Tuesday, 30 October 2007

RedQuartz prepares IPO of €1bn Russian real estate fund

Business New Europe

Jason Corcoran in Moscow


Irish property developer RedQuartz has hired UK stockbroker Cenkos to advise it on carrying out a possible IPO next February for a €1bn Russian real estate fund.

The fund, which has the working name of Celtic Bear, will invest in the construction of a number of urban multifunctional complexes in Russian cities in conjunction with local partners. Celtic Bear is backed by Redquartz, the investment vehicle of Paddy Kelly, one of Ireland's foremost property developers and hoteliers.

"We are closing in on the final stages of a decision," says Julian Morse, an institutional sales director at Cenkos. "An IPO is one of the options we are looking at for the fund."

Cenkos was involved in two listings by Raven, a British property developer in Russia, worth a combined €800m in 2006 and 2005. Morse admits Raven had "some operation difficulties" trying to invest the full amount of money raised for a portfolio of warehouse and distribution property assets across Russia. But the funds raised from Celtic Bear's placement are earmarked for the construction of five multifunctional complexes in Russia.

The company intends to implement a total 15 real estate projects in Russia in cooperation with local companies. Redquartz specialises in mixed-use developments, schemes that incorporate residential, retail, office, leisure and cultural facilities. Most projects are developed under different company names, with Redquartz being the family's holding company and Redquartz Boundary (RQB), formed in 2005, facilitating its investment opportunities. RQB itself is a joint venture between Redquartz and Boundary Capital, run by leading Irish financier Niall McFadden.

"Seven projects have been chosen for seven regional cities. We want these places to be villages within cities where people can work, rest and play," says a source close to Redquartz.

In the regions

The company intends to implement a total of 15 real estate projects mainly in Russia's regional cities. Redquartz declined to name the precise cities for the seven headline projects, but they are the believed to be cities of over 500,000 people and within a 2-3 hour radius from Moscow. Construction in Moscow and St Petersburg is not apparently a priority for the company, which is focusing on cities where it still possible to secure sites of 150,000 square metres for their large projects.

Nizhny Novgorod, just 250 miles from Moscow, is understood to be one of the locations for the urban multifunctional complexes. "It's a prime location because it's being set up as the back office to Moscow with lots of upwardly mobile people looking for better living and working conditions," says a source.

Representatives from Kelly's investment vehicle Redquartz International and his associates are believed to be close to signing a number or contracts with domestic partners in Moscow. Redquartz is willing to be flexible in its investments and will take anything from 20-70% stakes in joint ventures.

Inspiration for the projects is being drawn from Kelly's experiences in redeveloping Smithfield and Docklands, two flagship projects in Dublin's inner city. Jerry Ryan, renowned architect at Irish firm Horan Keoghan Ryan (HKR) Architects, has been brought on board after working with Redquartz on projects in Florida.

Sources close to Redquartz said its target return on investments would be 17%. Kelly is to be an investor in the fund and an ambassador, but his exact role is yet to be determined. Celtic Bear hopes to raises funds equally from investors in Ireland, UK and Russia.

Kelly, who is currently trying to acquire the five-star Ritz-Carlton hotel in Sarasota, Florida, spent time in Moscow recently meeting potential partners. His first partner in Russia is Sesegar investment group, a vehicle founded in October 2006 by the Swiss company Nordblom Group to project finance, develop and manage property in Russia.

Redquartz's expansion on the international market began several years ago. Today, the company has a portfolio of multifunctional complexes in Malta, Italy, the US, UK and Belgium. It has more than 300 partnerships, and its investments in real estate with partners are estimated at €2bn a year. The group also makes more than €300m a year managing projects. Kelly and his associates are part of an Irish property armada that is sailing steadily over the border from Poland and Eastern Europe.

Ireland's wealthiest man, Sean Quinn, in September forked out an estimated $150m to buy his group's first shopping centre in Russia in Ufa. Quinn Property Management is the most prominent Irish investor in Russia, having spent some €100m on a chain of DIY hypermarkets, as well as €75m on a logistics park.

John Ronan and Richard Barrett's property development company Treasury Holdings has two major developments underway in Russia's second city St Petersburg, a plush golf complex costing €200m and a €500m residential scheme for over a 1,000 homes in the grounds of St Catherine's Palace. Quinlan Private, the private equity group headed by former Irish tax inspector Derek Quinlan, is developing a 100,000-square-foot Atrium on St Petersburg main street Nevsky Prospekt with its US partner Golub & Company.


Monday, 29 October 2007

Alfa Bank lures three executives from rival UBS

The Wall Street Journal Europe: Financial News

By Jason Corcoran in Moscow

29 October 2007

Three investment bankers from UBS AG in Moscow have quit to join the Swiss bank's former Russia head Ed Kaufman at closely held Alfa Bank.

Mr. Kaufman, one of the Russian capital's leading rainmakers, caused a stir earlier this year when he left UBS to become chief executive of Alfa's investment-banking business. Joining him now at Alfa are Andrei Bykov, Sergei Yorshikov and Sergei Zyryaev.

Mr. Kaufman said Mr. Bykov has been hired to run initial public offerings and eurobonds, while Messrs. Yorshikov and Zyryaev will handle clients.

Mr. Kaufman has also hired Gene Moldavsky as Alfa's head of corporate finance after a year's sabbatical away from UBS, where Mr. Moldavsky led a number of deals, including two public equity placements of mobile operator OAO Mobile TeleSystems valued at $3.4 billion.

