Sistema CEO lays out global expansion plans

Business New Europe

Jason Corcoran in Moscow

January 29, 2008




Sistema's president and CEO, Alexander Goncharuk, is not easily rattled by corporate brinkmanship or pressure-cooker situations in the boardroom. A naval man from Sevastopol, the home port of Russia's Black Sea Fleet, Goncharuk was once an officer on a nuclear submarine, spending 260 days a year at sea. That experience has helped him in his current role heading up Russia's largest private sector consumer services company with a flotilla of subsidiaries involved in telecommunications, tourism, property development, banking, retail, IT and healthcare.

"I had to solve unique tasks in the underwater conditions of the submarine. In submarines, you are always at a level of danger because you are 200 metres underwater with nuclear weapons for company," Goncharuk told bne in an interview. "That experience was a great practice for your nerves; you can sustain uncomfortable situations for a long time and are not afraid of challenging tasks."

In 1991, Goncharuk resigned from the Navy with a huge tinge of regret after the dissolution of the USSR led to its neglect. "I was a very successful officer and for me, leaving the navy was very much of a tragedy. But one has to continue to live. That's when my second life started," he says. Goncharuk went into business in 1991, joining a wholesale trading company and later worked in a Sistema division, joining the board in 1996. He has been president of Sistema since February 2006 and its chief executive officer since 2006.

Sistema's plush headquarters are located next to the National hotel at 13 Mokhovaya Street, which was the US embassy until 1950. Goncharuk's own room has a bird's eye view of the Kremlin and one of his desks features framed photographs of leading politicians, including one of him shaking hands with Dmitry Medvedev, first deputy prime minister, at Sitronics' office in Leningrad. Medvedev's photo was moved from the back row to a more a prominent position at the front when President Vladimir Putin named him as his favoured successor. Goncharuk respects what Putin has done for the country and voted for his United Russia party in the recent parliamentary elections.

He says Putin's administration has recently been very supportive of the group's overseas expansion. In January, Sistema announced its Indian telecom firm Shyam had been granted licenses to provide nationwide mobile services in India, the world's fastest-growing market. Goncharuk said the government had helped broker the deal and is actively supporting the creation of Russian transnational champions. "Of course, we got support from the Russian government, especially during the governmental meetings between Russia and India," he says. "The government sent us a message that they will support the creation of transnational corporations and nothing else could help us better than the support of our own government."

In December, Sistema also received approval from India's Foreign Investment Promotion Board to increase its stake in Shyam to 51% from 10%, with an option to raise it to 74%. Goncharuk said Sistema would invest $4bn-7bn in building a national Indian mobile network to compete with the UK's Vodafone, which spent $11bn last year to take a controlling stake in Hutchison Essar. Sistema will resist calls made by Shyam's minority shareholders at December's annual meeting for an IPO or to buy them out. "We explained to [shareholders], 'please be patient and let us invest and develop the company and you will be co-owners of the company that you couldn't even dream of,'" Goncharuk says. "An IPO would put obstacles in our way, but we openly explained that we want to build it into a national player within five years and everybody will be happy."

Acquisitions

Global expansion is the core strategy for Sistema, which owns Russia 's biggest mobile phone operator MTS, along with fixed-line operators Comstar and MGTS. Its fastest growing business is Sitronics, the technology systems business where Goncharuk grew revenues tenfold in three years before taking over as Sistema's president.

The group is now scouting for M&A opportunities in developed markets despite the German government scuppering talks about an asset swap with Deutsche Telekom in 2006. "We are looking at companies as acquisitions and not particular markets. With the existing technologies, I would not advise anybody to build a new mobile telecommunications network in Germany, for example," says Goncharuk. "On the other hand, there are successful examples of small local discounters in developed markets: E-Plus in Germany and Tele2 in Russia."

Sistema's main revenue driver MTS is the largest mobile phone operator in Russia and the CIS. Together with its subsidiaries, the company serves over 79m subscribers in Russia, Ukraine, Uzbekistan, Armenia, Belarus and Turkmenistan. Goncharuk said expansion abroad was not a hedge against saturated home markets. "Two years ago, analysts said average revenue per user would stagnate in Russia, but I said there would be at least five years growth and it's still growing because of the additional services and the fact people are talking more."

