Deutsche Bank rakes in the roubles from Russia

Financial News

Jason Corcoran in Moscow

December 11 2006

Ownership of UFG pays dividends

Deutsche Bank’s status as adviser to gas group Gazprom and its close relationships with other state-controlled Russian monopolies is the envy of Moscow’s investment banking community. Its decision to take full ownership of the Russian investment bank UFG in February has only cemented its commitment to the country.

The move seems to be paying off with Deutsche powering ahead this year in mergers and acquisitions, equity capital markets and debt financing despite several staff departures.

Deutsche, which employs more than 700 people in Moscow, has had ties with Russia since its financing of a natural gas pipeline in the 1970s during Leonid Brezhnev’s leadership.

Charlie Ryan, chief country officer and chief executive of Deutsche Bank in Russia and founder of UFG, said: “I think this clear and strong bond between Germany and Russia is a positive. The more we can integrate Russia economically with the west, the safer the world’s going to be. I think we are doing God’s work there.”

Western investors have criticised Deutsche and other banks for helping the Kremlin to regain control of Russia’s natural resources, but this has not daunted Deutsche’s Moscow management.

The bank’s recent work with national champions Gazprom and Rosneft has put it under the spotlight. The bank advised Gazprom on its bid to buy Yuganskneftegas, the main production asset of the beleaguered Yukos oil company, as well as two privately owned oil groups Surgutneftegaz and Sibneft, acquired from oligarch Roman Abramovich.

In the case of Yuganskneftegas, Deutsche wanted to help fund Gazprom’s plans for a $10bn bid (€7.7bn) for the Yukos subsidiary but a Texas bankruptcy court judge granted an injunction barring Gazprom and its lenders from taking part.

Rosneft, the state-owned oil company, ultimately took control of Yuganskneftegas, which led to the end of merger talks between Rosneft and Gazprom. Deutsche now finds itself in the middle of a battle for the remaining assets of Yukos, which include two oil production units and five refineries.

Ryan hopes Deutsche can service both companies, although his team was not selected to join a syndicate of six banks putting together a $24.5bn loan for Rosneft to acquire the remainder of Yukos. He said: “Rosneft and Gazprom are clients and we definitely work for both companies but we have a rigorous system for managing conflicts. The fact we can be relevant and offer services and work on deals for Gazprom and Rosneft is the reason we are so happy with the merger.”

However, analysts believe UFG has lost its cachet as one of the few remaining Russian independent banks after the Deutsche move. A Moscow banker said: “UFG gained a balance sheet but it gave up its independence for a huge bureaucracy, which hasn’t played well with some clients.”

A former UFG employee said: “They are doing more blue chips now and have Deutsche’s debt capability but Troika and Renaissance would be seen as sexier brokers.” Last week, Troika hired Goldman Sachs to advise it on a possible IPO.

Ryan, an American, first arrived in Russia in 1991 to work for the European Bank for Reconstruction and Development in St Petersburg. His job assisting the country’s privatisation programme brought him into contact with reformers, including Vladimir Putin, then deputy mayor of St Petersburg.

Ryan set up UFG with Boris Fedorov, finance minister under Boris Yeltsin, in 1994. Fedorov, who left UFG shortly before the merger, is a director of Gazprom, the state savings bank Sberbank and sat on the board of the electricity monopoly, Unified Energy Systems.

UFG prospered after the 1998 financial crises, which sent most US investment bankers scampering home. It made its mark by helping foreign investors get round restrictions on foreign ownership of local shares in Gazprom.

The success of the initiative meant that at one stage Gazprom represented as much as 25% of UFG’s business. By 2002, UFG needed access to a global bank’s capital and products to serve its blue-chip clients so Ryan started talking to western banks about a tie-up.

Ryan said: “We were clearly becoming less relevant to companies like Gazprom. It was impossible for the likes of UFG, Troika and Rencap to be relevant to a company of that size.”

Deutsche Bank acquired a 40% stake in UFG in 2004 and bought the rest this year for an estimated aggregate price of $700m. The completion of the merger led to the departure of executives, including Christopher Granville, UFG’s chief strategist, Derek Weaving, head of utilities research, Paul Swigart, head of the international sales team, and equity salesman Mike Stein.

Competition in Moscow is set to intensify. US banks Goldman Sachs and Lehman Brothers plan to return but Ryan is not quaking in his boots. He said: “It will be healthy for the market and hopefully we will stay this time. In the past, they have viewed it opportunistically. The reality they will discover is the Russian investment banking business is not a get-rich-quick scheme.”

He plans to develop Deutsche’s derivatives platform and expand DWS, its private banking operation and retail fund management business. Ryan claims the revenues Deutsche generates from Russia are larger than any other investment bank, although Frankfurt will not allow him to disclose any figures.

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