Russian banking carousel spins once more

Financial News

Jason Corcoran

17 August 2009
Letter from Moscow

The great purge in Moscow’s banking sector is over. Pay and staff were cut to the bone, but wages are now back to near pre-crisis levels, with annual guarantees of $2m to $3m ensuring that the hiring carousel is back in action.

Russian markets have rallied a year after being pistol-whipped by the international credit crunch, and roiled by a five-day war in Georgia, a domestic banking crisis and a series of investor scandals.
Russia’s RTS and Micex stock exchanges have won back trading lost to the London Stock Exchange and have recovered from their 80% plunge in value.

The upheaval caused by the market’s meltdown resulted in the effective nationalisation of brokerage KIT Finance and mid-tier lenders Globex and Svyaz Bank. Renaissance Capital was forced to accept a $500m investment last September from billionaire Mikhail Prokhorov in return for the sale of a 50% holding while Troika Dialog sold a 30% stake to South Africa’s Standard Bank.

RenCap, once the standard-bearer for Russian investment banking, slashed its staff by about half, and Troika by 35%.

Western banks, which had built aggressively in Moscow since 2007, were also forced to retrench as equity and credit markets shrivelled.

RenCap is hiring for selective areas and has increased salaries in Moscow by 20% and in London by 10%, which returns most surviving staff’s pay to pre-crisis levels. Deutsche Bank, the largest foreign investment bank in Russia, said it had never cut wages and had raised them in some departments by 15% to 20% from July 1.

As dealmaking has returned in oil and gas and in pockets elsewhere, owners and country heads are starting to worry about hanging on to their best people. Credit Suisse has fought to retain its sales staff in Moscow after an attempted raid by Goldman Sachs.

The Swiss bank was forced to authorise $2m guarantees after Goldman tried to swoop, according to a source close to the matter.

Goldman, which has struggled to break into the top five in any of the Russian league tables, has been linked with a move for several of Moscow’s best-known rainmakers.

The rumour mill went into overdrive this month after Alfa Bank’s Edward Kaufman had lunch with Chris Barter, co-chief executive of Goldman Sachs in Russia. Kaufman insists the issue never came up and that he is happy to stay at Alfa, where he is taking charge of “a revenue opportunity” to merge the group’s investment bank and the corporate bank. He said its fixed-income and equities divisions had recorded their best two quarters and corporate finance deals were growing rapidly.

At the height of the war on talent in 2007, Kaufman gained notoriety after being hired from UBS for a reputed $15m over two years. Sources close to Alfa suggest Kaufman has in the past few weeks signed a new two-year contract that is more lucrative than the original package.

Goldman is not the only outsider looking to land a senior banker to break into Russian dealmaking. Merrill Lynch has hired a co-head for its global market team in Russia from MDM Bank and is rumoured to be close to be bringing a head trader on board.

Barclays Capital is understood to be whittling down a short list of top bankers to head its expanded business in Moscow.

Swiss bank UBS is close to naming senior hires for investment and private banking while state-controlled VTB Capital continues its build-out into equities following its startling progress this year in debt capital markets.

One leading headhunter said: “The merry-go-round of hiring is back on. It won’t be as dizzy as 2007, but we have more work than we can handle and we are having to partner with other firms.”

Crisis bites deep into Russian infrastructure programme

Business New Europe

Jason Corcoran in Moscow
June 5, 2009

Russia's Stalinist-like trillion-dollar infrastructure programme to revamp its crumbing roads, bridges, ports and airports over 10 years has been shaken by the global financial crisis. Many infrastructure projects have been postponed or cancelled due to the lack of available finance from domestic and international capital markets. And the Kremlin's much touted public-private partnership (PPP) programme to stimulate investment has yet to take off, while bankers hired to capitalise on an anticipated deal-making boom have been twiddling their thumbs for the past six months.

Senior financiers held a meeting with Deputy Prime Minister Sergei Ivanov at the start of the financial crisis in November last year and were told that the infrastructure programme for 2009 was being cut by 30%. The 2009 budget for infrastructure is believed to have been slashed again by a similar amount following the ruble's devaluation and dwindling federal revenues from lower commodity prices.

The government is now targeting selective projects in St Petersburg, Moscow and the Winter Olympic venue of Sochi as priorities for completion until the investment climate for foreign and private capital improves. Joerg Bongartz, chairman of the board of Deutsche Bank Russia, said the government was stepping in to meet the shortfall in showcase projects. "In Russia, there has been a reality check on infrastructure spending since the start of the crisis," Bongartz tells bne in an interview. "A significant amount of foreign capital was expected to be made available for a number of large infrastructure projects structured as public-private partnerships, but it appears now that if the government wants these projects to materialise, a larger share of the funding and the coverage of particularly the foreign exchange rate risk will need to come from the budget and government funds."

Bongartz said Deutsche Bank is still hoping to get involved in infrastructure via its corporate finance specialist team, its infrastructure and property management unit Rreef and DB Partners, and its joint venture with the Austrian construction firm Strabag.


Planes, trains and automobiles

The St Petersburg municipal government has said it will delay $13bn of infrastructure projects, which had attracted bids from international companies including Alstom, Siemens and Oleg Deripaska's Basic Element, due to the credit crisis deterring most private investors. Projects facing prolonged delays include the $10bn highway, known as the Western High-Speed Diameter (WHSD), the Orlov tunnel under the Neva River and a planned $1bn upgrade of Pulkovo airport. The Orlov tunnel and a fast-speed train link to the airport are likely to be postponed indefinitely.

The WHSD roadway encircling St Petersburg was meant to be the pioneering large PPP project in Russia, but the winning consortium formed by oligarch Oleg Deripaska and Strabag hasn't yet signed the concession contract governing the project. St Petersburg Governor Valentina Matviyenko said in April that some of the major projects of the city's road infrastructure would be built at the expense of the federal budget after private investors pulled out. The federal government is to allocate $617m for the construction of the WHSD roadway provided the city authorities keep their word to invest $198m.

A decision on the winning consortium for Pulkovo airport has been pushed back to June 25. The municipal government on May 21 whittled down the list of bidders to upgrade Pulkovo airport to three - Deripaska's Basic Element, Flughafen Wien in partnership with Leader, an investment house founded by Gazprom structures, and German Fraport in tandem with state bank VTB. Those that didn't make it on to the shortlist include Macquarie Renaissance, a joint venture formed by the investment banks Macquarie and Renaissance Capital to invest in Russian and CIS infrastructure; Germany's Hochtief in partnership with oil and mining tycoon Viktor Vekselberg; India's GMR; and Turkish TAV Airports.

A spokesman for Renaissance Capital in Moscow declined to comment on "specific transactions," but said the alliance sees the number and quality of potential deals increasing as industrial groups look to exit non-core investments, including infrastructure assets. Macquarie Renaissance's first fund raised half of its $1.5bn target last year. Most of the funds raised came from Russian and CIS multinational development agencies such as Vnesheconombank (VEB), the Kazakhstan State Development Bank and the Eurasian Development Bank.

VEB, which is the government agency responsible for infrastructure spending, has declined repeated requests for an interview. However, VEB's chairman, Vladimir Dmitiev, recently claimed on the VEB website that international agencies such as the International Finance Corporation and European Bank for Reconstruction and Development (EBRD) had expressed an interest in participating in the Macquarie Renaissance fund. Dmitriev said the fund's resources will soon be used for implementing infrastructure projects in CIS countries and more credit will be made available by VEB, the Kazakhstan State Development Bank and the Eurasian Development Bank.
"And we are absolutely sure that as soon as the [the Macquarie Renaissance Fund] starts operating, we'll get a number of private and institutional investors to participate in it, including ones from the Middle East," Dmitriev said in a statement on the VEB website.

Renaissance said fund raising continues to progress, and is making solid progress, but declined to give any specifics. The Russian investment bank, which has its own financing difficulties, insists that private investment still has a role to play in priority projects alongside government funding. "The process of private investment alongside the government will be evolutionary," explains the Renaissance spokesman. "Macquarie Renaissance Investment Fund, for example, is the first dedicated infrastructure fund to be focused on Russia and the CIS. As in other markets, investor interest will follow as the opportunities to invest ramp up."

One location where investors can be certain that most planned projects will be undertaken is Sochi, the Black Sea resort which will host the Winter Olympics in 2014. "Sochi is one of the priority areas for the government because of the reputational issue attached to hosting the Olympics," says Deutsche's Bongartz. "This has to be successful and there has to be a clear timeline for projects as the date is fixed. There still remains a great deal of interest from abroad from companies keen to get involved in services and construction."

