring offices.

This attempt at a succession strategy is out of step with most moneyed Russians. When asked to identify the critical challenges to their businesses, 61 percent of owners cited “government and regulation,” almost double the average in PwC’s survey. Limiting property rights is a defining characteristics of “Putin’s system,” according to University College London’s Ledeneva.

There are some 60,000 business owners who will grapple with the transfer dilemma over the next several years, according to Ruben Vardanyan, chairman of the expert council for the Skolkovo center. Vardanyan, who sold Troika Dialog investment bank to state-run Sberbank for more than $1 billion in 2011, created Phoenix Advisors this year to help entrepreneurs navigate ownership changes.

“Few Russian business owners are thinking of transferring their assets to the next generation, so selling is on their agenda,” Phoenix AdvisorsManaging Director Alexey Stankevich said. “We expect this to trigger a surge in M&A.”


Wealth Funds From Oslo to Riyadh Raid Coffers to Offset Oil Drop

Bloomberg, Oct 8, 2015

Investors watch share price movements in Riyadh, Saudi Arabia.

* SWF growth seen slowing to 4% after 12% five-year average
* Qatar, Abu Dhabi sell assets as Saudi reserves shrink

From Oslo to Doha, Riyadh to Moscow, governments that rode crude’s historic rise to unprecedented wealth are now being forced to start repatriating their rainy-day funds just to make ends meet.

The halving ofoil to less than $50 a barrel has the potential to alter one of the most powerful economic and political forces of the past half century: the rise of the petrostate. These countries led a surge in state investments in the U.S. and Europe that now totals about $7.3 trillion globally, according to the Sovereign Wealth Fund Institute.

During the last boom, the oil countries flaunted their wealth abroad by buying stakes in iconic companies such asBarclays Plc as well as trophy assets including Manhattan hotels, European soccer clubs and London luxury homes, often in the face of opposition from the local public.

Such swagger is fading.

The biggest fund, Norway’s, this weeksaid it expects to tap its $820 billion stockpile for the first time next year to balance its budget, following similar moves across the Persian Gulf and in Russia. If sustained, the withdrawals may be felt by investors the world over, according to Michael Maduell, president of the Las Vegas-based Sovereign Wealth Fund Institute.

“If the wealth funds of Norway and the Gulf countries begin to slowly pull out, it will have an impact on financial markets,” Maduell said by e-mail.

Looking ahead, TheCityUK, a lobby group for the financial services industry in London, expects sovereign-fund assets will increase by just 4 percent in 2015 to $7.4 trillion, well below the 12 percent average annual growth seen over the previous five years.

Quantatative Easing

The amount of petrodollar investments in the five years through 2014 was on a similar scale to theFederal Reserve’s bond-buying program, known as quantitative easing, according to analysts at Barclays. As the flows have reversed, the world has lost about $400 billion in annual demand for financial assets, they said.

Nowhere is the decline more evident than inSaudi Arabia. The kingdom’s foreign holdings fell for the seventh month in a row in August to $654.5 billion, the lowest since February 2013, according to data from theSaudi Arabian Monetary Agency. The oil slump has spurred the biggest Arab economy to search for savings, contemplate project delays and sell bonds for the first time since 2007.

“Any continued weakness in the international oil price could prompt some oil-exporting countries to divert money from sovereign wealth funds to bolster their fiscal positions,”Anjalika Bardalai, deputy chief economist at TheCityUk, said by e-mail.

Other Gulf monarchies that have spent lavishly on public works to ensure the loyalty of their populations –United Arab Emirates, Kuwait and Qatar among them — have all announced initiatives to preserve cash as the price drop in crude saps growth.

Glencore, Volkswagen

Abu Dhabi, home to the $773 billion Abu Dhabi Investment Authority, isreassessing its largest state companies with an eye toward selling assets, four people with knowledge of the matter said. The government and its entities have been running down reserves and withdrawing deposits from banks to fund their spending.

Qatar Investment Authority, which owns stakes in companies includingGlencore Plc andVolkswagen AG, this week sold a stake in French construction companyVinci SA valued at about $400 million, just two months after it sold two London office buildings worth more than 550 million pounds ($842 million).

In Europe, Norway plans to spend 208 billion kroner ($25.4 billion) of its oil wealth next year, topping the 204 billion kroner it predicts it will receive from offshore oil and gas fields, according to the 2016 budget. That implies a net withdrawal from the fund of 3.7 billion kroner, after an inflow of 38 billion kroner this year.

Russia, which is being squeezed both by lower commodity prices and sanctions imposed by the U.S. and the European Union over the conflict in Ukraine, expects to spend as much as 4.7 trillion rubles ($75 billion) of the Reserve Fund, one of its two oil funds, this year and next to weather its first recession in six years. The two funds, which are invested mainly
in U.S. and European government bonds, held the equivalent of $144 billion on Oct. 1, according to the Finance Ministry in Moscow.

Neighboring Kazakhstan, the second-largest oil producer in the former Soviet Union, plans to use about $4 billion of its $69 billion fund to support its economy this year.

Yield Hunt

To be sure, sovereign funds aren’t just retrenching. Norway’s, for example, in search of higher returns, opened an office in Tokyo this week as the government in Oslo considers increasing the fund’s cap on investments in stocks from the current 60 percent.