Convergence between fixed and mobile telecommunications is set to be a big play for the group. TS Retail, a unit of MTS, opened nine Tochka branded stores in December offering retail products and services of MTS, Sky Link, MTT, Moscow City Telephone Network, Comstar Direct, Sistema Mass Media, MBRD, Intourist and other firms. The Tochka stores were opened in Moscow, St Petersburg, Samara, Novosibirsk and Yekaterinburg, with more planned for Vladivostok and Kursk. TS Retail plans to open about 2,500-3,000 stores in Russia and other CIS countries where MTS has a presence.

With the belated introduction of Blackberry services to Russia, Goncharuk envisages personal digital assistants (PDAs) taking off as restrictions on such devices are eased. "PDAs are important because they are important in the global market. We are looking at PDAs and other assistants from the point of view of operators. Of course, it would be more exciting if we would start their production but that's in the future."

Sistema's main shareholder is Vladimir Yevtushenkov with 62.1%, who is also its founder and board chairman. Yevtushenkov is the only top-20 oligarch in Russia without ties to the country's natural resources and the company's squeaky clean reputation has helped with tapping international capital markets. "Borrowing money costs for us less on average than for other Russian companies because we are transparent for investors. And of course we value very much our reputation for corporate governance," Goncharuk says.

Sistema has sold shares in four of its subsidiaries: mobile operator MTS (in which it retains a 53% stake); fixed-line telecom firm Comstar (59% retained stake); property arm Sistema Hals (80%); and technology company Sitronics (85%). Goncharuk says the group will consider IPOs of its non-listed companies, such as Moscow Bank for Reconstruction & Development and Detsky Mir, when they increase sufficiently in value.

A merger of its fixed and mobile operators is also on the cards. "Merging Comstar and MTS is something that we are looking at and might be inevitable, but it's for the midterm," he says

New tougher listing requirements for foreign companies on the London Stock Exchange won't present a problem for Sistema, according to Goncharuk. "We already have five listed companies, and we listed MTS and VimpelCom in New York and they have stricter regulations under Sarbanes Oxley. Anyone who has lived under Sarbanes Oxley is prepared for London's new regime."


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Emerging markets: International firms march east

Financial News - Private Equity News

28 January 2008


Deal sizes have trebled in two years, whetting large firms’ appetite for Russia, writes Jason Corcoran in Moscow

Private equity in Russia and eastern Europe has long been dominated by local investors who have been around for more than a decade, but last year the big game international firms arrived.


US firm TPG Capital will be the first global buyout group to do a big deal in Russia if it can conclude its $1.4bn (€940m) bid for supermarket chain Seventh Continent.

TPG, which has recruited Goldman Sachs Private Equity to help with financing, is expected to improve its offer after being knocked back by the chain’s main shareholder in December. The deal is led by TPG partner Stephen Peel, previously vice-president in charge of German investments at Goldman Sachs.

CVC Capital Partners, Apax, 3i and Permira are also trying to line up direct investments in Russia, according to Moscow bankers.

Even Carlyle Group, which closed its Moscow operation in 2005 after several unsuccessful attempts to invest, is said to be weighing up a return.

The volume of Russian private equity in Russian mergers and acquisitions more than doubled to $5bn last year, according to consultancy KPMG. While the country’s share of overall M&A is low at 4.5%, KPGM believes it could reach between 8% and 10% over the next few years.

According to the Russian Association of Venture Investment, the average size of the transactions involving buyouts has trebled to $26m in 2007 from $8m in 2005. It forecast that the average-sized of deals could reach $50m this year.

Javier Ferrán, a partner at London-based Lion Capital, expects Russia’s consumer boom to attract more big buyouts. He said: “There is a lot of excitement in retail, with TPG and other big funds circling. Russian funds, such as Baring Vostok, are increasing their firepower and we are seeing wealthy oligarchs creating private equity-style funds to invest on a case-by-case basis.”

Last year heralded Russia’s first leverage buyout deal, when Lion Capital acquired fruit juice maker Nidan Soki in a deal valuing the company at $500m. Goldman Sachs, which is understood to have made several direct investments in Russia, advised Lion and provided financing.

Baring Vostok Capital Partners, Russia’s largest and most established private equity investor, set a record when it raised a $1bn fund in March. It also raised an additional sidecar fund with $450m in total capital commitments.

Mike Calvey, co-managing partner of Baring Vostok, said: “Russia and the Commonwealth of Independent States remain challenging markets in many respects, but the returns on investments are very attractive and compare favourably with most other countries or regions.”