Deals come back into vogue after lean start to year

Financial News

Jason Corcoran in Moscow

01 June 2009
The volume of mergers and acquisitions deals in Russia and eastern Europe recovered in April after a barren time for advisers in the first few months of the year.

Data from Thomson Reuters showed the volume of dealmaking in Russia soared to $8.3bn (€5.9bn) during April, compared with $2.4bn and $3bn recorded during February and March, respectively. The number of deals also rose to 340 in April, from 238 in March and 254 in February.

Across eastern Europe, the rally began in March and was just as pronounced. Volumes rose to just under $6bn for both March and April, compared with $1bn for January and February combined.

However, compared with last year, volumes fell 67.5% in Russia and 76% in eastern Europe in the first five months of this year.

The fall would have been greater, were it not for three big deals in the oil and gas sector. According to figures from data provider Mergers.ru, Russia’s M&A market value in the first quarter of this year was $12.5bn – and about half of that came from those three deals: investment group Basic Element acquiring Russian private oil firm RussNeft, India’s ONGC Group’s acquisition of London-listed Imperial Energy, and Gazprom taking control of the NIS oil monopoly in Serbia.

Mergers.ru noted that several deals were likely to close in the second quarter, such as the merger of MDM Bank and Ursa Bank, and South Africa’s Standard Bank taking a 33% stake in Russian investment bank Troika Dialog.

Oil company TNK-BP said it would continue to seek acquisition opportunities in Russia after losing out to Gazprom Neft for a stake in the troubled UK-listed Russian oil producer Sibir Energy.

Apart from the energy sector, bankers believe the buoyant retail and consumer segment remains the most attractive for foreign entrants.

Russian daily Kommersant last week reported that a UK supermarket chain had appointed Goldman Sachs to explore an expansion strategy into Russia. A Goldman Sachs spokeswoman declined to comment.

Wal-Mart, America’s largest retailer, said it might expand into Russia to take advantage of its fragmented retail market while French retailer Carrefour has been circling Seventh Continent, an upmarket grocery chain, for several months.

Russian economy entices new investors

Financial News

Jason Corcoran in Moscow

06 April 2009

After the sell-off, hopes of good returns are rising

Like heroes inspired by the firebird of Russian folklore to undertake the most dangerous of quests, investors are returning to a resurgent Russian stock market in the hope of riches.

Norway’s $330bn (€249bn) state pension fund, one of the world’s largest sovereign wealth funds, last month awarded Prosperity Capital, the largest foreign fund manager operating in Russia, its largest mandate.

G2 Group, a Swiss family office, has taken large equity stakes in two Moscow investment firms, Da Vinci Capital and Diamond Age Advisors.

Swedish fund manager East Capital has increased its Russia weighting in its largest fund, the $500m east European fund, from 40% to 57%, the highest level in its seven-year life.

Karine Hirn, co-founder of East Capital, said: “Russia is extremely cheap now. It was by far the most oversold of the stock markets last year. In fact, the region of eastern Europe had 10 out of 20 of the most oversold markets in the world.”

Investor enthusiasm has pushed the RTS Index of leading Russian shares up 46% since its low point in late January. Higher oil prices, a stronger rouble and hopes that the international credit markets could soon be prised open for domestic issuers have helped improve investor sentiment.

But investors should bear in mind that, according to Russian folklore, while good fortune lies in store for whoever catches the firebird, trouble is normally close behind.

The Russian equities market has ruined investors twice in little more than a decade, with the RTS dropping 85% in 1998 and 75% last year, spurring investors to pull $290bn from the country between August and January this year, according to French bank BNP Paribas.

It was the combination of collapsing share prices and client withdrawals that forced Da Vinci Capital and Diamond Age Advisors to restructure themselves in the first place.

Alfa Bank co-founder Petr Aven last week warned that bad debts could reach 20% of total loans by the end of year, while finance minister Alexei Kudrin expects 10% in defaults.

Chris Weafer, chief strategist at banking group Uralsib, said: “The economy is still in decline and will need both a sustained rally in the demand for, and price of, commodities – plus a resumption of bank lending – to create new growth. These are more likely in the fourth quarter than in the second quarter, if they happen at all in 2009.”

East Capital’s asset managers said they are focusing on companies with low levels of debt, a strong market position and opportunities to benefit from sector consolidation.

Hirn said: “We are looking more at the balance sheets these days because there are financing issues that need to be resolved for many companies. We are happy to avoid real estate because the debt burden is heavy.”

Hirn said the firm’s east European funds had suffered a sharp fall in valuations since September but only suffered 10% in client redemptions. “We lost a huge amount in valuation in recent months but it was less brutal than 1998,” she said.

East Capital said Russia was still the strongest economy in eastern Europe with exposure to a large domestic market. It said countries dependent on exports such as Hungary and the Czech Republic are more vulnerable. Turkey and Romania also benefit from a strong domestic economy.

The manager last month launched a special opportunities fund to target assets in Russia and the Commonwealth of Independent States where valuations have declined sharply. The board of East Capital has agreed to put $50m in the fund when it launches during the second quarter of this year.

Moscow investment firm Da Vinci Capital also hopes to exploit cut-price opportunities in Russia through its new partnership with G2 Group, which manages $1bn in alternative assets.

Oleg Jelezko, managing partner and chief executive of Da Vinci Capital, said “Our strategy will be different now we are in recovery mode so we won’t need to pursue derivatives. It’s about using different asset classes such as bonds and special situations.”

Mattias Westman, chief executive of Prosperity Capital Management, said his firm’s Russian funds had received more interest from institutions in recent weeks.

He said: “Nothing very big, but it’s more constructive. We have endowments, pension funds and family offices considering further investment. Hopefully the Norwegians will help make Russia something that other major institutions feel more comfortable with.”

Flows into Russian equity funds hit a 19-month high in March, according to EPFR Global, a data provider that tracks funds. It said capital flows into Russian-dedicated funds rose from $7m in the week ending March 18 to $50m the following week.

However, inflows remain modest, as many investors are sitting on the sidelines waiting to see whether the rebound is just a bear market rally.

Angelika Millendorfer, head of emerging market equities at Austria’s Raiffeisen Capital Management, said: “So far our institutional and private investors are not returning to emerging markets. The relative performance of emerging markets has improved but investors are not yet making any substantial moves.”

Millendorfer said the big emerging markets funds and institutions continued to have low allocations to equities and to markets like Russia. She said: “I would be surprised if investors moved into emerging markets if the case for the developed markets does not return first. We need to have confidence that western banks will not collapse Lehman-style.”

Greater rouble stability and recent higher oil prices have been a major reason for domestic equity recovery but questions remain over the banking system, external corporate debt and the high level of inflation.

The biggest risk, partly because it cannot be quantified, relates to the level of non-performing loans in the banking sector and the future ability of big Russian corporates to pay or refinance the amounts they owe.

Russia's double-headed eagle

Guardian Unlimited

Jason Corcoran: Rather than reversing Putin's policies, Medvedev has only hinted at reform. Time will tell if he can step out of the shadows

Dmitry Medvedev was destined to be a lame duck leader when he was elected Russia's third president a year ago. His inauguration ushered in a ruling tandem with his mentor and predecessor Vladimir Putin seemingly shifting a gear to become prime minister. Putin, however, has so far done all of the steering while Medvedev has been along for the ride.

Russians have not been duped, judging by the latest opinion poll by the respected Levada Centre, which indicate only 12% believe Medvedev wields real power. Another 34% believe it lies with Putin, while 50% believe it is shared between them.

Buoyed by rising commodity prices, Putin's eight-year reign restored Russia's shattered economy, raised living standards for many and re-established Russia's standing internationally as a power-broker.

A tough act to follow. Unfortunately, events have not been kind to Medvedev; the equity market and economy have collapsed; a war with Georgia and a major gas dispute with Ukraine have soured relations with Europe; a currency crisis has rattled the public; and an oil price that rose steadily through his predecessors' two terms has tanked.

Medvedev's presidency has brought a change of tone but not a change in substance. His response to the January murders of a human rights lawyer, Stanislav Markelov, and the journalist Anastasia Baburova on a Moscow street were markedly more sympathetic than Putin's gruff response to the 2006 murder of journalist Anna Politkovskaya.