Mr. Moldavsky said Alfa was currently working on three or four IPOs pencilled in for early next year. “There is a role for us as the client’s Russian house and second banker on IPOs. We are already top adviser in M&A here for the first six months of this year.

Kaufman, who is reputed to have been lured to Alfa by a guarantee of $15m over two years, said: “We have a full team in place now since September with Simon Vine too moving up to head of fixed income and Dominic Gualtieri retaining equities. The new structure will take time to bed down – 2008 should be a major year for us.”

UBS responded last week by hiring Alfa’s lead oil and gas analyst Dmitry Lukashov.

UBS has experienced defections as local and foreign investment banks have been building their presence in Russia, which is experiencing record levels of capital-markets activity. Head of research Al Breach left last month to explore new opportunities after almost five years in the job. Hartmuth Jung, vice-chairman of global investment banking, stepped down at the end of June, while banker Pavel Fedorov rejoined Morgan Stanley in May after a year at UBS.

A UBS spokeswoman in Moscow declined to comment.

Monday, 22 October 2007

Troika plans shake-up of business lines

Financial News

Jason Corcoran in Moscow

22 October 2007

Russian broker Troika Dialog is shaking up its business following the departure of its head of investment banking, Dmitry Kushaev.

Troika’s head of capital markets Jacques Der Megreditchian has taken over from Kushaev, who left the bank without a new job.

A Troika source said: “Dmitry has packed up and gone. We don’t know what his plans are.”

Der Megreditchian joined Troika in 2000, having been in charge of capital markets and investment banking at French bank Société Générale in Moscow.

Troika, which rejected takeover approaches from JP Morgan and Credit Suisse last year, is tweaking its business lines to compete better with global banks operating in Moscow.

Managing director Andrei Sharonov, former Russian Deputy Economic Minister, is setting up a division to deal with large companies while a separate team will tackle new generation firms. Troika’s successful asset management operation is turning its focus to the mass-affluent segment.

The bank has also hired Philippe Rakotovao from Italian bond trading platform MTS as head of its international network to coordinate development of its offices in New York, London, Kiev, Cyprus and Kazakhstan.

Yuri Nechuyatov, who joins from accountancy Ernst & Young, has replaced Sanya Zezulin as chief financial officer and chief operating officer.

The bank, headed by Ruben Vardanian, who controls 65%, last month bought Armenian investment bank Armimpexbank and is in talks to buy the brokerage services arm of Russian bank VTB.

Troika this year shelved plans for a listing until after Russia’s presidential elections next year, having hired Goldman Sachs to look into a flotation.

Moscow market sources in Moscow said Troika was performing well in debt capital markets but its Russian rival Renaissance Capital had stolen a march in mergers and acquisitions, and equity capital markets.

A Troika source said: “I think we are there or thereabouts on ECM too but we are not projecting ourselves as well as Rencap.”

Data providers Dealogic and Thomson Financial placed Troika seventh and ninth, respectively, for M&A deals in the first half of the year.


Friday, 19 October 2007

Irish lead a second eastern front

Russia’s economy is now picking up again less than a decade after the stockmarket crashed and the rouble hit rock-bottom levels. And, as Jason Corcoran discovers, some of the Celtic Tiger’s best business brains are helping the Russian Bear back on its feet

To Russia with love Irish players: (from below right to left) Sean Quinn bought his first shopping centre in Russia, Derek Quinlan is developing a 100,000 atrium on Nevsky Prospekt, Chris Weafer is chief strategist at Russian bank Uralsib, Minister for Trade and Commerce John McGuinness and John Ronan of Treasury Holdings have two major developments in St Petersburg.

Irish Independent

By Jason Corcoran in Moscow

Thursday October 18 2007

Moscow-based Irish businessmen still have nightmares about the 1998 financial crisis when the rouble collapsed, the fledgling stock market crashed and the government defaulted on its bonds.

The resulting meltdown sent most of them fleeing to Moscow's Sheremetyevo Airport. Nine years later, the Irish are coming back tempted by Russia's consumer spending boom, a fast-growing middle-class and a more stable economic and political climate.

In the 1990s, Irish investors were some of the foremost pioneers during Russia's new era of perestroika. Aer Rianta forged the way by opening duty-free shops, bars and hotels in Moscow through a joint venture with the Russian airline Aeroflot. Many small to medium sized enterprises, involved in everything from hairdressing to butchering, followed to take a chance in what they called the "Wild East".

Mike Hogan, Enterprise Ireland manager for Russia and the CIS, is witnessing a new wave of Irish businessmen arriving in the capital on his second stint in the country.

"The first influx in Russia in the early 1990s resulted in a high number of Irish living and working in Moscow, but this probably reflected the then moribund nature of the Irish economy, where our chief export was still our people," he says.

"This second wave reflects a different Ireland, where our chief exports are now our capital and our world class products and services.

At the vanguard

"While there may be fewer Irish on the ground in Russia today than heretofore, their presence is much more tangible."

In the vanguard of this new influx are Ireland's richest men and their property development operations.

Ireland's wealthiest man Sean Quinn last month forked out an estimated $150m (€106m) to buy his group's first shopping centre in Russia. The new 120,000 square metre Avrora Centre in the Urals city of Ufa is scheduled to open later this year and follows a number of other high profile investments in Russia by Quinn.

Quinn Property Management is the most prominent Irish investor in Russia having spent some €100m on a chain of DIY hypermarkets, as well as €75m on a logistics park.

His group has also completed office projects in Moscow and the Ukrainian capital of Kiev and is also constructing large-scale logistics projects in Moscow, Rostov-on-Don and Kazan. The Caspiy Centre, a six-storey business block near Moscow's main airport, is due to open in the middle of next year.