Russian pioneer Delta Private is expected to start another Russia fund shortly while former investment bankers have also been active in private equity.

Ilya Sherbovich, head of Russian investment banking at Deutsche Bank, launched boutique United Capital Partners ahead of his departure later this year. Former Deutsche staff have been hired and investments have been made.

Marshall Capital Partners, headed by Konstantin Malofeev, has made three investments from its $500m fund in a baby food producer, a hotel developer and a wireless content provider.

Javier Ferran of Lion Capital has been travelling to Russia since 1993 and believes the climate has never been better for buyouts.

He said: “Consumer goods are the safest bet and the hottest sector.

“There are available managers who have 15 years’ experience in multinationals, there is political stability and the appearance of a middle class.”

Russian wealth manager head leaves Deutsche Bank

Financial News

Jason Corcoran in Moscow
28 January 2008


Claus Korner, head of Deutsche Bank’s wealth management business in Russia, has left for Icelandic banking group Glitnir.

Korner, head of Deutsche Bank’s private wealth management since 2004, has been working in Russia and eastern European private banking and asset management since 1992.

He was a pioneer at Deutsche in attracting clients worth more than $1bn and proving wealthy Russians are prepared to invest their money onshore. Private banking group UBS and Credit Suisse have followed in Deutsche’s wake and set up operations in Moscow.

Other senior Deutsche staff in Moscow have resigned in the past year as the market for top Moscow bankers has become more competitive.

Russian rainmaker Nick Jordan left for Lehman Brothers and his investment banking co-head Ilya Sherbovich is leaving soon to start a boutique.

Glitnir, which is setting up corporate finance, brokerage and asset management in Moscow, is recruiting eight sales and marketing staff to its wealth management team, in addition to its four advisers.

Erkin Nusurov, former managing director for investments at Austria’s Raiffeisen Asset Management, has also joined as chief investment officer.

Raimo Valo, head of investment management for Russia, said Glitnir’s threshold for wealth clients will be about a third of its rivals.

Glitnir last year acquired Finland’s FIM Asset Management, which has a record of investing in Russia since 1997.

The group last year launched three rouble-denominated mutual funds – FIM Russian Equities, FIM Russian Portfolio and FIM Russian Bonds – which closely match other funds that invest in Russia.

Glitnir’s large and small-cap Russian funds have more than €500m ($733.79m) under management. As the Nordic region’s third-largest broker, Glitnir manages more than €8.5bn in assets under management in 46 funds.

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Putin puts Russian sovereign wealth fund back on agenda

Financial News

Jason Corcoran in Moscow

21 January 2008

Analysts hope the vision of a Norwegian-style investment strategy will prevail
Plans are back on track to spin off a sovereign wealth fund from Russia’s $150bn (€101bn) oil reserves to invest in foreign stocks and bonds after President Vladimir Putin’s decision to nominate a successor, according to Moscow analysts.

The aim of Finance Minister Alexei Kudrin to set up a Norwegian-style future generations fund next month looked uncertain when Sergei Storchak, the minister responsible at the Stabilisation Fund, was arrested on charges of embezzlement, which he denies.

Concerns emerged after an Israeli fund manger said Kremlin officials had given him the go-ahead to conduct a “velvet reprivatisation” in strategic industries and suggestions the fund should pay off oil group Rosneft’s debt.

But Kudrin was bolstered last month when Putin nominated Dmitry Medvedev, a liberal reformer close to Kudrin, as his favoured presidential successor.

Yaroslav Lissovolik, chief economist of Deutsche Bank in Russia, said: “The Stabilisation Fund is the anchor of Russian macroeconomic policy. There has been some disagreement about its future but the changes in the top echelons of government have given me added conviction the Minister of Finance’s vision will prevail.”

The Stabilisation Fund will be divided into the Reserve and National Prosperity funds from February 1. The Reserve Fund, expected to total 10% of Russia’s GDP, will perform a similar role to the Stabilisation Fund, cushioning the federal budget in the event of an oil price plunge.

Oil and gas revenues above this limit will supplement budget spending and will go to the National Prosperity Fund, which could be seeded with between $25bn and $30bn.

This month the Finance Ministry said the Reserve Fund would follow the same investment rules as the Stabilisation Fund – with at least half going into developed countries’ sovereign bonds – but it is devising the Prosperity Fund’s investment strategy with other ministries and the central bank. While a detailed investment model has yet to be seen, finance ministry officials have indicated the fund will initially adopt a cautious approach.