Rather than reverse any of Putin's policies, Medvedev has hinted at reform of the judiciary and the political system. He has subtly criticised Putin's cabinet for its handling of the crisis but hasn't sacked anyone in the federal executive for their mishandling of the economy.

Russia's five-day war with neighbouring Georgia in August was arguably Medvedev's toughest assignment, but many doubt the extent of his involvement in the key decisions. It was Putin, not Medvedev, who appeared in a flak jacket among Russian troops after the outbreak of war, in which Russia quickly routed its southern neighbour.Medvedev had never won elected office before becoming president. He owes his dizzy rise in government and his old job as chairman of energy giant Gazprom to Putin. A former lawyer, Medvedev made a commitment to the rule of law and to stamp out "legal nihilism" a central tenet of his inauguration speech last year. A new trial commencing on Wednesday of jailed tycoon Mikhail Khodorkovsky is a chance to show his leadership credentials and whether he is committed to those promises.

Khodorkovsky, the former owner of oil giant Yukos was jailed for eight years in 2005 for fraud and tax evasion in a trial regarded widely as a vendetta by Putin, for his funding of rival political forces. If Khodorkovsky is convicted on new charges, Medvedev will be seen as suffering a setback in his campaign for the rule of law. If the former oligarch is acquitted, the ex-KGB hardliners surrounding Putin will be seen to have lost.

Russia's double-headed eagle is working as a tandem, albeit with one driver and a passenger, who is a spoke in Putin's wheel. Only time will tell whether Medvedev has the capacity to exercise his legs and turn direction.

http://www.guardian.co.uk/commentisfree/2009/mar/04/dmitri-medvedev-vladimir-putin

guardian.co.uk © Guardian News and Media 2009

Architect Of UBS' Onshore Russian Business Leaves

Wealth Briefing

Jason Corcoran in Moscow

Michael Kuenzi, the architect of UBS's Russian onshore wealth management business, has left the group to pursue other challenges, WealthBriefing understands.

Mr Kuenzi, a German national who spoke excellent Russian, left UBS two weeks ago having built up the business from scratch since 2006.

A source close to the Swiss bank said Mr Kuenzi had been replaced on an interim measure by Russian Dmitry Fedossov, who has a background in products and services.

"UBS remains committed to this important and developing market and we are continued to build our presence," said the source.

Steven Meehan, recently appointed as chief executive of UBS in Russia, said growing wealth management would be one of his main priorities.

UBS opened a representative office in Moscow in 1996, and entered into a joint venture with local brokerage Brunswick in 1997. In 2004, UBS purchased the remaining stake in the joint venture, and re-branded the business as UBS in 2005.

In 2006, UBS received a banking license from the Central Bank of Russia, allowing it to offer wealth management, asset management, rouble fixed income and foreign exchange services onshore.

UBS declined to comment.

Despite projections of massive growth, the onshore private banking market remains small by international standards with many Russians preferring to keep their money in the Caymans or Cyprus.

Credit Suisse, one of the pioneers in Moscow, estimates the nascent Russian private banking market has about $15 billion in assets, with the potential to grow to $400 billion.

It is this potential which lured many international players such as HSBC and Union Bancaire Privée to set up private banking shops in Moscow last year.

The current credit crisis has put on the squeeze on Russia's billionaires who are facing depressed equity valuations, difficult refinancing activities and an increasing number of margin calls from Western financial institutions.

This environment, however, may ultimately benefit international private banks, according to Alexander Kotchoubey, head of international development for Russia and Eastern Europe at Lombard Odier.

"Family offices in Russia who have built up a staffing of 25 analysts and investment hurdles of 30-40 per cent are no longer sustainable," Mr Kotchubuey told WealthBriefing.

"I think we are going see many of these operations collapse into the arms of the banks," he added.

Russian M&A expected to rise amid crisis

Financial News


Jason Corcoran in Moscow

19 February 2009

The economic crisis is starting to trigger mergers and acquisitions in Russia and could lead to the formation of new national champions, according to a report by Italian bank UniCredit.

Recent deal activity has seen the takeover of London-listed, Russia-focused Imperial Energy by India's state-run energy giant ONGC.

Other deals in the offing include the bid by Polyus Gold, Russia's largest gold producer, for KazakhGold, and Russian gold producer Peter Hambro's proposed all share acquisition of iron ore producer Aircom.

The report from UniCredit said: "We expect the trend to continue, likely expanding to larger companies, as the correction of commodity prices and lack of financing should stimulate companies to search for synergies in alliances with rivals and repair balance sheets."

Steven Dashevsky, head of equities at UniCredit in Moscow, said: "Clearly we can see a lot of appetite for M&A for mid-cap deals. They are becoming more affordable and more digestible. The next step is the super-mergers. "

The report dismissed the much touted creation of the Russian equivalent of BHP Billiton from six diverse companies – Norilsk Nickel, Metalloinvest, Evraz, Mechel, Uralkali and VSMPO-Avisma – as highly unlikely, given its complexity and the lack of potential synergies.

Instead, UniCredit said it saw super-mergers among two or three Russian companies as more feasible.

The report said the combination of energy giants Surgutneftegaz-Rosneft and miners Rusal-Norilsk Nickel are the most likely candidates to form new national champions. It said it believed Surgutneftegaz's $20bn cash stockpile may prove too attractive for debt-laden Rosneft to pass up this year, while the crisis may prompt the state to tighten its control of the oil sector, which remains the key to securing budget financing and political influence in Russia.

Several Russian metals billionaires, hit hard by the credit crunch, have proposed merging their firms in various schemes that would allow the state to part-own a diversified miner in exchange for absorbing most of the owners' debts.

As for Rusal and Norilsk Nickel, UniCredit believes the threat of nationalisation due to high debt levels and increasing interest from other industrial groups such as Metalloinvest might compel the owners to merge the assets later this year.

The bank said the potential mergers of Sistema's fixed line and mobile subsidiaries MTS and Comstar, along with steel-maker Mechel and coalminer Belon, are the most reaslistic due to their simpler structure and operational synergies.

The financial strain on Sibir Energy's key shareholders raises the chances of an alliance with an oil major. UniCredit regards Gazprom Neft as the primary candidate.

Russia’s market freeze takes country closer to Bric exit

Financial News

Jason Corcoran in Moscow

16 February 2009

Falling trading volumes and low liquidity are forcing managers to desert

Temperatures as low as minus five degrees Celsius last week gave fund managers a ready-made excuse for turning their backs on Moscow and finding somewhere warmer. But Russia’s rapidly freezing stock markets had rather more to do with the decision of James Fenkner, founder and managing partner of Red Star Asset Management, to move his fund’s operation to Los Angeles this month. Illiquidity has become the order of the day in Moscow-quoted equities.

Jim O’Neill, head of global economic research at Goldman Sachs, raised the possibility last month that Russia could be dropped from the Bric grouping, only to dismiss it.

Fenkner cited family reasons as his main motivation to relocate, and the fact that his seed investor, Austria’s Erste Bank, pulled its mandate, but he also depicted a market suffering from declining corporate disclosure and crumbling market infrastructure.

He said: “On the business side, Russia has become a pure macro play. Over the past year we have moved most of our portfolio into American and global depositary receipts due to a combination of value and liquidity and we really get active around 5:30pm when London and US open. Micex and most of the local share stories are a joke.”

The worsening economy and the slide in the price of oil has spurred investors to pull $290bn (€226bn) from the country since the end of July, according to French bank BNP Paribas.

Hedge funds and long-only vehicles focused on Russia began switching their focus to trading ADRs and GDRs in London and New York after Russia’s five-day war with Georgia in August. Damaging corporate disputes at miner Mechel and the Anglo-Russian joint petroleum venture TNK-BP shook the domestic markets and exacerbated the investor exodus.

Further market instability, fuelled by falling commodity prices and a weakening rouble, has led to 30 trading suspensions on the Micex stock exchange. Micex has shed 50% of its value, while its dollar-denominated rival RTS has fallen by 75% from its highs last year. The Russian RTS index was the worst performer last year after Ukraine and Iceland and came close to equalling the 85% drop experienced during Russia’s sovereign default in 1998.

Daily trading volumes in Moscow dropped off sharply from $7bn early last year to $2bn by the end of the year, which is on a par with trading volumes of 2003.

