Nordic banks’ entry into the Russian market: motives, processes and challenges

The importance of services in the global economy has grown steadily in the past decades and the growth of services sector’s direct investments has been increasing. Nowadays, all companies are influenced by the much changing global environment and the financial services companies are no exception. The internationalization of financial services companies is an expanding and accelerating phenomenon which has various motivations. The overall aim of this thesis is to shed light on the market entry processes of the Nordic financial services companies when they have entered the Russian market. In this study, the factors affecting Nordic banks’ market entry to Russia are presented in order to better understand what have been the main motives for market entry, what kind of processes the banks have used and what kind of challenges they have faced along the way. A case study approach was used in conducting the empirical research and it aims at investigating a specific case: Nordic banks’ entry into the Russian market. The empirical research was carried out by conducting qualitative interviews for employees involved in entry processes of the case banks. These interviews aimed at examining the Nordic banks’ motives for entering the Russian financial market. This includes reflections on the reasons why the studied banks have decided to enter Russia and what have been the motives behind these decisions. Also, the market entry processes the banks have used when they have entered the Russian market were investigated. The findings allowed comparing the related theories and different market entry modes the case banks have used. Furthermore, the market-related challenges faced by the case banks were mapped and described. In addition, the main factors related to the entry processes of the studied banks were identified and key elements of successful market entry were mapped. The findings suggest that the main motivator for banks have been to follow their customers and hence, increase the revenues and add the value to the shareholders; consequently, being a win-win-win situation to all the related parties. It was also discovered that the banks market entry processes have had resemblances but the banks have taken different paths to get where they are nowadays. As the Russian market environment differs from the one in Nordic countries, also challenges were faced by the case banks. However, the internal challenges were considered more troublesome than the external ones. As the foreign market entry process is complex as well as time and resources consuming, it is vital to understand the specifics of the target market, organizational capabilities and individuals enabling a successful entry process.

POLITICAL RISK IN FOREIGN DIRECT INVESTMENT IN THE RUSSIAN ELECTRIC POWER SECTOR

Russia approved ambitious reform plan for the electricity sector in 2001 including privatisation of the country’s huge thermal generation assets. So far the sector had suffered from power shortages, aging infrastructure, substantial electricity losses, and weak productivity and profitability numbers. There was obvious need for foreign investments and technologies. The reform was rather successful; the generation assets were privatised in auctions in 2007-2008 and three European energy companies, E.On, Enel and Fortum, invested in and obtained together over 10% of the Russian production assets. The novelty of these foreign investments serves unique object for the study. The political risk is involved in the FDI due to the industry’s social and economic importance. The research’s objective was to identify and analyse the political risk that foreign investors face in the Russian electricity sector. The research had qualitative study method and the empirical data was collected by interviewing. The research’s theoretical framework was based on the existing political risk theories and it focused to understand the Russian government in relation to the country’s stability and define both macro-level and micro-level sources of political risk for the foreign direct investments in the sector. The research concludes that the centralised and obscure political decision-making, economic constriction, high level of governmental control in economy and corruption form the country’s internal macro-level risk sources for the foreign investors in the sector. Additionally the retribution due to the companies’ home country actions, possible violent confrontations at the Russian borders and the currency instability are externally originated risk sources. In the electricity industry there is risk of tightened governmental control and increased regulation and taxation. Similarly the company-level risk sources link to the unreformed heating sector, bargaining with the authorities, diplomatic stress between host and home countries and to companies and government’s divergent perspective for the profit-making. The research stresses the foreign companies’ ability to cope with the characteristics of Russian political environment. In addition to frequent political and market risk assessment, the companies need to focus on currency protection against rouble’s rate fluctuation and actively build good company-citizenship in the country. Good relationship is needed with the Russian political authorities. The political risk identification and the research’s conclusive framework also enable political risk study assessments for other industries in Russia

Controlling market power of vertically integrated firms in electricity networks: demand response of aggregator agents

This article reports the results of an experiment that examined how demand aggregators can discipline vertically-integrated firms - generator and distributor-retailer holdings-, which have a high share in wholesale electricity market with uniform price double auction (UPDA). We initially develop a treatment where holding members redistribute the profit based on the imposition of supra-competitive prices, in equal proportions (50%-50%). Subsequently, we introduce a vertical disintegration (unbundling) treatment with holding-s information sharing, where profits are distributed according to market outcomes. Finally, a third treatment is performed to introduce two active demand aggregators, with flexible interruptible loads in real time. We found that the introduction of responsive demand aggregators neutralizes the power market and increases market efficiency, even beyond what is achieved through vertical disintegration.