A spokeswoman for the ministry said the fund would not immediately invest in foreign equity. She said: “The rules are not ready yet, due to a delay, but we will go ahead when they are.” She said the state prosecutors had extended the detention of Storchak until April 9.

Kudrin wants the investment structure of the Prosperity Fund to resemble Norway’s state pension fund, 60% of which is invested in stocks and 40% in bonds. He has suggested a special agency or a private asset management company might manage the fund’s assets.

The overhaul of the Stabilisation Fund has been a point of political contention and disagreement continues about how it should be used. Pressure has been increasing on Kudrin to loosen the purse strings ahead of the presidential elections but he has consistently voiced fears about irrational domestic spending, which could overheat the economy and further fuel inflation.

The Government wants to revitalise the country’s industrial base and diversify the economy from energy exports towards investing in high-technology projects. It has drawn $12.3bn from the Stabilisation Fund to seed investment in infrastructure projects and nanotechnology.

Funds from oil revenues have found their way into the Russian Venture Company, a state fund created in August to support start-ups. US venture capitalist group Draper Fisher Jurvetson, Russia’s VTB Asset Management and Israeli financial services group Tamir Fishman have entered into deals with the RVC. Under these arrangements, the firms will create a fund with their money and state money. By the end of next year, the RVC hopes to have alliances with between seven and nine more funds.

The RVC initiative suffered a setback when Tamir Fishman pulled out of the deal, following comments made by its Russian minority partner Oleg Shvartsman of fund manager Finans-Group. In an interview with Kommersant newspaper, Shvartsman said the Government had authorised him to acquire the assets of some firms and then give them to an asset management group on what he called “a voluntary-coercive basis”, which he described as “velvet reprivatisation”.

The Russians could learn from Azerbaijan how best to spend their oil riches. The former Soviet state set up the State Oil Fund of the Republic of Azerbaijan in 1999 to transfer the benefits of energy exports to future generations.

The fund’s assets are used to finance capital budget expenditure – particularly related to infrastructure – and projects aimed at stimulating small to medium enterprises, reducing poverty and addressing other social problems.

Its main source of revenue is income from oil contracts, including proceeds from the sale of profit oil, which account for about 75% of its annual revenues.

Katya Malofeeva, chief economist for Russia at Renaissance Capital, said: “So far, the inflow of oil revenues has been only a fraction of the expected total inflow as commercial oil only started flowing last year. The country expects to receive $150bn to $200bn in the next 20 years through existing projects.”

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Funds of funds struggle under weight of ambition

Financial News - Private Equity News


Investors fear rocketing fund sizes will cut outperformance, writes Jason Corcoran in Moscow

14 January 2008

Institutional investors are growing concerned about the swelling size of funds of private equity funds and whether they can maintain performance levels on investments.


During the past two years, private equity has attracted substantial interest from UK pension funds and the number of new mandates awarded by investment consultants has increased sixfold. While direct investments are becoming more popular, the majority of funds continue to favour the fund-of-funds route.

Jane Welsh, senior investment consultant at Watson Wyatt, said: “I don’t think there is a right limit but you have to wonder whether some of these very large funds of funds can continue to make the money work and generate outperformance to justify the extra layer of fees they charge.”

A recent report by Watson Wyatt identified private equity as the most expensive asset class, with managers’ fees ranging from 5.40% to 11.80% of investors’ returns; and fund of funds’ fees taking an extra cut of between 0.75% and 3.70%, depending on gross investment returns and fee structure. This means investors are paying a minimum of 6.15% a year for their investment to be managed – and anywhere up to 15.5%.

Sanjay Mistry, a principal at consultancy Mercer, feels returns by established fund of funds managers suggest they can identify those who outperform and justify these fees.

He said: “Returns from private equity have, in the past, been in excess of the quoted markets. However, the range of returns among managers varies enormously.

Through due diligence it is possible to select a fund of funds manager who will be able to identify private equity groups with the greatest expectation of being able to deliver returns above those available from the quoted market.”

The established funds of private equity funds attract the lion’s share of pension assets, according to data provider Thomson Financial. The top ten funds attracted more than $61bn of the $128bn raised by more than 150 firms in the past three years.