O’Neill, who popularised the term Bric as a moniker for Brazil, Russia, India and China, raised concerns about Russia’s over-reliance on oil and its poor corporate governance. Its share index has fallen far behind that of Brazil, the other net exporter of natural resources of the four.

Russian public companies are trading at the price/earnings ratio of three, whereas the ratio in January last year was 11. The average p/e ratio of emerging markets was nine and developed markets was 12 at the end of last year.

One of the results of the fall has been to drive trading back to London. Before the meltdown, analysts at Renaissance Capital estimated Moscow had 70% of equity trading volumes against London’s 30%. Renaissance said the ratio last month was 50%-50%.

Alexander Kotchoubey, head of international development for Russia and eastern Europe at Swiss private bank Lombard Odier Darier Hentsch, said the preference for GDRs and ADRs reflected the realisation that the Russian market possesses little depth or companies that offer diversification. He said: “You have to wonder why one needs to take the risks associated with local markets’ liquidity and closures when similar returns can be had through GDRs and ADRs but with a lot less hassle.”

Hedge funds operating throughout Russia and the Commonwealth of Independent States are cutting their staff and slashing costs in response to market falls and increases in client redemptions.

The closure last year of the Florin FSU Credit Opportunities fund, which was invested in real estate and equity collateralised debt, led to 10 lay-offs at the firm in Moscow and London.

Da Vinci Capital Management’s special opportunities fund, which invested in Russian equities, has bee restructured because of too little assets.

Other funds, including Denholm Hall Russian Arbitrage fund have announced they are considering a restructuring following difficulties.

East Capital Asset Management, which maintains a large investment team in Moscow, has been forced to begin trading more in London because of trading problems. The Swedish firm, which has about $1.5bn invested in Russia and eastern Europe, has cut 40 jobs from its base in Stockholm and from other centres such as Moscow. Peter Elam Hakansson, founder of East Capital, listed falling oil prices, a weakening rouble, corporate governance and financial market regulations as four reasons for Russia’s cheapness.

In a letter to investors, Hakansson wrote: “It is difficult for Russia to influence the first two factors, but the remaining two are even more important for the country to focus on. Corporate governance is once again in the spotlight, after the autumn saw some dubious interpretations of what is right or wrong according to Russian legislation.

“And lastly, financial market regulations have been making the news after the markets on occasions were shut down in such a way as to baffle observers and appear over-dramatic.”



Russia falls away from Brazil

Troika returns to Russia after Cohen exit

Financial News

Jason Corcoran in Moscow

16 February 2009

Russian investment bank Troika Dialog has moved the management of its hedge fund business from London to Moscow following the departure of its chief executive Stephen Cohen last year.

A Troika spokeswoman said the fund was now being run by an investment committee and its two portfolio managers are Oleg Larichev and Vladimir Potapov.

Larichev is chief investment officer at the bank’s fund management subsidiary Troika Dialog Asset Management and Potapov, who joined the group in 2003 as an intern, has been a fund manager for several years.

Cohen joined Troika as head of its hedge fund business in 2006 after being made redundant as head of European business at Putnam Investments. He quit Troika in August last year, re-emerging at UK fund manager Montanaro in October as a director with responsibility for business development.

Of his departure from Troika, Cohen said: “They had wanted me to relocate to Moscow, but I could not for various personal reasons. I was trying to build an international product so Russians could invest outside of Russia but there was little demand. The product was no longer valid so it was logical to move the business to Moscow.”

Cohen said the Cayman Islands-registered Troika Russian fund had once totalled $200m but had been “whacked for performance” over the past six months.

Troika said Cohen’s departure had pre-dated the financial crisis in Russia but declined to comment on the circumstances. A number of Russian hedge funds have closed recently or “gated” investors’ ability to withdraw funds during a 75% decline in the stock market and a deteriorating investment climate for minority shareholders.

Fleming Launches Business In Russia

Dow Jones International News

By Jason Corcoran in Moscow

U.K. investment house Fleming, Family & Partners is launching a fund management business in Russia following its acquisition of DWS Investments in Moscow from Deutsche Bank.

FF&P, which has had operations in Russia since 1992, confirmed it had bought the DWS management company, its legal structure and four unit funds from Deutsche.

Denis Sukhanov, chairman of FF&P in Russia, said the new business targeting private clients and institutions would launch next month or in March. He said: "We think it's a great time to launch considering how equity valuations have bombed in recent months. Asset management is a core business for Flemings in London and Zurich but we have never had it in Russia till now."

The sale of DWS to FF&P by Deutsche marks a turnabout for the German company, which had intended to merge its funds with UFG Invest, an investment boutique in which it acquired a 40% stake in September for $65 million.

A Frankfurt spokeswoman for DWS said it was carrying on its business under the new Deutsche UFG Capital Management brand. She said: "Flemings will not use the DWS brand."

FF&P recently hired Andrei Uspensky to run the fund management business from Pioglobal Asset Management, where he had been chief executive.

Sukhanov said the valuations of the four DWS funds had fallen from $400 million to between $25 million and $35 million following the collapse in equity prices since September.

The UK firm manages the wealth of Roddy Fleming and his family, one of the City's oldest dynasties. It also provides asset management for other wealthy families. As well as providing advice to Russian corporate and personal clients in Moscow, FF&P has real estate funds that invest in the region.

The family previously held a stake in the Russian mining company Highland Gold.

Merrill Lynch leads Russian M&A in 2008

Business New Europe

Jason Corcoran in Moscow

January 23, 2009

Merrill Lynch has ousted JP Morgan Chase to take the crown as leading adviser to Russian merger and acquisitions in 2008.

US bank JP Morgan narrowly beat its Wall Street rival in 2007 due to its involvement in announced deals worth $40.8bn, compared with Merrill's $39.2bn. However, last year Merrill nudged ahead through advising on 14 deals worth $24bn compared with JP Morgan's 12 transactions worth $19.6bn, according to statistics prepared for bne by data provider Thomson Reuters.

During the year, Merrill's most notable deals included advising steelmaker Severstal on its $775m acquisition of US steel products manufacturer Esmark, as well as Rusal, the world's largest aluminium producer, on its taking a 25% holding in domestic rival Norilsk Nickel.

Overall, fees generated from M&A were well down last year, with Merrill Lynch earning $40.7m, compared with $58m in 2007. JP Morgan's fee income from Russian deals more than halved to $37.6m, from $78m a year ago.

Merrill Lynch is one of the few investment banks operating in Russia that is yet to cut its staffing levels. The bank has 83 staff based in Moscow and has several vacancies it is seeking to fill when the market stabilises. "We have made a lot of money in M&A and fixed income in the past year, and the business is not yet a high cost one," says one senior source. "In fact, we got lucky that we were gradually building up the brokerage business when the banking crisis struck."

Responsibility for the business lies with Riccardo Orcel, head of investment banking for Central and Eastern Europe and the Middle East and Africa, but the business is fronted in Moscow by American Bernie Sucher, head of global markets in Russia. Sergei Aleksashenko, the chairman of Russian business, quit in April last year following a dispute over the running of the operation, but sources indicated his position would not be refilled.

Harsh times

Overall, investment banks operating in Russia have been hit by a 40% slump in M&A activity with little sign of recovery until the middle of 2009.

The volumes of M&A deals tumbled by almost 40% in the three months to November 2008, according to Russian data provider Merger.ru. Some 258 transactions were completed worth $13.7bn, down by 40% from $22.6bn for the same period a year earlier. Volumes were hurt when big deals were pulled, including planned acquisitions by electricity utility OGK-1, supermarket chain Lenta and steelmaker Novolipetsk.

Russian deal activity had been growing steadily for several years until the banking crisis hit Russia in September. In the second quarter of 2008, M&A volumes were up 80% to $57bn from $31.5bn in the same period a year earlier. But from January through November, the M&A market declined by 7% to $102bn, compared with $110bn in the corresponding period of last year.

The communications sector was the most popular for deals, generating 20% of all M&A deals between September and November worth $2.7bn. The financial sector was next with 18.5% of volumes worth $2.5bn.

Russian broker Renaissance Capital was again the leading bookrunner in equity issuance for 2008 with a market share of 18% from four IPOs worth $452m. Morgan Stanley came second with three mandates worth $320 in a market where dealflow had dried up by end of the second quarter. The largest deal was a $1bn rights offering by London-listed Russian retailer X5 on April 22. Citigroup and Goldman Sachs were joint bookrunners and the underwriter was Russian broker Alfa Capital.