A spokesman for Quinn said: "Overall, the group operations in Russia and Eastern Europe are proving very successful with a strong pipeline of high-quality projects coming down the line."

Quinn's investments in Russia alone are believed to amount to €2bn. The group declined to comment.

John Ronan and Richard Barrett's Treasury Holdings have two major developments underway in Russia's second city St Petersburg, a plush golf complex costing €200m and a €500m residential scheme for over a 1,000 homes in the grounds of St Catherine's Palace.

Quinlan Private, the wealth management group headed by former tax inspector Derek Quinlan, is developing a 100,000-square-foot Atrium on St Petersburg main street Nevsky Prospekt with its US partner Golub & Company.

Ireland's a major player

Property developer Paddy Kelly is always mentioned as a potential major player in the Russian market but sources close to Kelly say that while Russia is one of the countries he looks at, his interest is still very preliminary.

Irish direct investment into Russia is now leapfrogging much larger countries.

Russia's Economic Development and Trade Minister Elvira Nabiullina last week told Irish ambassador Justin Harman that Ireland was the 12th largest inward investor to Russia in 2006.

Rosstat, the federal statistics service, indicated that this position has improved further with Irish investors pumping around $2bn (€1.5bn) into Russia during the first quarter of this year. This puts Irish investment at $4.4bn, placing it sixth in the list of countries who have invested in Russia.

Minister for Trade & Commerce John McGuinness was in town last month for a trade mission to help strengthen and create new commercial ties between the two countries.

McGuinness said: "This is my first visit to Russia and it certainly feels like home. Signs of affluence and progress everywhere ... the traffic jams are spectacular, even better than the ones we have in Dublin. Perhaps the length of the traffic jams should be one of the measures of success of an economy."

The government had identified opportunities for Irish companies in IT healthcare and pharmaceuticals, construction, engineering and the service sector, according to McGuinness.

The Minister spoke at a reception to announce the launch of the first direct flight between Dublin to Moscow. Russian airline S7 is to start flying to April next year in response to what it claims is growing demand from businessmen and tourists in both countries.

Russia is the world's largest producer of natural gas and one of the world's largest oil producers. It is currently the EU's largest provider of natural gas and this is a situation which it set to expand.

In the near future, Ireland will be more dependent on Russia as a key supplier of gas and oil, and as substantial provider of metals and raw materials.

As a quid pro quo, Ireland may be expected to help Russia's campaign to join the World Trade Organisation and ease its often fractious relationship with EU member states.

Some Irish companies have acquired industrial branches in Russia.

CRH's purchase of Scancem's operations in Eastern Europe gave them ownership of two readymix cement operations in St Petersburg while Smurfit Kappa owns a factory just outside the city.

Irish-registered oil and mineral exploration companies Aminex and Celtic Resources also have sizeable operations in Russia.

Irish businessmen and women have penetrated high echelons of Russia's corporate boardrooms in key sectors such as oil and gas and banking. Michael Madden, a Tipperary man, has built up Russia's third largest consumer lending business from scratch in four years. As chief executive of Renaissance Capital Consumer Finance, he presided over a business of 3,800 employees, with 2.5 million customers in 60 regions throughout Russia

Madden was instrumental in setting up American Express's first operations in Russia and first encountered President Putin in 1993, when he registered the credit card business in St Petersburg.

"Mayor Sobchak was hogging all the limelight during the Goodwill games at the time and Putin was his deputy. He was pretty impressive then but I never thought he would one day rule the biggest country in the world," says Madden, who is now working on new Russian projects.

Former Irish Life fund manager Chris Weafer is one of Moscow's most recognisable bankers through his frequent appearances on television and in the financial press. Weafer is chief strategists at Russian bank Uralsib, which he joined after a decade at rivals Alfa Bank and Troika Dialog.

Avril Conroy is one of a handful of expats to have made an impact in Russia's energy industry. She is general director of oil major BP's retail venture in Moscow and also chairs the Irish-Russian business association.

"This is a fantastic place to do business and it's getting better all the time in terms of the corruption, bribery and the red tape which used to be commonplace. I have been here 14 years and I am here as long as someone else can't do my job," says Conroy.

Further afield to Kazakhstan, Eddie Walshe, an Irish oil veteran with 35 years experience in oil and gas at BP and British Gas, was last year appointed as a director to the board of state-controlled energy giant Kazmunaigas before its listing on the London Stock Exchange.

Almost 30 years of business links with Moscow

Ireland's business links with Russia stretch back to the 1980s when the government started allowing the Soviet airline Aeroflot to use Shannon as a fuel stopover for trans-Atlantic jets.

A joint venture in duty free between Aer Rianta, the Irish Airport Authority and Russian state airline Aeroflot ensued.

Today, Aer Rianta still runs a profitable duty-free business with its Moscow Aerofirst operation consisting of duty-free shops at Sheremetyevo-2 international terminal, the Irish bar and onboard stores.

In 1991, Aer Rianta branched out by setting up the Soviet-Irish Trading Company (SITCO) with a local construction company. The partnership ran a number of supermarkets, a software company, a clothes retailer and Moscow's first Irish bar.

But SITCO struggled against increasing competition and it gradually turned into a loss-making operation. Aer Rianta sold out, with the Russian co-founders accusing the Irish partner of mismanagement.


Mike Hogan of Enterprise Ireland remembers the impact: "The small to medium-sized enterprises, who arrived on the back of Aer Rianta, got stung. That stuck in the local psyche of the investors from Clare, Tipperary and Limerick and they told others back home about big, bad, mad Moscow."