US fund-of-funds manager HarbourVest Partners tops the table, having attracted $11.6bn in its 12 funds. Adams Street Partners, Axa Private Equity and Goldman Sachs have all brought in in excess of $6bn each over the past three years.

Close to 40% of the $128bn is estimated to come directly from pension funds.

Welsh said there are only a finite number of top-tier underlying managers in the market to absorb new inflows.

“This poses the question whether funds of funds are putting more and more with the big groups such as Blackstone and if that is consistent with generating outperformance. If funds are diversifying, it may be at the expense of quality,” she added.

For venture capital, consultants prefer to see more underlying managers to hedge risk but they question the wisdom of having as many as 60 managers for plain vanilla funds of funds. “In many cases, it looks they are actually running a pure index fund,” said Welsh.

Sam Robinson, director of SVG Capital’s fund advisory business, said some funds of funds are exiting venture capital. He said: “Allocations will be immaterial in a large fund of funds. The exits are legitimate as long as it matches their funds’ strategies and investor expectations.”

With capacity becoming an issue, consultants anticipate funds of funds making more co-investments in companies in which private equity funds already invest. “The effect is that exposure is geared towards a particular investment and diversification is reduced,” said Mistry.

BlackRock Private Equity Partners, which manages $3bn of funds of private equity funds, overcomes potential scalability by using a “warehouse facility” whereby they can make investments at the same time as raising funds.

Roger Pett, head of investor relations for BlackRock Private Equity Partners, said: “We do it in parallel so we don’t have a massive overhang when the fund size is too big.”

Robinson said his firm has relieved overhang problems by creating two fund structures: plain vanilla funds of funds and the leveraged Diamond series of funds of funds.

Leveraged funds benefit from greater diversification and focus on relatively stable performers in the large and mid-market, while the plain vanilla funds offer greater exposure to venture and emerging capital.

Investors, including wealthy individuals and institutional pension funds, have committed €700m of private equity funds to SVG Diamond III, comprising a revolving credit facility or loan worth €420m and €280m of equity.

The Diamond III structure incorporates drawable equity, reinvestment and overcommitment strategies.

The fund has an overcommitment facility of up to 140%, which allows a target investment capacity of €980m.

The fund is focused predominantly on large and mid-market buyouts in Europe and the US and was 41% committed at closing last May, following the expected transfer of a portfolio of 17 funds, representing total commitments of €290m.

Robinson said: “The two programmes have raised nearly €3bn over the past six years and we have invested that without diluting returns.

“A firm’s investment capacity depends on the strategy of the products. I believe we could invest between €500m and €600m per year in vanilla funds of funds without diluting returns, but there is a limit. The leveraged funds we launched in 2004 offer more scalability, allowing us to grow while maintaining our discipline.”

Sistema views India as stepping stone in global telecoms push

Financial News

Jason Corcoran in Moscow

14 January 2008


Russia’s mergers and acquisitions activity has been dominated by the energy sector but a plan by conglomerate Sistema to invest up to $7bn (€4.8bn) creating an Indian mobile network is a sign the country’s M&A boom will be more broad-based this year.

Alexander Goncharuk, Sistema’s president and chief executive, said the company’s plans for India represent its first step in becoming a global telecoms group and follow Sistema’s acquisition of a controlling stake in Indian operator Shyam Telelink.

Goncharuk said the Russian Government had helped arrange the deal and was actively supporting the creation of Russian transnational champions. He added: “Of course, we got support from the Russian Government, particularly during the governmental meetings between Russia and India. It is a positive example that our Government finally starts to support domestic business.”

Sistema last month received approval from India’s Foreign Investment Promotion Board to increase its stake in Shyam from 10% to 51%, with an option to raise to 74%.

Goncharuk said Sistema would invest $4bn to $7bn in building a national Indian mobile network to compete with the UK’s Vodafone, which spent $11bn last year to take a controlling stake in Hutchison Essar, India’s fourth-largest mobile operator.

He said: “If you want to be an operator across India, the entry ticket is several billions – $1bn is not enough. That is the first step and our specialists estimate we will need between $4bn and $7bn to roll out a national network.”

Goncharuk said Sistema would resist calls to list the company made by Shyam’s minority shareholders at December’s annual meeting or buy them out.

Global expansion is Sistema’s main strategy. The group owns Russia’s biggest mobile phone operator MTS, with fixed operators Comstar and MGTS. It is scouting for M&A opportunities in developed markets, despite the German Government scuppering talks about an asset swap with Deutsche Telekom in 2006.