In debt capital markets, US bank Citigroup triumphed over Deutsche Bank with a market share of 12.4% generated from six issues worth $2.75bn. The German bank registered a market share of 10.6% from five issues worth $2.36bn, while the Royal Bank of Scotland was not too far behind with a 10.4% share from 10 issues worth $2.3bn.

http://businessneweurope.eu/storyf1423/Merrill_Lynch_leads_Russian_MA_in_2008

Crisis and competition drive down Russian custody fees

Financial News

Jason Corcoran in Moscow
08 December 2008

Increasing competition from new entrants and sharp falls in equity prices are driving down the margins of Russia’s sub-custody banks.

The recent arrivals of Sweden’s SEB and France’s Société Générale, plus the increasing participation of Russian banks such as VTB and Gazprombank, are forcing fees downward but bringing greater segmentation and opportunities for niche providers.

Natalia Sidorova, head of securities services at ING Wholesale Banking in Moscow, said: “Margins are decreasing, which is inevitable in a busy market like Russia driven by competition. Fees used to be about 20 basis points but have come down significantly in recent years.”

Serhiy Berezhny, head of trust and securities services at Deutsche Bank, agreed but said high fees could still be charged depending on the volume of client assets.

He said: “Different clients are charged differently depending on the level of assets under custody but overall margins have been decreased significantly over the past five years. A big client with $1bn (€800m) could be charged less than five basis points but we would still charge clients 20 basis points if they had assets of $200,000 as they couldn’t be charged at cost.”

With Russia’s main equity markets among the worst performers over the past two months – posting falls of more than 75% – custodians’ incomes generated from assets under custody have tumbled.

ING’s assets under custody fell from $155bn in August to $64bn last month but the Dutch bank’s custody operation remains Russia’s biggest player, serving more than 450 foreign and domestic clients.

Deutsche Bank, a top-three player along with ING and Citigroup, has seen its assets under custody decrease to $30bn from $100bn since the banking crisis in August. Other banks with custody operations in Russia include JSC Bank VTB; UniCredit; RZB and Sberbank.

Sidorova said: “We have seen a significant drop in our overall amount of assets under custody which has led to less safe-keeping fees as indices have gone down. But business is booming from new clients and the volume of transactions is high.”

Berezhny believes market entrants face a tough job to establish a network and contend with the financial crisis.

He said: “The arrival of new entrants this year has been the worst timing with the crisis occurring. It is very difficult to build a network and I don’t think some of them will establish a proper presence till next year.”

Société Générale hopes its capture this year of local bank Rosbank will make it a dominant player in domestic investor services, along with servicing in-bound and outbound assets.

The French bank paid $1.7bn for a 30% share of Rosbank, in addition to the 20% it already owns.
Ramy Bourgi, head of emerging markets development at Société Générale Securities Services, said the French bank would transfer assets to Rosbank once service standards had been met. Matthieu Moreau has been seconded from Société Générale Securities Services in South Africa to help with the transition.

Bourgi said: “We are marrying a strong local player, Rosbank, with a foreign and established player in SocGen.

“There is a good deal of competition and there will be some consolidation but there is also a good deal of segmentation in the market. We are very oriented towards the blue-chip clients in Russia and the international clients entering the country, whereas VTB and Gazprombank are very oriented towards the domestic client base.”

Sweden’s SEB launched custody services in August with a team of five in its St Petersburg office, offering international clients with Russian holdings custody, settlement, safe keeping and asset servicing.

Göran Fors, global head of custody services at SEB, said: “Initially, we are focusing on foreign broker-dealers and not the domestic client base. Russia is very important for our clients because historically the Nordic region has contributed 2% to 3% of overall investment in Russia. Being in Russia bolts it up with our network in the Nordics, the Baltics and Germany.”

Veronika Vasilieva is head of custody for UniCredit Group in Russia, which has a strong network of banks across Europe and is one of the leading sub-custodians in the Russian market through its ownership of International Moscow Bank – acquired by the Italian group’s Bank Austria Creditanstalt subsidiary in January 2007.

It also bought local broker Aton and has a large stake in Russian stock exchange Micex. Vasilieva said the market had fractured into large international providers offering full custodial services and those focusing on niche areas.

She said: “There is a good deal of competition and I expect some consolidation in the industry. The market has developed towards different segments.”

ING and Deutsche Bank are the two biggest custodians for Russian depositary programmes, with JP Morgan and Citigroup also serious participants.

The two market leaders acknowledged the inroads being made by Russia’s big domestic banks such as VTB and Gazprombank as they expand their offerings and diversify.

VTB Bank last month said it had received custodian status for Russian companies under a Bank of New York Mellon global depositary receipt programme while Gazprombank – which like VTB is building an investment banking team – plans to expand its American Depositary Receipt programmes.

However, Gazprombank vice-president and depositary centre head Vladimir Tatsy told news service Interfax that the launch had been delayed by the financial crisis.

Berezhny of Deutsche Bank said: “VTB and Sberbank have definitely managed to break into the realm of depositary receipts and their share of the market will grow but they can’t compete for standard custodial accounts because of their staff’s limited ability in English, a lack of a global relationship management and a lack of a global network.”

East Capital reveals staff cuts

Financial News

Jason Corcoran in Moscow
28 November 2008


Swedish fund manager East Capital has cut its personnel by a fifth following a 70% slide in its core equity market of Russia over the past two months.

The 40 jobs cuts from East Capital's overall headcount of 225 indicate how the financial crisis in Russia is spreading from investment banks to the buyside.

The Stockholm-based manager said 20 jobs in Sweden would be affected and the remainder in its international offices in Moscow and elsewhere in the CIS.

A statement from East Capital said: "Like many others in these turbulent times, we are carrying out an organisational review…We need to adapt to the new reality."

Hedge funds operating throughout Russia and the CIS are cutting their headcounts and slashing costs following sharp falls in equity prices and increases in clients redeeming their accounts.

Prosperity Capital, previously the leading Russian fund manager, has seen its assets under management shrink to $1.5bn (€1.1bn) from over $5bn over the past few months. It's $1.2bn Russia equity fund has fallen to $400m due to the drop in equity values.

Prosperity's chief executive Mattias Westmann told Financial News that Prosperity had posted some inflows from new clients and little in the way of redemptions.

He said: "We have not closed any funds but we are trying to cut costs in general. No personnel has been affected so far as we have always been a pretty low cost operation."

Prosperity, which was established in 1996, employs just 25 people in Moscow and London.

The closure last month of a Russian hedge fund run by Florin Investment Management has led to fears many more could go under as investors flee emerging markets.

The closure in October of Florin FSU Credit Opportunities Fund, which was invested in real estate and equity collateralised debt, led to 10 lay-offs at the firm in Moscow and London

Another Russian hedge fund, Denholm Hall Russian Arbitage Fund, announced it was considering a restructuring following difficulties. In a letter to investors, Denholm said it was conducting a review of "of the collateral of our loans, the liquidity of our borrowers, the health of the underlying businesses and our hedging strategy".

Meanwhile Da Vinci Capital, which conducted an initial public offering on London's junior Aim market in May, has launched a crisis opportunities fund.

Da Vinci's long-short hedge fund has suffered from redemptions and has fallen to just $15m and it's managers are considering winding it up.

Russian Banks Face Winter Freeze

Dow Jones International News

By Financial News reporters

17 November 2008

Just a year after they were engaged in a frantic war for the best talent, investment banks in Russia have started slashing hundreds of jobs and cutting pay.

Lay-offs at two of the country's largest domestic investment banks - Troika Dialog and Renaissance Capital - are approaching 1,000, and cuts will end up being substantially deeper than had previously been declared, according to bankers in Moscow.

Troika Dialog has begun cuts expected to total 500, or 35% of its overall staff, according to two bankers at the company. The bank was unavailable for comment. Renaissance Capital will cut 25% of its employees, according to an internal memo sent to staff, which represents about 375 of their overall staff of 1,500. However, bankers there said the figure will be higher.

A Rencap spokesman said nothing had been decided.

Elsewhere, there have also been 20 redundancies at mid-tier broker Trust Bank, according to a banker inside the company. VTB Bank is also cutting staff. Meanwhile, Ed Kaufmann, head of investment banking at Alfa-Bank, said the company was "trimming overall headcount" but is still hiring selectively.