Despite Russia's thriving economy, Hogan says the Irish still have misconceived notions.

"There is a huge information void about Russia. People are still focussed on food queues," he says. "Someone coming from Dublin asked me recently if they should bring only dollars and whether ATMs or mobiles worked here."

Patrick O'Dolan, chief executive of broadband wireless company Moscom, is one survivor of the 1998 financial crisis who is now thriving again.

He was involved in the paging business employing 220 Russians. Within a week of the market's collapse, he was forced to pare back his staffing.

Today, O'Dolan provides wireless services to Moscow's big hotels. He also recently launched an office space provider competing with Regus and an internet cafe located next to Russia's first Starbucks in Ikea's Khimki Mega Mall.

"I have been there, got the t-shirt, lost it and own it back again," he says.


Russian 'Bear' fund backed by Kelly mulls €1bn listing

Irish Independent

By Jason Corcoran in Moscow

Thursday October 18 2007

A Russian-property fund, backed by Irish property developer and hotelier Paddy Kelly, is mulling a €1bn listing on the London Stock Exchange in February of next year.

The fund, which has the working name of Celtic Bear, will invest in high profile projects throughout Russia in conjunction with local partners.

UK stockbroker Cenkos Securities had been appointed to explore the possibility of a flotation although sources said market conditions, investor appetite and finding the right sites would determine whether it gets the final green light.

Julian Morse, a partner at Cenkos, said: "We are closing in on the final stages of a decision. An IPO is one of the options we are looking at for the fund."

Redquartz specialises in the creation and development of areas mixed with commercial buildings, residential, commercial, hotel and recreational facilities.

The company intends to implement a total of 15 real estate projects, mainly in Russia's regional cities.

Inspiration for the projects is being drawn from Kelly's experiences in redeveloping the Smithfield and Docklands areas of Dublin .

Jerry Ryan, managing director of Horan Keoghan Ryan (HKR) Architects, has been brought on board after working with Kelly on projects in Florida.

Representatives from Kelly's investment vehicle, Redquartz International, and his associates are believed to be close to signing a number of contracts with domestic partners in Moscow.

Kelly is to be an investor in the fund and an ambassador but his role is yet to be determined. Celtic Bear hopes to raise funds from investors in Ireland, UK and Russia .

Kelly, who is currently trying to acquire the five-star Ritz-Carlton hotel in Florida, has spent time in Moscow recently meeting potential partners.

- Jason Corcoran


Monday, 15 October 2007

Those Irish eyes smile on Russia's Ufa

Business New Europe

October 15, 2007

Jason Corcoran in Moscow

The property arm of Ireland’s richest man, Sean Quinn, has forked out an estimated $200m to buy its first shopping centre in the Russian city of Ufa. The deal highlights how Western investors are increasingly turning their attention away from the twin gateways of Moscow and St Petersburg, in favour of Russia’s so-called millionniki - million-plus-population cities.

International property agency Jones Lang LaSalle coined the expression to describe the Russian 11 cities that are set to be the next commercial real estate investment hot spots. The retail sector especially is bringing multi-billion-dollar funds shopping on a route taking in Volgorad and Rostov-on-Don in the south-east of the country to Omsk and Novosibirsk in Siberia.

The deciding factor for investors is the high rates of return in Russia, which range from 12-30%. In other European countries, this rate is just 4-8%. Consequently,the return period for shopping complexes in Russia is just 3-5 years, significantly shorter than in Europe.

In September, Quinn Property Management acquired a shopping mall and entertainment complex in Ufa, a city of 1m people situated in the southwest Urals some 730 miles east of Moscow. The group declined to disclose the cost and the seller, but Moscow analysts put the likely cost at a minimum $200m for the shopping mall on its own.

Quinn Property Management is part of school dropout Quinn’s privately-owned empire, which spans insurance, construction, glass manufacturing, hotels and pubs. The new 120,000-square-metre (sqm) Avrora centre is scheduled to open later this year and features a cinema, bowling alley, swimming pool, a climbing wall as well as retail outlets.

“This is a combined shopping and leisure centre project that has just started
construction. It will take two years to build the project,” Brian Bell, a spokesman for the reclusive Irish billionaire, told bne.

“The group is also in the process of developing a logistics park in the city and this project complements operations there. All the major Russian and international retailers who are active in Russia have expressed interest in Ufa and in this project in particular.”

The anchor tenants in Russia’s biggest shopping centre chain Mega Mall include Sweden’s IKEA, French hypermarket Auchan and Finnish retailer Stockmann. IKEA, which already has three outlets in Moscow, has plans to build outlets in 12 more Russian cities, including Vologorad, Nizhny Novgorod, Rostov-on-Don, Voronezh and Novosibirsk.

Russian retailers, such as X5 Retail Group, Russia’s largest grocery retailer with over 1,000 stores and plans for additional 900 stores with a target of $6bn annual
sales by 2008, are also driving retail expansion in the regions.

Quinn will be keen to sign up such names for its new mall in Ufa, the industrial hub of Bashkortostan known for its petrochemical and manufacturing industries. The site for the mall is in the centre of the city with an immediate catchment area of more than 300,000 people.

Scouring the region

Quinn has about 40 people involved in scouring for property development opportunities throughout Central and Eastern Europe. The property business, which has a war chest of $5bn to spend in the region over five years, has already acquired shopping malls in Turkey and Ukraine and a string of office blocks, retail stores, logistics centres and hotels in the region.

