Special investment funds tap officials as clients

State-owned banks VTB and Sber launched specialized mutual investment funds last week aimed at government officials who are restricted by law when it comes to the ownership of foreign securities.

• Russian legislation prevents officials from holding accounts with banks based outside of Russia, or to own — or use — foreign financial services.
• In a bid to get around this, VTB Capital Asset Management announced Thursday that it is setting-up two new investment funds for officials. Sber Asset Management is launching an equivalent fund, Kommersant newspaper reported the same day. Sber’s fund will invest in shares and bonds of Russian companies, as well as government bonds. Similarly, Ingosstrakh Investments, a division of one of Russia’s leading state-owned insurance companies, is reportedly planning to offer a similar option next year. This is the first time we have seen such products offered on the Russian investment market.
• With rates on savings accounts falling and a continuing boom in digital financial services, private investment is increasingly popular. However, it’s not standard practice to indicate the jurisdictions in which such funds might work — and this is a problem for officials seeking to invest their cash. Even many Russian companies – like online marketplace Ozon, internet giant Yandex, and metals firm Evraz — are officially headquartered abroad. It’s a problem easily solved for wealthy investors who can pay for personalized services, but not for more run-of-the-mill clients. There have even been cases of officials being obliged to close their accounts after uncovering violations, according to Kommersant.
• Asset managers traditionally profile clients via geography, age, gender, professional and even religious beliefs — but ‘officials’ are an extremely small subset, according to the head of Alfa Capital, Irina Krivosheyeva. In her view, such funds for officials are “a headline grabber.”

Why the world should care: Russia has about 850,000 officials, but, in reality, the legal restrictions on investments only apply to a fraction of them. Nevertheless, state-owned banks clearly now see ‘officials’ as a business opportunity.