Pricing and competition in the Swedish retail market for electricity

Sweden, together with Norway, Finland and Denmark, have created a multi-national electricity market called NordPool. In this market, producers and retailers of electricity can buy and sell electricity, and the retailers then offers this electricity to end consumers such as households and industries. Previous studies have shown that pricing at the NordPool market is functioning quite well, but no other study has to my knowledge studied if pricing in the retail market to consumers in Sweden is well functioning. If the market is well functioning, with competition and low transaction costs when changing electricity retailer, we would expect that a homogeneous good such as electricity would be sold at the approximately same price, and that price changes would be highly correlated, in this market. Thus, the aim of this study is to test whether the price of Vattenfall, the largest energy firm in the Swedish market, is highly correlated to the price of other firms in the Swedish retail market for electricity. Descriptive statistics indicate that the price offered by Vattenfall is quite similar to the price of other firms in the market. In addition, regression analysis show that the correlation between the price of Vattenfall and other firms is as high as 0.98.

On the efficiency of the Argentinean electricity wholesale market

This paper discusses two key aspects regarding the efficiency of the Argentinean Electricity Market. Using hourly data on prices, marginal costs, and operational status of generators, it will be argued that, unlike the former British and Californian electricity spot markets, this market is not subject to the conventional forms of exercise of market power by generators. We then use Chao's (1983) model of optimal configuation of electricity supply to evaluate the social desirability of the change in the supply pattern of the Argentinean electricity industry, which took place throughout the last ten years.

Formation of Exchange Rates on the Russian Market: Dynamics and Modelling

Galina Kovaleva. The Formation of the Exchange Rate on the Russian Market: Dynamics and Modelling. The Russian financial market is fast becoming one of the major sectors of the Russian economy. Assets have been increasing steadily, while new market segments and new financial market instruments have emerged. Kovaleva attempted to isolate the factors influencing exchange rates, determine patterns in the dynamic changes to the rouble/dollar exchange rate, construct models of the processes, and on the basis of these activities make forecasts. She studied the significance of economic indicators influencing the rouble/dollar exchange rate at different times, and developed multi-factor econometric models. In order to reveal the inner structure of the financial indicators and to work out ex-post forecasts for different time intervals, she carried out a series of calculations with the aim of constructing trend-cyclical (TC) and harmonic models, and Box and Jenkins models. She found that: 1. The Russian financial market is dependant on the rouble/dollar exchange rate. Its dynamics are formed under the influence of the short-term state treasury notes and government bonds markets, interbank loans, the rouble/DM exchange rate, the inflation rate, and the DM/dollar exchange rate. The exchange rate is influenced by sales on the Moscow Interbank Currency Exchange and the mechanism of those sales. 2. The TC model makes it possible to conduct an in-depth study of the structure of the processes and to make forecasts of the dynamic changes to currency indicators. 3. The Russian market is increasingly influenced by the world currency market and its prospects are of crucial interest for the world financial community.

Analysis of the Iberian electricity forward market hedging efficiency

An assessment of the hedging performance in the Iberian Forward Electricity Market is performed. Aggregated data from the Portuguese and Spanish clearing houses for energy derivatives are considered. The hedging performance is measured through the ratio of the final open interest of a month derivatives contract divided by its accumulated cleared volume. The base load futures in the Iberian energy derivatives exchange show the lowest ratios due to good liquidity. The peak futures show bigger ratios as their reduced liquidity is produced by auctions fixed by Portuguese regulation. The base load swaps settled in the clearing house located in Spain show initially large values due to low registered volumes, as this clearing house is mainly used for short maturity (daily and weekly swaps). This hedging ratio can be a powerful oversight tool for energy regulators when accessing to all the derivatives transactions as envisaged by European regulation.