It has completed office projects in Moscow and Kyiv and is also constructing large-scale logistics projects in regional cities Rostov-on-Don and Kazan. The Caspiy
Centre, a six-storey business block near Moscow’s main airport, is due to open in the middle of next year.

Bell said Quinn’s up-and-running assets in Moscow are currently selling for a 9-11 % yield, while the regional cities are registering a much higher yield. Jones Lang LaSalle said the millionniki cities were last year responsible for a third of the total volume of Russian retail investment, with the figure set to jump further in 2007.

Karina Kreja, CEE research manager at Jones Lang LaSalle, reckons that such cities, “will feature increasingly on the radar screen of real estate occupiers, developers and investors. Apart from major retail developers, who can now be found in all the millionniki, these cities are still largely unexplored by the commercial real estate community.”

While competition is increasing for a limited number of quality assets, prime yields for the retail market in the regions are approximately 150-200 basis points
over prime yields in Moscow. The millionniki still have a considerable advantage over Moscow with yield premium, freehold land tenure and an increasing
emphasis on investment incentives from local governments.

Kreja says investors like Quinn and Swiss investment company Eastern Property Holdings were searching for investment opportunities or completing their first purchases in the regional cities.

“There is an increasing diversification of the source of capital on the Russian market, including private money, German funds, Russia-specific funds, investment
banks through special situations groups or funds they control as well as managers of private wealth,” she says.

“The Russian market attract new groups of investors and alongside the well established domestic, CIS and Western European players, we expect new market entrants coming from more distant locations like Singapore, China, South Korea, and Australia.”

The investment market in the regional cities first emerged in 2004-05 when Austrian fund Meinl European Land bought its first Park House projects in Volgograd and Yekaterinburg. Meinl owns six completed projects in Russia with 13 other projects
under construction.

Over the last three years, the company acquired shopping and entertainment centres Park-House in Volgograd, Yekaterinburg and Togliatti from Vremya group and in Kazan from Marta Holding. The company also plans two other shopping centres with an area of 60,000 sqm each in Ryazan and Rostov-on-Don that should be finished by 2009 and worth a combined €150m.

The Austrian property company Immoeast, which last year acquired two Moscow shopping centres with a combined 60,000 sqm space, is now rumoured to be looking at the regions too.

Aberdeen Property Investors, the UK fund manager, recently opened an office in St Petersburg to scout for opportunities for a €1.5bn fund in Russian commercial real estate. Their emphasis will initially be Moscow and St Petersburg, with the regions coming later.


Daiwa opens for business in Russia

Financial News

Jason Corcoran in Moscow
15 October 2007

Japanese investment bank Daiwa Securities SMBC has appointed five staff to its Moscow operation, which launched last week.

The Russian representative office, which is supported by the bank’s European subsidiary in London, is headed by Yasuhiro Ota.

A Russian speaker, Ota was seconded from Daiwa’s Tokyo business, which he joined in 1987.

New Zealander Matthew Parker, a Daiwa director in London, has been named head of business development. Russians Mikhail Kharlamov, Vladimir Boyko and Katerina Zasetskaya join as business development manager, analyst and office manager, respectively.

Daiwa, Japan’s leading initial public offering bookrunner, will focus on servicing Japanese clients working in Russia and support the London team on Russian business in equity and debt underwriting, corporate finance advisory work, and mergers and acquisitions.

Japanese rival Nomura reopened its Moscow office in May, nine years after pulling out of Russia in the wake of the 1998 financial crisis, when it lost $600m (€423m).

Japanese investment banks Mizuho Corporate Bank and Mitsubishi UFG are also plotting a push into the increasingly crowded Russian market. Last week, the Bank of Cyprus opened its first Moscow branch, targeting the corporate market. The group will seek to take advantage of the fact that Cyprus was the biggest source of foreign direct investment into Russia last year, with a 22.6% share.

Wednesday, 10 October 2007

Baltics are fertile ground for private equity

The Wall Street Journal Europe

Baltics are fertile ground for private equity --- Growing economies attract investment; inflation a concern?

By Jason Corcoran

The Baltic countries of Lithuania, Latvia and Estonia are revving up their economies -- and emerging as new hunting grounds for private-equity firms looking to make deals.

All three former Soviet republics joined the European Union in 2004 and have experienced a consumption boom that has driven a surge in economic growth. Estonia and Latvia were the two fastest-growing economies in the EU last year -- Estonia's gross domestic product grew 11.4%, while Latvia's economy surged 11.9%.

But that strong growth has fueled inflation and driven current-account deficits to record highs. The environment demands caution from private equity and fund managers as they go about choosing their deals.

"The most likely scenario is a soft landing, although we are concerned about Latvia and the risk of psychological contagion in the other markets," says Marcus Svedberg, chief economist at Nordic fund manager East Capital.

The poster child for the private-equity push is Skype, the Internet phone-call phenomenon. Draper Fisher, a venture-capital firm, made a 100-fold return on its investment in Skype when it was sold to online auctioneer eBay Inc. for $2.6 billion in 2005. Skype allows users to make unlimited free calls over the Internet to anywhere in the world. The company, which has its main office in the Estonian capital of Tallinn, was founded by a pair of Swedes, but the software was developed by Estonians.

Now Blackstone Group, one of the world's largest private-equity funds, has been chosen as a strategic partner for the $575 million management buyout of Latvian information-technology and telecommunications company SIA Lattelecom Group. Blackstone is to invest $178 million for a 51% stake in Lattelecom, which is majority-owned by the government.

While Blackstone has no plans to set up shop in Latvia or set aside regional allocation, the group said it would look at individual deals in the area on merit.

