The way the money flows

By bne IntelliNews October 30, 2006

Max Ognev in Moscow -

The money transfer business in the CIS is now big business, but as the brouhaha between Georgia and Russia shows it is also subject to the whim of politics.

If a Russian wanted to send his mother living on the other side of the country some money in Soviet times, the last thing he did was make use of the state-run Pochta , or postal transfer, service. Long queues and a high chance the money would get lost in transit meant most people preferred the informal tricks of trusting an envelope to the train driver or simply finding a friend of a friend that happened to be going in that direction.

But 14 years on and Russia’s money transfer business is booming. In addition to devoted sons supplementing their mother’s meager pension, the swelling numbers of Gastarbeiters flocking to Russia for work means the money transfer business has been growing at a rate of 300% in recent years to create a business worth several billions of dollars a year.

International operators like Western Union were the first to arrive, but their rates were far too high for ordinary people. From the beginning of 2000, however, the money transfer business began to change radically as the local banks started to get into the game and new brands were introduced. Aggressive and enthusiastic, these new players brought with them lower tariffs and new services.

Among the second-generation operators who drastically changed the way this business was carried out were Migom, VMT, Strana Express, Bystraya Pochta, Interexpress, and Unistream. The rapid increase in competition immediate began to bring tariffs down, falling 20% on average in 2005 alone. At least the same fall is expected this year. As a result, this segment has become increasingly affordable for ordinary people, including those from poorer CIS countries who have moved to Russia in search of a better life.

Family remittances

For migrant workers living in Russia, money transfer services are the only way to send money home to their families. In 2004, the market share of such people, typically young men, was nearly 20%, which rose to 30%-35% in 2005, and is now thought to be almost 50%.

All this has led to an outstanding increase in the volume of transfers. Souren Hayriyan, the CEO of Unistream, says the CIS cash transfer market has seen 70% growth in the past 12 months and has finally reached the $15bn level.

Unistream entered the market in 2001, offering tariffs from as little as 1% of the money sent, the cheapest that existed at that time. Hayriyan says that in the past year alone, the market has seen a 20% decrease in rates, making the services even more affordable. As a result, Unistream’s market share is now 24% of the CIS market, while the market share of the informal component has dropped from 50% to 40% over the same period.

The Central Bank of Russia (CBR), which traces the organized transactions in and out of the Russian Federation said in a report published recently that the amount of the money transfers out of Russia reached $1.3bn in the second quarter of 2006 versus $790m in the same period of 2005, a 60% increase on year. And in the first quarter of 2006, the volume transferred topped $815m, a 63% growth from the quarter before.

In all, the amount of money transferred out of Russia has been growing from $1.3bn in 2003, to $2.1bn in 2004 and to $3.5bn in 2005. At the same time, the amounts transferred to Russia from CIS countries have also increased significantly.

“We expect further growth in the market since everything indicates growing demand and tremendous prospects for CIS money transfers,” says Hayriyan. Indeed, his company's revenues almost tripled in 2005 to $750m and transaction volumes are expected to reach $2bn in 2006.

Reasons to be cheerful

The main reason why the CIS remittance market will grow further is that migration from the CIS countries to Russia (excluding Kazakhstan, which is witnessing an oil boom) continues to be fueled by the rising living standards in Russia.

Kyrgyzstan is a typical example. It received over $100m in remittances in the second quarter of 2006 alone. The Kyrgyz people are famous for leaving the country in search of better economic opportunities elsewhere. According to some estimates, the number of migrants from Kyrgyzstan is surging, with the overwhelming majority of these people heading to Russia and Kazakhstan in search of jobs. Between 350,000 and 500,000 Kyrgyz nationals, out of an overall population of roughly 5m, work either seasonally or full-time in foreign countries, according to estimates from the Kyrgyz Labor and Migration Committee.

Besides guest workers, some 90,000 Kyrgyz are currently in the process of obtaining permission to live permanently in Russia. Using money transfers is a convenient way to send money back to their families, therefore, because the procedure requires neither a bank account nor a full set of proper immigration papers.

With its immigration policy in flux, Russia remains the primary target for guest workers from the CIS, just as Western Europe is a desired destination for migrants from Asia and Africa. And international experts are very positive about the prospects of the money transfer market in general and its CIS component in particular.

“The opportunities for the money transfer market have been, and remain, outstanding," says Olga Maitland, the CEO of the International Association of Money Transfers Networks. "Strong economies bring migrant workers without whom they could not function; this in turn provides for a vibrant remittance market."

“The opportunities for the Russian and CIS remittance market to Europe, and indeed globally, have never looked brighter,” Maitland says. “At the moment we are experiencing the period when the Russia and CIS money transmittance business is surely and fast integrating into the global market, playing an increasingly growing role in it.”

However, in this part of the world the potential for politics to get in the way of business is ever present.

Georgia on my mind

The latest hiccup to the money transfer business is the recent ugly spat between Georgia and Moscow, when Tbilisi arrested four Russian officers for allegedly spying. Russian President Vladimir Putin denounced the move as "an act of state terrorism with hostage-taking" and later accused Georgia of "blackmail."

In a fairly typical excessive Russian fit of pique, Moscow severed all air, sea and land links to Georgia, deported hundreds of "illegal" Georgian immigrants and, ruinously for the Georgina economy, hit the Georgians where it really hurts by halting money transfers.

In an acknowledgement of how important that segment is to Georgia's economy, the National Bank of Georgia (NBG) responded immediately by establishing a special group to develop a plan of action to counter the consequences of that ban on money transfers. According to the NBG, the banking system will "use all means at its disposal not to hamper money transfers between Georgia and Russia."

According to the NBG, the largest share, some 67.5%, of foreign money transfers to Georgia is made from Russia, which reached $219m between January and August of 2006.

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