BlackRock-style money: The largest investment company will teach Ukraine how to fight the crisis. Why is this a good signal?
What we know about the company, what its experts have to offer, what Ukraine should strive for and why we should not expect easy profits
On 10 November, the Ministry of Economy of Ukraine signed a memorandum of understanding with the investment company BlackRock. According to the Ministry's website, the agreement signed in Washington stipulates that BlackRock Financial Markets Advisory will advise to the Ministry of Economy on the creation of a roadmap for an investment platform that will attract primarily private capital. Includes the structure of the platform, its powers and management.
"Thus, the Memorandum formalises the preliminary exchange of views on the possibilities of attracting public and private investment in Ukraine, which took place in September between President of Ukraine Volodymyr Zelensky and BlackRock Chairman and CEO Larry Fink," the Ministry of Economy emphasises.
To recap, on September 19, President of Ukraine Volodymyr Zelensky had a conversation with Larry Fink, Chairman of the world's largest investment company BlackRock. The topic was the possibilities of attracting public and private investment in Ukraine. "Our country is interested in the arrival of global capital that will create new jobs and boost the economy. We can and want to restore a normal investment climate," Zelensky later wrote in his Telegram channel.
"Access to capital markets is not a right. It is a privilege," BlackRock Inc. Chairman Larry Fink wrote in his annual letter to CEOs. Larry Fink. And by deciding to suspend operations with russian securities immediately after the outbreak of a full-scale invasion, he clearly demonstrated this principle.
And while the investment decisions of governments or central banks can in theory still be attributed to a wide range of motives (political, social, etc.), the position of business circles, which seemingly should not care about anything too distant from their profits, finally distinguishes the parts of the world that take part in the global economy from those that are excluded from it.
The meeting of the CEO of Blackrock with the President of Ukraine in its turn showed the place that our country should take. We have the privilege to receive capital and full integration into the world community of advanced economies. From an average representative of emerging markets to the European "economic tiger" – this very way is the real one after the war.
Mind analysed how and in what ways BlackRock experts can help stabilise the Ukrainian economy, and why it is important not to miss this chance.
What is BlackRock famous for?
BlackRock Inc. was founded in 1988 and was part of the Blackstone Group, finally separating from it in 1994. Interestingly, before the creation of BlackRock, Larry Fink had an experience worth $100 million which he lost while managing First Boston. However, it was these losses that motivated him to develop a new risk management strategy which, as we can see, passed further trials.
In 1999, the company listed its shares on the New York Stock Exchange (NYSE: BLK), finally changing its status from an "eight-people-in-one-room" startup to a top-level player. There was more to come: absorbing Merrill Lynch Investment Management, Barclay's Global Investors and a number of smaller deals; launching a line of ETFs (iShares Core); opening of an artificial intelligence research centre in Palo Alto.
Thus, today BlackRock holds the status of the largest investment company (in terms of assets under management) in the history of the business, with 18,400 employees working in 35 countries.
Assets under its management amount to $8.5 trillion, and at the end of last year (before the global markets decline) exceeded $10 trillion. Compare this with Ukraine's GDP that amounted to $200 billion in 2021 and the total assets of our banking system that reached $75 billion by the year-end. Also, the market capitalisation of the world's most valued company, Apple (NASDAQ: AAPL), is also several times lower – $2.5 trillion.
In short, this is the most serious player who could come to us. And while BlackRock did not operate in Ukraine before russia's full-scale invasion, now they see prospects and opportunities for themselves here.
What form of cooperation with Ukraine is under consideration?
It is important to note that buying certain assets or opening investment funds in our country was not in question during the conversation between Volodymyr Zelensky and Larry Fink. According to reports from the President's Office and the media, closer cooperation is being prepared, in which BlackRock will involve its Financial Markets Advisory department (FMA).
FMA was founded at the time of the financial crisis in April 2008 as a separate business within the company. At the same time, BlackRock acted as a key adviser to the Federal Reserve in resolving the issue of buying out the assets of the infamous Bear Stearns investment bank. In fact, FMA being a part of BlackRock employs all market data, analytics, modelling and technology of the corporate parent, while avoiding conflicts of interest and providing advisory (not investment) services to clients
The company reports more than 500 settled deals in 37 countries, and its clients include both government and commercial entities. Meanwhile, Volodymyr Zelensky managed to negotiate free consultations for the Ukraine's government on the creation of a Recovery Fund to sustain the Ukraine's economy.
An analogy with cooperation with the IMF suggests itself, when the "yes" answer received from this organisation is a signal to other investors. If the leading player of the investment market becomes interested in Ukraine, we may expect activity from others.
And what are the requirements for Ukraine?
But let's take off the rose-colored glasses and think about what exactly should be done. It was for a good reason that our country was of no interest to BlackRock before the full-scale invasion. Obviously, not only because of the relatively small scale of our economy.
Every investor makes decisions with respect to two key parameters: profitability and risk. Risk is not only purely market risk, but also military, political, judicial, corruption, etc. If an investor can lose his assets due to a court decision or a sudden change in the rules of the game in the industry, the country must offer a very attractive profitability to make the investment worthwhile.
And in such a scenario, they will be treated more like venture capital investments, where the illusory chance of success is covered only by a multiple growth. Such investments attract rather speculative investors with a short time horizon. They, of course, also play their important role, but as we found out in a conversation with Oleg Ustenko, the priority is to attract strategic long-term investors. After all, it is not only about the nominal amount of resources attracted, but about the multiplier effect for the economy.
Therefore, today we can identify three key areas where the effect can be most evident.
Strategic investments in the country's economy: by purchasing controlling or minority stakes in Ukrainian companies or opening new businesses. BlackRock will be able to provide analytics to both the Ukrainian government and external investors interested in entering our market.
Credit sector: gradual reduction of the cost of attracting credit resources for Ukrainian residents of all levels (state-run, municipal, private sectors). Naturally, the attraction of loans is limited until the end of the war. But it is important that after the victory the country came to the rates that are relevant for East European countries as soon as possible.
Do not forget that now we are witnessing the highest global inflation in decades, and the world's central banks are pursuing a policy of increasing rates. This, surely, complicates our task, but at least we will no longer be able to ride the wave of easy cheap money without carrying out systematic reforms in the economy. Now the global capital will be more selective.
source: tradingeconomics.com
Long-term preservation and multiplying of capital. Two-thirds of BlackRock's assets are connected to pension money. Actually, the company has more than 60 million pension clients. And such money is the "longest" and allows to finance the most distant projects in terms of implementation.
In Ukraine, the State Pension Fund is actually formed and distributed every year, producing an increasing tax burden on taxpayers. Given the current demographic situation (the so-called "ageing of the nation"), we should not expect any improvements in this field, and the system will not be able to function for a long time without the proper operation of investment pension programmes.
But do not forget that the real results will be only with full cooperation and motivation on both sides. Ukraine should not expect that money will be "dropped from a helicopter". Moreover, the inflow of funding without structural reforms will only trigger an internal price increase (both for goods and assets), and then will hit another financial crisis when investors decide not to stay here for long.
Our main task is to obtain and retain long-term capital. It is, by and large, the long-time investment horizon that distinguishes solid developed economies from speculative "developing countries."