"This is our first foray into the Baltics. The deal's been approved by the legislature, but it's not closed yet because we need regulatory approval," a Blackstone spokesman said. "All our funds are global. We have no specific sector allocation or a regional one, and we will invest in the region again if we think we can add value."

Lots of other big private-equity players are also testing the waters. Carlyle Group is scouting for opportunities in the Baltics and throughout Central and Eastern Europe from its new office in Warsaw. AIG Global Investments is trawling the same ground for its 523 million euro ($738 million) New Europe fund.

But the region remains the preserve of small domestic funds and midmarket regional players such as Advent International, Argus Capital, Enterprise Investors and Mid Europa Partners, which have established relationships with local financial institutions for sourcing and executing deals as well as for co-investment opportunities.

Craig Butcher, a founding partner at Mid Europa, said: "You have to be opportunistic because these are smaller markets than we prefer. Lithuania has four million people, Latvia 2.3 million and Estonia 1.3 million."

Mid Europa has made two investments: Latvia and Lithuania mobile operator UAB Bite Lietuva, in February, and Baltic Rail Services in 2002, sold this year for a profit of 38 million euros. The 450 million euro acquisition of Bite ranked as the largest buyout in the Baltics and among the largest in central Europe.

The firm has raised more than 1 billion euros for buyouts in central Europe, a record for the region.

Mr. Butcher says the pipeline for investments of between 50 million euros and 200 million euros in equity remains strong. He said: "We have a large pipeline of deals in various things in the Baltics, which may or may not come to something. We are looking at consumer lending, transportation and infrastructure, retail, telecoms and broadcasting."

Private-equity firm BaltCap, which has offices in all three countries, is raising a 100 million euro fund, having made three investments from a 50 million euro fund raised in 2001.

"The Blackstone deal is significant because these funds have been overlooking us," said BaltCap managing partner Peeter Saks. "Each country is tiny on its own but together we are the size of Sweden, and the three states are homogeneous, especially for certain sectors such as telecoms and mobiles."

BaltCap looks for investments of between 5 million euros and 15 million euros. In June, the firm sold its minority position in mobile virtual-network operator Zetcom to the telecom unit of Latvijas Energoceltnieks, for an undisclosed amount. It also recently exited a position in Baltic office-supplies company UAB Daily Service for a 35% return.

While secondary placements are the favored option for exits, Mr. Saks said liquidity on the regional OMX exchange was also attractive for initial public offerings.

Alta Capital, an Estonian firm, is expanding with investments in food and fashion. It controls a growing range of fashion and lingerie brand names in the Baltics and has acquired a Latvian construction company and biofuel developer.

The firm, which has offices in the Baltic capitals of Riga, Tallinn and Vilnius, was set up in 2001 by former investment bankers. Alta founder Indrek Rahumaa said the fund had no specific investment horizon, which allowed his team to manage investments with a long-term view to operational development.

Mr. Rahumaa said Alta was building a portfolio of regional companies capable of operating in the three states and the Polish market.

"We believe transforming local players into regional companies decreases the operational, sales and marketing pressures that smaller companies are facing due to the increased proportion of chain retailers and their bargaining power," he said.

Alta has also moved into real estate and energy and owns Alta Real Estate Partners and Latvijas Energoceltnieks, which is involved in energy and telecommunication infrastructure projects.

Monday, 8 October 2007

Future is not Orange for Ukraine’s elections

Financial News

By Jason Corcoran

08 Oct 2007

Letter from Kiev

Any signs of Ukraine’s Orange Revolution have long since been pulped away, judging by voter apathy and widespread cynicism on the streets of Kiev last week.

A local newspaper said the three leading political forces could bring up to half a million people to the city’s main square on polling day to protest or protect the results of the country’s fourth election in three years.

However, political demonstrators, in their distinctive orange and blue colours, were far outnumbered by shoppers, buskers and visitors enjoying the weather. Instead of banging on the gates of power, the city’s youth were marching to Dynamo Kiev’s stadium to watch their team play FC Naftovyk.

Local sources suggested protesters from the Orange block and the pro-Russian Party of the Regions were being paid up to $25 a day to hold up flags and shout slogans – a far cry from the heady days of 2004 when hundreds of thousands took to the streets in nightly protests, dubbed the Orange Revolution.

The popular pro-democratic movement swept pro-western reformists Viktor Yushchenko and Yulia Tymoshenko into power and deposed the Kremlin’s Viktor Yanukovich. A year later, Yanukovich was back as Prime Minister after winning the country’s first free parliamentary elections. The three main protagonists have since engaged in a power struggle, which has eroded public confidence in politicians.

Perhaps the most remarkable aspect of life in Ukraine in the past three years has been the surge in the economy’s progress. While the indices of Russia’s stock exchanges appear wedded to whether President Vladimir Putin stays or goes, Ukraine’s markets have powered on, regardless of the vacuum at the top.

PFTS, Ukraine’s stock exchange, was the world’s best-performing index in the first six months this year, with a gain of 100%, according to Bank of America research.

Consumer demand led to GDP growth of 7.1% last year and predictions of 4.5% for this year, according to the International Monetary Fund. The inflow of foreign direct investment has jumped to €4.1bn against €1.3bn in 2003. Credit rating agency Fitch last week cited rising incomes, fast-growing bank credit and high steel prices as supporting ratings in a time of political uncertainty.

Germany’s Commerzbank, France’s Crédit Agricole and Austria’s Raiffeisen have piled into the growing retail banking market though mergers and acquisitions. But their investment banking counterparts have been less keen.