Electricity without borders: a plan to make the internal market work. Bruegel Blueprint Series 20, 5 September 2013

The most straightforward European single energy market design would entail a European system operator regulated by a single European regulator. This would ensure the predictable development of rules for the entire EU, significantly reducing regulatory uncertainty for electricity sector investments. But such a first-best market design is unlikely to be politically realistic in the European context for three reasons. First, the necessary changes compared to the current situation are substantial and would produce significant redistributive effects. Second, a European solution would deprive member states of the ability to manage their energy systems nationally. And third, a single European solution might fall short of being well-tailored to consumers’ preferences, which differ substantially across the EU. To nevertheless reap significant benefits from an integrated European electricity market, we propose the following blueprint: First, we suggest adding a European system-management layer to complement national operation centres and help them to better exchange information about the status of the system, expected changes and planned modifications. The ultimate aim should be to transfer the day-to-day responsibility for the safe and economic operation of the system to the European control centre. To further increase efficiency, electricity prices should be allowed to differ between all network points between and within countries. This would enable throughput of electricity through national and international lines to be safely increased without any major investments in infrastructure. Second, to ensure the consistency of national network plans and to ensure that they contribute to providing the infrastructure for a functioning single market, the role of the European ten year network development plan (TYNDP) needs to be upgraded by obliging national regulators to only approve projects planned at European level unless they can prove that deviations are beneficial. This boosted role of the TYNDP would need to be underpinned by resolving the issues of conflicting interests and information asymmetry. Therefore, the network planning process should be opened to all affected stakeholders (generators, network owners and operators, consumers, residents and others) and enable the European Agency for the Cooperation of Energy Regulators (ACER) to act as a welfare-maximising referee. An ultimate political decision by the European Parliament on the entire plan will open a negotiation process around selecting alternatives and agreeing compensation. This ensures that all stakeholders have an interest in guaranteeing a certain degree of balance of interest in the earlier stages. In fact, transparent planning, early stakeholder involvement and democratic legitimisation are well suited for minimising as much as possible local opposition to new lines. Third, sharing the cost of network investments in Europe is a critical issue. One reason is that so far even the most sophisticated models have been unable to identify the individual long-term net benefit in an uncertain environment. A workable compromise to finance new network investments would consist of three components: (i) all easily attributable cost should be levied on the responsible party; (ii) all network users that sit at nodes that are expected to receive more imports through a line extension should be obliged to pay a share of the line extension cost through their network charges; (iii) the rest of the cost is socialised to all consumers. Such a cost-distribution scheme will involve some intra-European redistribution from the well-developed countries (infrastructure-wise) to those that are catching up. However, such a scheme would perform this redistribution in a much more efficient way than the Connecting Europe Facility’s ad-hoc disbursements to politically chosen projects, because it would provide the infrastructure that is really needed.

Reforming the Market Design of EU Electricity Markets: Addressing the Challenges of a Low-Carbon Power Sector. CEPS Task Force Report, 27 July 2015

This CEPS Task Force Report focuses on whether there is a need to adapt the EU’s electricity market design and if so, the options for doing so. In a first step, it analyses the current market trends by distinguishing between their causes and their consequences. Then, the current blueprint of EU power market design – the target model – is briefly introduced, followed by a discussion of the shortcomings of the current approach and the challenges in finding suitable solutions. The final chapter offers an inventory of solutions differentiating between recommendations shared among Task Force members and non-consensual options.

A hybrid probabilistic criterion for market-based transmission expansion planning

Market-based transmission expansion planning gives information to investors on where is the most cost efficient place to invest and brings benefits to those who invest in this grid. However, both market issue and power system adequacy problems are system planers’ concern. In this paper, a hybrid probabilistic criterion of Expected Economical Loss (EEL) is proposed as an index to evaluate the systems’ overall expected economical losses during system operation in a competitive market. It stands on both investors’ and planner’s point of view and will further improves the traditional reliability cost. By applying EEL, it is possible for system planners to obtain a clear idea regarding the transmission network’s bottleneck and the amount of losses arises from this weak point. Sequentially, it enables planners to assess the worth of providing reliable services. Also, the EEL will contain valuable information for moneymen to undertake their investment. This index could truly reflect the random behaviors of power systems and uncertainties from electricity market. The performance of the EEL index is enhanced by applying Normalized Coefficient of Probability (NCP), so it can be utilized in large real power systems. A numerical example is carried out on IEEE Reliability Test System (RTS), which will show how the EEL can predict the current system bottleneck under future operational conditions and how to use EEL as one of planning objectives to determine future optimal plans. A well-known simulation method, Monte Carlo simulation, is employed to achieve the probabilistic characteristic of electricity market and Genetic Algorithms (GAs) is used as a multi-objective optimization tool.