Pay cuts are also in the pipeline. At Troika, those earning more than $3,000 (EUR2,357) a month have been told their pay will be slashed by 25%, according to one banker. Banking group Uralsib's staff have been told their salaries will be cut by 20%, while employees at broker Metropol earning more than $10,000 per month have been told their salaries will also be cut by 20%, according to staff at both companies.

Overseas banks that have piled into the market in the past year appear more resilient however. Merrill Lynch said it was not cutting staff in Moscow and UBS said it plans to increase staff.

www.efinancialnews.com

Russia braced for a bleak winter

Financial News

Jason Corcoran in Moscow and Harry Wilson

17 Nov 2008

Moscow-based investment bankers are at the sharp end of job cuts


Russian index slumps

It seems like a different age, but it was only recently that Moscow-based investment bankers had firms fighting to secure their services and could command pay packages commensurate with demand.

Senior Moscow-based bankers and those covering the Russian markets asked for and got lucrative pay deals as local brokers and large international investment banks fought a hiring war to build their businesses in the country.

Guaranteed packages in excess of $10m (€7.8m) were not unheard of and even junior staff with experience of the Russian markets received $1m guarantees to join rivals.

In early 2007, Russian investment bank Alfa-Bank recruited the head of UBS’ Moscow office Ed Kaufman for a reputed $20m over two years.

Speaking to Financial News at the time of his hiring by Alfa, Kaufman described his package as “very generous”, while declining to comment on the specifics.

US investment banks including Lehman Brothers spent similar sums to secure top bankers from rivals to give them the entrance they desperately wanted into Russia’s booming natural resources-fuelled economy.

However, after two and a half months in which the Russian stock market has lost 70% of its value and with the oil price at a three-year low, the days of the multi-million dollar guaranteed package are history and the hiring boom has turned on its head as the axe begins to fall on bloated and expensive banking teams.

Last week, Russia’s largest independent investment bank, Troika Dialog, began culling 20% of its workforce with the loss of about 300 jobs. However, the cut could be more severe and as many as 500 jobs are potentially at risk, equal to 35% of its staff.

Troika’s redundancies followed similar cuts at main Moscow-based rival Renaissance Capital, which after accepting a $500m investment from Russian billionaire Mikhail Prokhorov was forced to make hundreds of employees redundant as it cut a quarter of its staff.

Renaissance Capital had become known within the international banking community for its lucrative pay packets, which included large grants of stock and generous guarantees.

In 2007, Renaissance Capital’s total staff compensation bill came to $370m, equating to an average payout of more than $300,000 for each of the firm’s 1,145 employees.

Until recently, Renaissance Capital was deluged with CVs from staff at investment banks looking to escape job cuts in their own firms and join the seemingly invulnerable Russian boom.

Weeks before it was forced to accept Prokhorov’s money, Renaissance Capital hired John Porter, Morgan Stanley’s head of Middle Eastern and African equity capital markets, to lead its growth in the region.

Speaking to Financial News in the wake of Prokhorov’s investment, Renaissance Capital’s co-head of investment banking Andrew Cornthwaite said: “We have always taken the view that if you are involved in these markets you have to accept that some things will go badly wrong from time to time. We are comfortable with that.”

The hiring freeze has hit institutions thought to be relatively immune, such as state-owned bank VTB, which had spent hundreds of millions of dollars in the past 18 months building its investment banking business.

In a statement, VTB said it had frozen recruitment and would focus on risk management, setting up a unit to cope with the fallout from the financial crisis.

However, for staff made redundant by Russian investment banks the terms are still generous. Troika employees who lose their jobs will receive between five and eight months’ salary, which in many cases will not be far off the length of time employees had worked for the firm.

International banks are starting to scale back the size of their Russian operations too, just over 10 years after many of the same banks shut up shop in Moscow in the wake of the Russian Government’s default.

A Russian investment banker said: “It is different to 1998. Then, the pull back was focused on Russia; this time it is part of global retrenchment by banks to what they consider their core businesses.”

Rivals say Goldman Sachs is scaling back its staff in Moscow, though a source at the bank said it was currently “assessing market conditions, while the jobs of former ABN Amro employees are likely to be vulnerable in the wake of RBS’ announcement last week that it would make 3,000 redundant in its global banking and markets business.

This is a change from 11 months ago, when bankers such as Merrill Lynch chairman and chief executive John Thain flew into Moscow amid fanfare in the local and international media to meet then President Putin and open the bank’s Moscow office.

One banker at a Russian bank said: “Everyone has been hiring like mad for the last couple of years, but the party is well and truly over now.”

Merrill Lynch insisted it is not cutting staff in Moscow despite widespread rumours it is preparing to dismiss staff and even close the office. One source close to the bank said it was preparing to expand the operation. Despite the sombre mood in the Russian market, fee levels are not far down on 2007 and are substantially up on previous years.

Russian investment banking revenues for the year so far stand at $1.53bn, according to investment banking data provider Dealogic, down 13% on the same point last year, but up more than 50% on the same point in 2006, when fees hit a then record of $1.14bn.

Steve Meehan, head of UBS in Russia, said: “The number of competitors in this market will be reduced dramatically. For the long term, this correction will be positive for banks like us.”

The long-term prognosis for Russia is positive and, despite the fall in oil prices, most admit this is only a temporary blip. One Russian banker said: “The long-term trend has got to be for higher energy prices and Russia will obviously benefit from this. What you’re seeing now is the bursting of a bubble, not the end of Russia.”

Meehan said: “Russia is the only country that has got a top-10 position in all the mineral resources that matter."

Russia’s hopes of creating a global financial hub come back earth

Financial News at Sibos

September 16, 2008


A series of setbacks has raised questions over whether Moscow could rival other centres and whether the rouble could become a reserve currency, writes Jason Corcoran


The credibility of Moscow's ambition of becoming a global financial centre within five years has been called into question following a summer of systemic shocks to investor confidence and the arrested development of its market institutions.

Highly liquid domestic markets, strong economic growth and a position at the heart of a booming region have contributed to the rapid growth of Russia's capital markets over the past decade.

The dual government of President Dmitry Medvedev and Prime Minister Vladimir Putin have a blueprint in place for building Moscow's position as a financial hub. Some institutions, especially the Federal Anti-Monopoly (FAS) commission, have grown in stature due to its recent high profile investigations into price fixing. The
administration is now adding to the institutional pillars brick by brick but some of the foundations appear shaky.

Russia's five-day war with Georgia over Southern Ossetia, along with a selling spree sparked by allegations of price fixing at miner Mechel, left domestic stock markets nursing 35% losses and two year lows at the end of August.

Analysts at French bank BNP Paribas estimated the conflict with Georgia could have triggered capital flight worth $25bn of outflows, while Russia's gold and foreign currency reserves fell by $16.4bn since the beginning of military operations on August 7.

Alexander Kotchoubey, head of international development for Russia and Eastern Europe at Swiss private bank Lombard Odier Darier Hentsch, believes Moscow's goal of becoming a financial centre had been pushed back to 2015-2020.

"The credibility of making Moscow a financial hub and transforming the rouble into a reserve currency has been hit," explained Kotchoubey, who was until recently a managing director at Moscow-based Renaissance Investment Management, an emerging markets fund manager with $7bn under management. "Investor confidence and the perception of stability in Russia depends on what people are thinking in London and
Frankfurt and neither one is present at the moment."

Foreign investors have highlighted the lack of corporate governance, the respect for the rule of law, uneven property rights and an abused taxation regime, as obstacles towards the development of domestic markets. Recent cases cited by investors include the price fixing probe of miner Mechel, allegations of tax evasion by fund manager
Hermitage Capital and the separate shareholder wrangles at the
Anglo-Russian TNK-BP and mobile group Telenor.

Yet Alexei Fedotov, head of securities and fund services at Citigroup's global transaction arm in Russia, believes the market reform process kick-started in 2005 is irreversible.

He said: "Russia is a unique BRIC market created as a result of mass privatisation of huge number of companies within extremely short period of time. Since 2005 the speculative growth of the market has been gradually replaced by growth caused by serious changes implemented by the government."

"Changes included liberalisation of banking stocks, Gazprom shares, liberalisation of Russian currency and huge unprecedented IPO growth. As a result the growth has attracted to the market investors and market players of a higher calibre."

Market makers have mixed views about the prospects of the rouble becoming a reserve currency, which is one of the central planks of President's Medvedev's plans to develop Moscow into a global financial centre.