Credit Suisse opened a representative office in April while Russia’s Renaissance Capital has a full-service operation, competing with domestic market leaders Dragon Capital and Concorde.

Initial public offering activity has risen since 2004 with more than a dozen companies selling shares at home and abroad and a further 30 are in the queue. Firms wanting to list have several options. London is favourite while Russian exchanges RTS and Micex are increasing their efforts to win business.

A tug of war between Kiev and Moscow is nothing new since Ukraine gained independence from the Soviet Union. Ukraine’s sometimes fractious relationship with Russia was highlighted last week when energy group Gazprom again threatened to cut off gas supplies. A stand-off last winter led to supply cuts and accusations that Russia was using energy as a political weapon.

The country’s new leadership will have to resolve that dispute as well as the regional and linguistic differences between the Ukrainian-speaking west and the eastern and southern regions, where Russian predominates.

With the Yushchenko and Tymoshenko double act looking set to return to power, Ukrainians might be advised to take a shot of Russian vodka with their orange juice.


Tuesday, 2 October 2007

Supporters of losing party in Ukraine polls settle in for long protest

Business New Europe

Jason Corcoran in Kyiv

Supporters of Prime Minister Viktor Yanukovych are bedding down with the Communist party on the streets of Kyiv in anticipation of challenging the official result if the Orange bloc is confirmed as the ultimate winners in Ukraine's parliamentary elections.

Activists from Yanukovych's pro-Russian Party of the Regions were joined Sunday, September 30 at their encampment in front of the Central Electoral Commission on Lesi Ukrainky Prospect by Communist tents bearing red hammer-and-sickle flags. However, Vladimir Shapoval, head of the Central Electoral Commission, told journalists Monday at a press conference that the results so far were valid. "The figures have not yet been finalised, but the trend is obvious," he said.

Even so, Shapoval and his team will have their work cut out convincing Yanukovych's supporters camped outside his office that everything is above board.

Anton Dimoglo, a Party of the Regions member from Zapoloznie near Crimea, said: "If the Commission does its job, then we will have no complaints and we will go home. If it gets it wrong and doesn't perform its duties according to law, then our little city will grow and we will tell the world what a crime has been committed."

Not-so happy campers

Dimoglo, a maths student, and his friend Anton Zapadnuk, have been camped outside the commission along with 150 others for the past two weeks. On Sunday night, they were joined by a further 50 from the Communist party. Sources in Kyiv claim protesters from the Party of the Regions were being paid $10-$25 a day, but Dimoglo denied he was on any payroll. "Some parties are paying protesters to demonstrate at rallies but we are doing it to win the hearts of minds of our countrymen," he says.

Many of the city's natives are pessimistic and jaded by Ukraine's fourth election in three years. Sergey Mazerov, an agent from Kievlet.com, is predicting a hung parliament will emerge once the results are tallied. Mazerov spent many nights on Kyiv's Maidan Square, since renamed Independence square, during the 2004 Orange Revolution. "The parties are already saying they will dispute the results if their side loses, it will be just like the (2006) election," says Mazerov, who has become disenchanted with the political process since the heady days three years ago.

The local Delo newspaper said the three leading political forces could bring up to half a million onto the Maidan on election day to protest or protect the election results. However, political demonstrators in their distinctive orange and blue colours were far outnumbered by shoppers, buskers and people enjoying Kyiv's Indian summer.

Victor Semyevich, a 70-year-old standing in the street offering passers-by the chance to use his weighing scales, says all the politicians have betrayed the country's elderly by not doing enough to improve social benefits. He earns a pension of about €75 a month, and says he needs to travel to the city most days "to earn bread."

"There's no money for anything else like clothes or chocolates, and medicine is expensive," he says.

Alexander Kniaziev, a 22-year banking graduate and Kyiv native, said that in Soviet times you could live for a month on RUB100 ($4), but that now you could not live even on UAH3000 a month, which is about $600. The average salary in Ukraine is now $280.

On Saturday night, Kyiv's youth seemed more interested in their football team Dinamo's prospects against Naftovyk. "Football is a game, a life, a real emotion. The elections mean nothing to me. I don't want to want to vote and I don't think politics can change the game," says Kniaziev.

A football ticket costs UAH10, so attending a game at Lobanovsky stadium is one of the few affordable pursuits in a booming city fast resembling Prague for its numerous Western high-street outlets and growing number of English stag parties.

In a prediction of Dinamo's chances against bottom-of-the-league Naftovyk, Kniaziev forecast a 3-0 victory for the home side. They lost 1-0. His prediction for the elections: "One for the blue [Party of the Regions] and one for the Orange." A score draw could yet come true.


Speculation mounts about Putin’s successor

Financial News

Jason Corcoran

01 Oct 2007

Letter from Moscow
Huge billboards bearing the slogan “Putin’s Plan – Russia’s Victory” against the background of the Russian flag have been sprouting up all over Moscow during the past month.

While the signs do not carry the slogan of any political group, they are believed be a subliminal message from the United Russia party, a strong backer of President Vladimir Putin.

The mystery behind the advertising campaign has tickled the curiosity of Russia’s blogosphere. One blogger thought it referred to Putin’s involvement in Sochi’s winning bid for the 2014 Winter Olympics; another said it hinted at Putin’s secret blueprint for reforming the former USSR; it reminded another user of slogans from Brezhnev’s Soviet era.

Whatever the message’s meaning, it is clear the Kremlin is in election mode and gearing up for the parliamentary contest on December 2 and the presidential elections in March.