And Qatar’s fund has expressed interest inbuying a minority stake in Glencore’s agriculture business, according to three people familiar with the matter. The Qatar Investment Authority said last week it opened an office in New York and plans to invest $35 billion in the U.S. over the next five years to diversify its holdings.

“The view now is that oil prices are going to remain low for longer, so oil-producing states are having to look at both how to maximize revenue and how to reduce spending,”Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC, said by phone. “This trend will continue into 2016.”


Norway Seen Tapping Its Wealth Fund to Ward Off Oil Risks

Bloomberg, Oct 5, 2015


* Oil wealth spending may outstrip petroleum income in 2016: DNB
* Government may be forced to make first withdrawal from fund

For Norway, the future may already be here.

The nation could as soon as next year start making withdrawals from its massive $830 billion sovereign wealth fund, which it has built over the past two decades as a nest egg for “future generations.” The minority government will reveal its budget plans on Wednesday and has flagged new spending measures and tax cuts.

Prime MinisterErna Solberg is trying to avoid a recession as a slump in the nation’s key commodity takes its toll on the $500 billion oil-reliant economy. Norway has already spent recent years using a growing chunk of its oil revenue to plug deficits while at the same time building the wealth fund. Now, with tax revenue from petroleum extraction down 42 percent on last year, budget spending in 2016 will probably outstrip income.

“We have reached a point where we will from now on see that the oil-corrected balance will be above the cash flow — that’s based on oil prices increasing slowly in the future,” saidKyrre Aamdal, senior economist atDNB ASA in Oslo. Tapping the fund’s returns marks a turning point that wasn’t expected to come for “several more years,” he said.

The government said in May its non-oil budget deficit, or spending in real terms, would be a record 180.9 billion kroner ($21.6 billion). With its crude output waning and prices falling, the government saw petroleum income dropping to 251.6 billion kroner this year, almost 30 percent lower than its October projections. Those estimates assumed oil at about $69 a barrel. Brent crude has averaged $56 so far this year.

Brent crude traded at $49.13 per barrel as of 8:20 a.m. in London.

The decline in oil prices has sent the krone down 13 percent over the past 12 months. Only the Brazilian real has performed worse.

Taxes collected on petroleum extraction reached 138 billion kroner in the first three quarters of the year, down from 238.2 billion kroner in the same period a year earlier, according to Statistics Norway.

Tapping the fund to cover budget needs comes at a time when the managers of the fund, set up to safeguard the wealth of future generations, warn that it alsofaces diminished returns ahead amid record-low interest rates.

Government officials and economists contend that only investment returns from the fund will be used for the budget, meaning it will not actually shrink in size. By using interest and dividends to cover the deficit, “no one will ever need to break the piggy bank,” saidKnut Anton Mork, senior economist atSvenska Handelsbanken AB in Oslo.

Oeyvind Schanke, chief investment officer for asset strategies at the Oslo-based fund, said in an interview last month it will be able touse the cash it gets from dividends and bond interest payments to make shifts in the portfolio, rather than having to sell assets.

But capital coming into to the fund has alreadystarted to dwindle. Inflows were just 17 billion kroner in the first half of this year, compared with a quarterly average of 60 billion kroner over the past 10 years.Central bank GovernorOeystein Olsen, who oversees the fund as head of the bank’s board, said in February that oil around $60 would mean transfers to the fund “may come to a halt.”

The government on Wednesday is also scheduled to release a proposal for tax reforms and outline how the wealth fund should implementa ban on investing in coal companies, which goes into effect Jan. 1.

“There is room for more active fiscal policy to stimulate in downturns,” DNB’s Aamdal said. He sees the government’s structural non-oil deficit rising by 31 billion kroner from last year.


For Norway, Oil at $50 Is Worse Than the Global Financial Crisis

Bloomberg, Aug 10, 2015

The Mongstad oil and gas refinery, part-owned by Statoil ASA, is near Bergen, Norway.

The Mongstad oil and gas refinery, part-owned by Statoil ASA, is near Bergen, Norway.

Scandinavia’s richest nation is facing a mess.

When the financial crisis brought the global economy to its knees, Norway was largely unscathed. But oil under $50? That’s another story.

Unemployment peaked at about 3.7 percent in 2010 in the post-crisis aftermath. Falling oil prices already pushed the jobless rate to 4.3 percent in May, the highest in at least 11 years, and that was before a renewed drop in Brent crude.

Here are a few ways it’s harder for Norway to deal with plunging oil prices than a global financial meltdown.

1. Norway is heavily reliant on oil

As a key driver for growth in Norway, it was largely its oil wealth that kept the nation afloat during the financial crisis.

But with its key sector in trouble, there are few other industries for the nation to look to for growth.

2. The petroleum boom was about to end, anyway

Oil is losing value just as investments in the petroleum industry are heading to the lowest level since 2000. To cope with the shift, companies such as Statoil ASA started restraining spending more than six months before Brent crude started to tumble.

3. Norway might have to dip into its savings

If the government has to withdraw money from its $875 billion sovereign wealth fund, it will be a historical step. It’s either that, or heavily rein in fiscal spending at a time when the country needs it most. The state’s spending could start to outstrip income from oil, which it pours into its wealth fund for future generations.

Taking money from the fund wasn’t planned for at least a few decades and no finance minister wants that to be their legacy. Approaching that withdrawal will spawn an ugly debate about what got Norway there faster than expected, and maybe even new legislation.