One senior Western banker in Moscow said: "People have been slow to adapt to the Euro currency as a reserve. It's a good goal to have the rouble as a reserve currency but there needs to be much more done to achieve it."

Maxim Baklunov, head of equity sales at Russian investment bank KIT, fees the rouble could be a credible alternative to the dollar.

He said: "The plans of the Russian government to turn Moscow into an international financial centre and the rouble into a major regional reserve currency will make the Russian financial system more competitive. Taking into account the government policy seeking to increase the significance of the Russian currency and to reduce the
risks associated with fluctuations of the US dollar's exchange rate, we think that rouble has a good chance of becoming a major regional reserve currency."

A deepening liquidity, with volumes on domestic bourses recorded of up to $7bn a day, has lured leading US and UK investment banks to set up local brokerage subsidiaries over the past three years.

Citigroup has been a pioneer in Russian wholesale and retail banking and Fedotov argues the Russian growth story remain intact in spite of the recent volatility.

He added: "The volatility is not able to change improvements in the market and did not create reasons for a serious capital outflow or did it make the market fundamentally unattractive or risky. In view of that, there is a certain optimism that the market will continue to develop in coming years and foreign investment will grow.

"This, however, does not stop us from focusing on market improvements and working closely with local market participants and regulators to introduce such important changes as a central depository, foreign nominee concept, RUB RTGS settlement, which in our view will be able to further support market growth and make it irrevocable."

Citigroup is one of the few foreign brokers to be involved in the reform process with other bulge bracket rivals complaining of being left out in the cold.

The Russian government's plans to create an international financial centre in Moscow are based on a competitive taxation system, simplified registration and more permissive procedures for issuers and investors.

The Federal Financial Markets Service (FFMS), the main Russian market regulator, submitted a draft strategy to the government in March for the development of domestic capital over the next four years.

The report, entitled "Measures to Improve the Regulation and Development of the Securities Market in 2008-2012 and a Long-Term Horizon," is a blueprint for the development of the domestic capital market and outlines measures to revamp laws tax law, improve corporate governance, lower administrative barriers and simplify procedures, prevent manipulative practises and the use of insider information.

The domestic capital market plays a vital role in the government's plans for Russia's continuing economic revival. The new administration intends to tap domestic capital for the investment needed to revive Soviet-era industrial assets rather than rely on foreign capital.

Among some of the provisions proposed in the report are radical changes to the tax rules. Under discussion is the possibility of cutting the capital gains tax and a reduction in the tax on income from securities to zero.

One aim of these proposed changes is to make Russia a more attractive place to list shares than the offshore havens companies currently use. The FFMS is worried about losing capital market functions to foreign exchanges and has already introduced administrative controls to encourage companies to list onshore.

Its success has been only partial, as Russian companies that float IPOs now almost always list simultaneously in Russia and abroad.

Additional measures introduced by the FFMS in July restrict companies engaged in oil exploration or mining from selling no more than 5% of their shares abroad, a cut from the previous blanket level of 35% for all companies listing abroad.

The regulations limit foreign stakeholding in industries related to national security and defence to no more than 25%, while those making public offerings in other sectors may sell a maximum of 30% of their stock abroad.

After a slow start to the year for Russian equity issuance, some analysts argued that these rules could hamper Russian equity issuance and liquidity. "In the short term it will have no effect, but in the medium term it could slow down the pace of the IPO pipeline, says Chris Weafer, chief analyst at the Moscow-headquartered UralSib bank.

There were just 13 IPOs in the first half of this year - about half the volume over the same period last year - according to Russian data provider Offerings.ru.

The report, which is being debated in government circles, also suggests developing a futures market and a pooled investments market.

The regulator has drawn up a proposal for increasing the free float. The free float in Russia is currently about 20-30% percent of total outstanding shares. "The free float of securities in Russia should be increased to not less than 40- 50% in the nearest two three years," the document says.

There are currently no foreign securities listed on Russian bourses due to a lack of legislation and appropriate regulation. This could change later this year, however, because a draft law is already in the Duma, the lower house of the Russian parliament. Once new laws are passed, Russian investors will be able to invest via a domestic exchange in foreign companies' shares and depositary receipts.

Key figures within the government and the regulator are actively pushing for the creation of a central depository and a merger of two the main stock exchanges, the rouble denominated MICEX and the dollar-denominated RTS. Some market participants, who are shareholder and members of both exchanges, have privately complained of the pace of the integration of the two platforms.

After all these amendments are made, the regulator estimates the capitalisation of the Russian financial market will increase by $40-50bnm and Moscow will have a chance of evolving into a pan-CIS and Central European hub for capital markets.

However, Lombard Odier's Alexander Kotchoubey feels legislative reforms and institutional change will not mean much without the "intangible concept of investor confidence and market stability."

He said: "Russia was on the cusp. It had entered the top ten in market capitalisation and it had become essential to have Russian equity allocation in global portfolios. It is now facing a tremendous headwind from the war with Georgia and the blow-up at TNK-BP with investors now being very cautious about making any sort of allocation to Russia."

Letter from Moscow

Dow Jones 'Financial News'

By Jason Corcoran in Moscow


Frazzled Russian investors have seen their domestic markets zigzag up and down like an erratic heartbeat on a cardiac monitor for the past month.

The RTS, the benchmark for foreign investors, plummeted by 6.5% to 1722 on August 7 after the outbreak of hostilities in the Georgian breakaway region of South Ossetia while the rouble-denominated Micex index slid by 5.3% to 1360.

The falling markets were resuscitated by Thursday last week after Russian President Dmitry Medvedev halted the invasion of Georgia and called an end to the fighting. The RTS rebounded to around its previous level, passing 1800 by the end of Thursday. The Micex closed at 1445, up 2.3% on the day.

The RTS had seen its value knocked by 24%, or $63bn, on July 24 after Prime Minister Vladimir Putin accused domestic mining company Mechel of price fixing and evading taxes. A few days later, Medvedev stepped in with the defibrillator to assure investors that the country’s stock market remained “one of the most attractive in the world”.

Medvedev appears to be playing good cop to Putin’s bad cop; the President steps in with honeyed words to ease investors’ concerns after the gung-ho Prime Minister has waded in and put the frighteners on everyone.

In Georgia, the roles seem to be reversed with President Mikheil Saakashvili playing the rabble-rousing antagoniser and his Prime Minister, Lado Gurgenidze, acting to soothe investors’ nerves.

The English-speaking Georgian double-act has been honed for the western media. Within hours of the outbreak in South Ossetia, the Bank of Georgia’s investment banking arm, Galt & Taggart, had organised a conference call between Gurgenidze and the country’s biggest investors and rating agencies.

In a live discussion with UBS and other banks, Gurgenidze described the political situation in Georgia and South Ossetia, and spoke about the perceived negligible impact on the domestic economy.

Gurgenidze knows more than most how capital markets respond to political crises, having worked at ABN Amro in various roles, including in its corporate finance department and as head of mergers and acquisitions for emerging European markets.

After Georgia’s Rose Revolution in 2003, Gurgenidze returned to his homeland as chief executive of the London-listed Bank of Georgia.

The bank has been a darling for frontier market investors with some Moscow-based hedge funds notching up a 1,000% return on their original investment. Gurgenidze has even built a celebrity name for himself after hosting Georgia’s version of Sir Alan Sugar’s The Apprentice television programme. Saakashvili nominated him as Prime Minister in November last year shortly after violence erupted on the streets of the capital following disputed election results.

Since the Rose Revolution brought Saakashvili to power, Georgia has become one of the most dynamic countries in the former Soviet Union.

Several reforms have begun to bear fruit, and have been hailed by international financial institutions such as the World Bank. Georgia’s growth stood at more than 10% in 2006 and last year and is expected to be around 8% this year.

Saakashvili and Gurgenidze may have won the heart and minds of the media, but the damage to Georgia’s investment credibility from its military humiliation is incalculable. The country is now counting its dead and licking its economic wounds.

Credit rating agency Fitch has downgraded Georgia’s sovereign debt as a result of the conflict. It has also downgraded the credit outlook for the Bank of Georgia, ProCredit Bank and TBC Bank from “stable” to “negative”.