Putin last week appointed a new cabinet charged with preparing the country for election. There was no purge of cabinet members – only three ministers made way for new blood. Economics Minister German Gref, who had indicated his wish to move into the private sector, was replaced by his former deputy Elvira Nabiullina.

The criticised Minister for Health Mikhail Zurabov was replaced by former Deputy Finance Minister Tatiana Golikova, while Regional Development Minister Vladimir Yakovlev made way for Putin ally Dmitry Kozak.

Ministers believed to be on shaky ground, including Deputy Prime Minister Dmitry Medvedev and Finance Minister Alexei Kudrin, retained their roles, with the latter promoted to rank of Deputy Prime Minister.

Kudrin, a liberal economic reformer, is the biggest winner in the reshuffle. One of his main tasks is to structure the growing stabilisation fund. Both he and Gref clashed with Putin this year about how Russia should spend its oil wealth.

The two have been pushing for the creation of a reserve fund similar to Norway’s state pension fund with a mandate to invest in foreign securities. Putin raised the prospect of using the windfall to support ailing domestic blue-chip companies, a move that analysts said could lead to the economy overheating.

Gref – an outspoken critic of the state champion energy model – might have been squeezed out for failing to secure Russia’s membership of the World Trade Organisation.

Moscow’s investors agree the changes strengthened the hand of the cabinet’s reform faction in spite of Gref’s departure.

The new cabinet is also striking for its number of family ties. Prime Minister Zubkov is the Defence Minister’s father-in-law, the new Energy Minister Golikova is the Health Minister’s husband, and the Justice Minister’s son is married to the deputy Kremlin chief of staff’s daughter.

The naming of new government comes a week after Viktor Zubkov, an obscure technocrat who had overseen money laundering investigation, became Prime Minister in a move that surprised most Kremlinologists and stoked speculation about Putin’s successor.

Putin, himself plucked from obscurity by former President Boris Yeltsin, suggested Zubkov could be a contender to take over when he steps down. Zubkov, a one-time farmer in a St Petersburg collective, has been playing up his chances of taking the top job just two weeks into his premiership.

Analysts say the reshuffle has also thrust Development Minister Kozak into the limelight as a potential contender with front-runners Deputy Prime Minister Sergei Ivanov and Medvedev.

Ultimately, the political changes did nothing to dent investor sentiment and much to increase confusion about who will follow Putin as President.


Macquarie and Rencap name joint venture leaders

Financial News
Jason Corcoran in Moscow
01 Oct 2007

Investment banks Macquarie and Renaissance Capital have appointed Igor Yurgens and Paulo Almeida to run their new Russian infrastructure joint venture.

Yurgens and Almeida, as chairman and chief executive respectively, will lead a Moscow-based team developing infrastructure advisory and fund management opportunities in Russia and the CIS countries.

As Renaissance’s head of Government affairs, Yurgens is responsible for relations with the Kremlin and Government institutions, which will be key if the venture is to take part in the anticipated boom in pubic/private partnership projects for infrastructure. Almeida is an associate director at Macquarie in London.

A team of 10 has been seconded to the new venture, Macquarie Renaissance, although that figure could double as investment grows.

Chris Baxter, Renaissance senior partner and Macquarie’s head of infrastructure advisory for Europe, will be closely involved and sector-specific experts from Macquarie’s London office may also be drafted in. It is estimated that up to $200bn will be spent on Russia’s creaking infrastructure in the next five years, excluding the oil and gas sector.

Bankers representing the joint venture are believed to be talking to Western institutions about investing in a new Russian-dedicated infrastructure fund. Some of the world’s biggest pension schemes, including the Canada Pension Plan Investment Board and the Netherlands ABP, are investors in Macquarie’s European fund.

Bob Foresman, deputy chairman of Renaissance Capital, said: “The joint venture is working on several opportunities and we plan to close some acquisitions in the coming months. We are obviously interested in new projects, such as the tunnel under the Neva river in Saint Petersburg.

“Russia is in dire need of transport and energy infrastructure and the private sector must collaborate with the public sector to help overcome this need.”


Russian airline unveils Moscow to Dublin route

Irish Independent

Friday September 28 2007

Jason Corcoran in Moscow

RUSSIAN airline S7 is to launch a route from Moscow to Dublin from April next year in response to growing demand from tourists and businessmen in both countries.

The airline, formerly Siberian Airlines, will fly three times a week from Moscow's Domodevo Airport to Dublin Airport.

Economy fares will be pitched at about €250 return plus taxes, while business class passengers will be charged €1,000 for the four-hour flight.

Dimitry Chukseyev, S7 corporate communications manager in Moscow, said their research indicated the service could initially attract a 70pc load factor on their 170-seater Airbus 319.

He said: "It's an obvious gap in the market because no one else is flying direct between the two cities. Russians are travelling everywhere throughout Europe after decades of having to stay at home. Their incomes have shot up and they want to see the green grass and taste the real Guinness.

"Irish businessmen in Moscow are grateful because they won't have to face hours waiting in Heathrow for a connection home any more."

A Russian-Irish airline Skynet was set up in 2001 to fly from Dublin to Moscow via Amsterdam. The service was under a code-sharing agreement with Russian state airline Aeroflot, but trading was suspended due to financial difficulties.

S7, Russia 's second largest airline in terms of passenger numbers, has grown from a regional to a federal air carrier, serving 150 domestic destinations and a growing list of international airports. The Russian state owns a 25pc stake.

The airline is believed to be in the early stages of talks with Aer Lingus about a possible partnership whereby their passengers could connect to US routes cheaply.