Goncharuk said: “We are looking at companies for acquisition and not at particular markets. With existing technologies, I would not advise anybody to build a new mobile telecommunications network in Germany, for example. On the other hand, there are successful examples of small local discounters in developed markets – ePlus in Germany and Tele2 in Russia.”

Sistema has sold shares in four subsidiaries: mobile operator MTS, in which it retains a 53% stake; fixed-line provider Comstar, with a 59% retained stake; property arm Sistema-Hals with 80% and technology company Sistronics with 85%.

Goncharuk said the group will consider listing its other companies, such as Moscow Bank for Reconstruction and Development and retailer Detsky Mir, when they increase in value. A merger of its fixed and mobile operators is also on the cards. He said: “Merging Comstar and MTS is something that we are looking at and might be inevitable but it is for the mid-term.”

Tougher listing requirements for foreign companies on the London Stock Exchange will not present a problem for Sistema, according to Goncharuk. He said. “We have five listed companies and we listed MTS and VimpelCom in New York and they have stricter regulations under the Sarbanes-Oxley Act. Anyone who has lived under Sarbanes-Oxley is prepared for London’s new regime.”

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Russians feel the chill wind of inflation

Financial News

Jason Corcoran
07 Jan 2008

Letter from Moscow
Long bread queues and rationing may be a thing of the past in Moscow but the rising price of the daily loaf is a concern for many during the long holiday season.

The Russian capital has been rated the world’s most expensive city by the Mercer Human Resources Consulting but a basic state pension of 1,260 roubles (€35) does not go far in any of the city’s new neon-lit shopping emporiums.

High international prices for crops have rippled through the supply chain since the summer, contributing to a rise in the retail price of basic foods.

Russia produces little of what it consumes. If consumers check food labels, they can see most of their fresh milk is from Finland while chocolate teacakes are imported from China.

Staple foodstuffs have been worst hit by price rises. For the first 10 months of last year, the price of bread went up 21.3%, the price of butter rose 32% and that of sunflower oil soared by 48%, according to official statistics.

Inflation was expected to reach 12% last year, four percentage points above the initial target. The central bank’s official inflation target for this year is between 6% and 7% but many analysts believe government spending promises on public salaries and infrastructure will keep inflation in double digits.

Rising inflation has led the government to freeze prices of bread, sunflower oil, eggs and yogurt until February 1, just before the presidential elections.

Moscow’s banking community is worried about domestic inflation and the impact of the US economic slowdown. Western investors have pulled billions of dollars from Russia and other emerging markets since last August to cover their global credit hits.

However, some analysts think Russia will escape the brunt of the global market turmoil, even if a slowdown leads to the price of oil nosediving to $50 a barrel.

Scares in the global banking system are pushing investors to the haven of commodities. With gold prices topping $800 an ounce and record prices for platinum, some Russian natural resources exporters seem well placed.

Waning investor appetite led to several listings being cancelled but dealmaking in Moscow picked up apace last month.

Aluminium group Rusal said it had taken a 25% stake in fellow Russian mining company Norilsk Nickel, paving the way for a potential merger between the two that would create one of the world’s biggest mining groups.

French insurer Axa took a 36.7% stake in insurance company Reso-Garantia for €810m while France’s second-biggest listed bank, Société Générale, said it would exercise a call option to take control of Russian rival Rosbank.

Banking leaders said Russia’s economy was too inter-connected with the rest of the world to escape global market turmoil.

Oleg Vyugin, chairman of MDM Bank, warned Russian businesses to be prepared for the worst. He said: “If the US enters recession, Russia will suffer a slowdown. The first wave of the credit crunch forced the likes of [steelmaker] Maxi Group to sell out to bigger rival NLMK. Everyone is thinking ‘we’ll be all right’, but a second wave will hit bigger companies and the Russian central bank needs to prepare for that.”

A leading headhunter said some bulge-bracket banks, including Credit Suisse and Deutsche Bank, had ring-fenced their emerging market operations to protect them in the event of job losses as a result of the US sub-prime crisis. He said: “Emerging market operations are usually where heads start rolling first. Some have done well out of Russia but others are struggling.”

Senior bankers suggested Lehman Brothers might be most vulnerable to cuts. One said: “It has struggled to gain scale and chief executive Richard Fuld has never been keen on Russia anyway.”