Banks return for IPO revolution

Financial News

Jason Corcoran in Moscow

18 Dec 2006


Investment bankers still have nightmares about the 1998 Russian financial crisis when the rouble collapsed, the fledgling stock market crashed and the government defaulted on its bonds.

The resulting meltdown saw most bulge-bracket banks fleeing to Moscow’s Sheremetyevo Airport. Eight years on they are coming back, tempted by an explosion in initial public offerings, loans and bond issues.

Goldman Sachs is hiring at least 60 people for its third attempt to crack Russia and Lehman Brothers is recruiting heavily, having returned following an eight-year hiatus.

ABN Amro Rothschild has opened a Moscow office while Morgan Stanley, Dresdner Kleinwort, Merrill Lynch and Credit Suisse are expanding operations.

Andrea Williams, a headhunter at executive search firm JBS Associates, said: “The demand for talent among banks in Moscow is massive. They are looking at expats, returning nationals and are trying to lure people from London, New York, Frankfurt and Paris.”

Deutsche Bank was one of the few international banks to remain active in Moscow after the 1998 crisis. Charlie Ryan, its chief executive in Russia, distinguishes the bank from its rivals as an institution willing to take a leap of faith and view the country as a place to find clients, rather than a place to do the occasional deal.

Ryan, an American, arrived in Russia in 1991 to work for the European Bank for Reconstruction and Development and has seen banks come and go. He said: “Competition will be healthy for the market and hopefully they will stay this time. In the past, they have viewed it opportunistically. The reality they will all discover is that the Russian investment banking business is not a get-rich-quick scheme.”

The banks are pressing on with expansion, despite difficulties doing business in Russia, notably potential political risks and organised crime. Russia’s deputy central banking chief Andrei Kozlov, who was leading a crusade to clean up the murky financial sector, was shot dead in a gangland hit in September.

The boom in IPOs may indicate companies are concerned stock prices could fall amid political uncertainty as President Vladimir Putin prepares to step down in 2008, according to Citigroup analysts.

Citigroup estimates 48 Russian companies will raise about $38bn (€29bn) in share offerings this year and next, six times more than was sold over the previous decade. In many cases, owners are selling shares and moving the money offshore, Citigroup said.

Al Breach, chief strategist with UBS in Moscow, said the good times are dependent on the continuing petroleum boom, but he believes economic fundamentals are much better than in 1998.

Breach said: “There are risks and the return of the investment banks is conditional on the economy and the oil price not plummeting. The economy in 1998 was built on credit but people are gaining assets abroad now and they are not as vulnerable to a credit crunch.”

Eric Kraus, head of the Moscow-based Nikitsky Russia fund, believes the country is the most accessible of the so-called Bric markets – Brazil, Russia, India, China. He said the market has overpriced the risk from regime change.

“The wheels are not going to fall off the gravy train this time. Russia has the third-largest forex position and $80bn in its stabilisation fund. Oil prices could hit zero for three years and the budget could still be balanced,” he said.