A framework for electricity price spike analysis with advanced data mining methods

There are many techniques for electricity market price forecasting. However, most of them are designed for expected price analysis rather than price spike forecasting. An effective method of predicting the occurrence of spikes has not yet been observed in the literature so far. In this paper, a data mining based approach is presented to give a reliable forecast of the occurrence of price spikes. Combined with the spike value prediction techniques developed by the same authors, the proposed approach aims at providing a comprehensive tool for price spike forecasting. In this paper, feature selection techniques are firstly described to identify the attributes relevant to the occurrence of spikes. A simple introduction to the classification techniques is given for completeness. Two algorithms: support vector machine and probability classifier are chosen to be the spike occurrence predictors and are discussed in details. Realistic market data are used to test the proposed model with promising results.

(Virtual) Agents for running electricity markets

This paper describes a multi-agent based simulation (MABS) framework to construct an artificial electric power market populated with learning agents. The artificial market, named TEMMAS (The Electricity Market Multi-Agent Simulator), explores the integration of two design constructs: (i) the specification of the environmental physical market properties and (ii) the specification of the decision-making (deliberative) and reactive agents. TEMMAS is materialized in an experimental setup involving distinct power generator companies that operate in the market and search for the trading strategies that best exploit their generating units' resources. The experimental results show a coherent market behavior that emerges from the overall simulated environment.

Determination of electricity consumers’ load profiles via weighted evidence accumulation clustering using subsampling

With the electricity market liberalization, the distribution and retail companies are looking for better market strategies based on adequate information upon the consumption patterns of its electricity consumers. A fair insight on the consumers’ behavior will permit the definition of specific contract aspects based on the different consumption patterns. In order to form the different consumers’ classes, and find a set of representative consumption patterns we use electricity consumption data from a utility client’s database and two approaches: Two-step clustering algorithm and the WEACS approach based on evidence accumulation (EAC) for combining partitions in a clustering ensemble. While EAC uses a voting mechanism to produce a co-association matrix based on the pairwise associations obtained from N partitions and where each partition has equal weight in the combination process, the WEACS approach uses subsampling and weights differently the partitions. As a complementary step to the WEACS approach, we combine the partitions obtained in the WEACS approach with the ALL clustering ensemble construction method and we use the Ward Link algorithm to obtain the final data partition. The characterization of the obtained consumers’ clusters was performed using the C5.0 classification algorithm. Experiment results showed that the WEACS approach leads to better results than many other clustering approaches.

A congestion management and transmission price simulator for competitive electricity markets

In a liberalized electricity market, the Transmission System Operator (TSO) plays a crucial role in power system operation. Among many other tasks, TSO detects congestion situations and allocates the payments of electricity transmission. This paper presents a software tool for congestion management and transmission price determination in electricity markets. The congestion management is based on a reformulated Optimal Power Flow (OPF), whose main goal is to obtain a feasible solution for the re-dispatch minimizing the changes in the dispatch proposed by the market operator. The transmission price computation considers the physical impact caused by the market agents in the transmission network. The final tariff includes existing system costs and also costs due to the initial congestion situation and losses costs. The paper includes a case study for the IEEE 30 bus power system.

Hybrid Wavelet-PSO-ANFIS Approach for Short-Term Electricity Prices Forecasting

A novel hybrid approach, combining wavelet transform, particle swarm optimization, and adaptive-network-based fuzzy inference system, is proposed in this paper for short-term electricity prices forecasting in a competitive market. Results from a case study based on the electricity market of mainland Spain are presented. A thorough comparison is carried out, taking into account the results of previous publications. Finally, conclusions are duly drawn.