Meanwhile, it remains unclear whether Medvedev and Putin’s unwieldy presentation of the war will damage Russia’s investment case in the longer term.

http://www.efinancialnews.com/archive/keyword/corcoran/1/content/2451551233

Former Goldman banker turns back on UniCredit for Merrill

Dow Jones - Financial News

Jason Corcoran in Moscow

12 Aug 2008

US bank Merrill Lynch has hired a former leading Goldman Sachs banker in Russia, who was supposed to be joining UniCredit's operation in Moscow, as co-head of investment banking in Russia.

The Italian bank UniCredit, which acquired Russian brokerage Aton 18 months ago, told Financial News in June that Amiran Kanchaveli, an executive director at Goldman Sachs, was joining as co-head of investment banking.

However, Kanchaveli, who previously worked at ABN AMRO alongside the prime minister of Georgia, Vladimir Gurgenidze, changed his mind.

A source familiar with the situation said Kanchaveli had opted to join Merrill Lynch instead and had recently taken up a senior position in investment banking.

The bank is also hiring additional staff in equity sales and trading, along with fixed income, according to a Merrill Lynch insider.

On a visit to Moscow earlier this year, Merrill Lynch chief executive John Thain said the bank was going to expand rather than lay off employees in Russia.

The bank has recently been one of the strongest players in Russia's burgeoning mergers & acquisition advisory market but is looking to build brokerage capabilities as well.

Russia remains one of the most competitive markets in investment banking for talent in spite of Russian equity issuance drying up and flagging domestic markets, in the wake of allegations of price fixing at mining group Mechel and the outbreak of hostilities with Georgia in the breakaway republic of Southern Ossetia.

Deutsche Bank emerges as top fee earner in Russia

Dow Jones: Financial News

Jason Corcoran in Moscow

11 Aug 2008


Deutsche Bank has earned more from investment banking fees in Russia in the 10 years since the country defaulted on its domestic debt than any other bank, according to data provider Dealogic. The bank has earned $509m (€336m) for its involvement in mergers and acquisitions, debt and equity capital markets work in the 10 years to the end of last month.

This is substantially more than the $359m earned by second-placed Morgan Stanley, which was just ahead of UBS, JP Morgan and Renaissance Capital, the highest-placed Russian bank.

However, Deutsche Bank has started to lose market share to its competitors over the past five years. Over the five years to the end of July it accounted for 12% of fees in Russia. The total fell to 9.2% in the 12 months to the end of last month.

Raids on its staff have increased over the past year and the bank was almost knocked off its perch as Merrill Lynch, JP Morgan and Renaissance Capital closed the gap.

Western banks such as Goldman Sachs and Lehman Brothers have returned to Moscow. Domestic brokerages Renaissance Capital and Troika Dialog have also gained ground, emerging as strong players in equity capital markets and corporate deals. Russia’s UFC Metropol has earned its first appearance in the top 10 fee earners over the past 12 months.

Russia devalued the rouble by 34% and defaulted on its domestic debt in mid-August 1998, crippling the economy. Deutsche Bank’s Russian subsidiary was established in April that year, four months before the crash. Germany was renowned for providing financial assistance to Russia following the crisis.

Deutsche Bank did not scale back its activities despite the debt crisis. It took a lead role in the resolution of disputes between Russia and international creditors.

Joerg Bongartz, chairman of the board of Deutsche Bank Russia, said: “We are absolutely committed to this market and have been active in Russia for 125 years.” Deutsche Bank was also the top bank in Russia over the past decade by value of deals worked on, according to data provider Thomson Reuters.

It has worked on almost 100 advisory and debt and equity markets deals worth $91bn over the 10 years and eight months from the start of 1998 to August 6 this year, according to Thomson Reuters.

Bongartz, who was working in Moscow in 1998, said: “After the crash, we recapitalised the business and developed in the directions of fixed income, corporate finance and transaction banking. We reallocated our workforce rather than lay people off.”

Deutsche Bank’s position in Russia was cemented by its acquisition of local broker UFG in a two-step deal for $700m. The German bank acquired 40% of UFG in 2003 and the remainder in 2006.

The bank employs about 1,000 bankers in Moscow and provides local and
international clients with corporate finance and advisory, sales and
trading services, as well as wealth management and asset management
services.

The defection of rainmaker Nick Jordan to Lehman Brothers and the
departure of UFG founder Ilya Sherbovich created trouble at the top.
This was exacerbated by raid on talent state run VTB, which has
recruited about 60 of Deutsche's bankers and analysts in the past 12
months.

Bongartz said the pool of talent is deep and can point to the return
of Igor Lojevsky this month from Dresdner Kleinwort to takeover as
country head from Charlie Ryan.

American Ryan, the last remaining co-founder of UFG and Deutsche's key
figurehead in Russia, is stepping back as chief executive and country
head to take up the chairman's role.

Foreign managers attracted to Russia by the region’s wealth

Financial News

Jason Corcoran in Moscow
28 Jul 2008

Russia’s crowded asset management arena is getting busier. France’s Société Générale Asset Management is the latest foreign investment business to explore launching funds there, as firms are attracted by the wealth being generated within the country.

Benelux’s Fortis, Germany’s Allianz, Italy’s Pioneer Investments, Austria’s Raiffeisen, Germany’s DWS, Iceland’s Glitnir and Baltic manager Parex have all launched Russia-domiciled funds in the past few years.

Russia’s emerging middle class and a boom in commodity prices have led to annual growth in retail asset management of 50% a year.

Société Générale Asset Management, which manages more than £262bn (€332.7bn) worldwide, may be about to join the fray by setting up a retail operation in Moscow, according to sources. It is believed to have applied to the main regulator, the Federal Financial Markets Service, for an asset management license.

Société Générale declined to comment on whether it was poised to enter the Russian fund market. A Paris spokeswoman said: “SGAM continues to study the various opportunities to intervene on the Russian market.”

The French group has distribution in Russia through its control of retail bank Rosbank, which has a network in most of the country’s regions.

However, domestic fund managers such as Troika Dialog Asset Management, which manages more than $10bn (€6.4bn) in retail, institutional and government funds, are sceptical of the chances of foreign participants succeeding. Pavel Teplukhin, chief executive of Troika Dialog Asset Management, said: “I assume that all of the global players will be in Russia pretty soon. Quite a number of global asset managers already operate in Russia and their success is rather mixed.”

Troika is Russia’s market leader in the management of retail funds, known as personal investment funds or PIFs. Teplukhin, who helped draft the Russian Federal Law on mutual funds, believes a lack of brand recognition is the greatest hurdle for foreign fund firms.

He added: “Their names are not familiar to the Russian audience and it is hard for the management of these banks to understand that. It would take a while before they can provide potential clients with a clear Russian record and before they win some brand recognition. Current market sentiments are not helpful either.”

One way for foreign funds to overcome the brand issue is to partner with a local institution.

Benelux’s Fortis and Germany’s Allianz have gone down this route with their tie-ups with St Petersburg-based investment bank KIT, and Rosno, which has a successful insurance business.

KIT Fortis, the fund management joint venture, has grown rapidly in assets under management to 60bn roubles (€1.6bn) since its launch in May last year. KIT Fortis has distribution agreements with more than 60 agents, such as VTB 24 and Citibank, in 650 outlets across Russia.

The growth in assets was helped by the transfer to the company of €640m ($1bn) from existing Fortis international funds and segregated accounts in the Nordic region. The assets were transferred under the terms of the acquisition of Fortis Investments of Dutch fund manager ABN Amro Asset Management.

Vladimir Kirillov, chief executive of KIT Fortis Investments, said the transfer of funds from ABN Amro was based on the success of its first Russia-domiciled equity fund. He said: “The fact that a large institutional client deposited €150m in the funds after the decision to transfer them to our company speaks for itself.”

Joint venture Allianz Rosno Asset Management, which has benefited from the expertise of the German group’s Allianz Global Investors, has grown to assets under management of about $700m.

It was one of five managers awarded 1.5bn roubles by the Russia Venture Company, which was set up by the Government to revitalise Russia’s industrial base.

Pioneer Investments, the funds subsidiary of Italy’s UniCredit, has set up a Moscow operation and hired local managers to run its domestic fund range. Austria’s Raiffeisen Capital Management, which manages €40bn, is one of the few foreign participants with brand recognition through its Russian retail banking network and its acquisition last year of Impexbank, Russia’s seventh largest bank.

Raiffeisen, which has been investing in Russia since 1994, has a local fund management subsidiary staffed by three fund managers and two analysts. Through Raiffeisen Capital Moscow, Russians are being offered locally domiciled bond and equity funds.

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