Tuesday, 3 November 2009

Barclays and HSBC march on Moscow

The Independent

BarCap boss putting 'considerable' money to work in Russia


By Jason Corcoran in Moscow

Monday, 2 November 2009

Banking giant Barclays is spearheading a new British invasion of Russia’s high street, according to one of its most senior bankers, as relations between the two countries bounce back from last year’s low point.

Barclays, as well as rival HSBC, have become increasingly visible across central Moscow with new branches and high-profile advertising as part of a move to aggressively expand in Russia’s major cities.

Hans-Joerg Rudloff, chairman of Barclays Russia and the investment banking arm Barclays Capital, said the group was making significant capital and trading commitments to Russia in light of an improving investment climate.

He said: “The battle against the command economy has been won and there are signs that ongoing reform will be favourable for the investment community and that is part of the reason I am putting considerable amounts of money to work in Russia.” Barclays has 36 branches across the country and is expanding its operations to offer full-service retail banking from previously offering support mainly to small and medium enterprises. Stuart Lawson, head of HSBC Russia said last month that the group would be “aggressive” in expanding its existing four branches in Moscow and one in St Petersburg.

A year ago, British firms were afraid they might become outcasts in Moscow following a dispute at Anglo-Russian joint energy venture TNK-BP, the closure of the British Council’s offices in Russia and the Kremlin’s refusal to extradite Andrei Lugovoi, the chief suspect in the London killing of dissident Alexander Litvinenko. Diplomatic relations between the two Governments sank to their lowest point since the Cold War but the economic crisis and the need for foreign investment stimulus has since helped to paper over political differences.

Mr Rudloff said BarCap, which lost £250m after Russia’s sovereign default in 1998, would also help build a domestic capital market. He added: “Right now, we are entering a phase where everything seems to go on green light. It is evident that Russia is now making huge strides to move forward, be responsive and get things going. It’s a big offensive directed at foreign investment and will undoubtedly lure investors into the market.”

Barclays, which acquired local player Expobank last year for $745m, has recently hired two senior financiers on the ground to build their businesses.

Nikolai Tsekhomsky joined from state bank VTB last month to head up Barclays retail and commercial banking business. American Bob Foresman,the former deputy chairman of Russia’s Renaissance Capital, will start work as Barclays country manager on December 1. He will be responsible for building investment banking on the ground as well as the launch of a new local asset management business to cater to Russia’s wealthy.

HSBC, which already has corporate and investment banking interests in the country, is spending $200m rolling out a retail and private banking network. Royal Bank of Scotland’s blue and white livery has also surfaced in Russia thanks to its acquisition of Dutch Bank ABN AMRO’s operations. Mr Lawson believes the UK banks offer a better service than domestic rivals. He said: “In addition to providing conduits for Russian corporates to access international debt markets, foreign banks are helpful to the Russian market as they import innovative products and also provide sources of training for Russian bankers.”

Foreign banks burnt by Russia’s sovereign default in 1998 turned off the taps to international credit in the aftermath of the current economic crisis. The banks are reluctant to open new lines of credit until oligarchs agree to painful debt restructuring of $437bn (£265m) in foreign debt.

BarCap has billions of debt in the Russian public sector although virtually no exposure to the troubled private sector. Railway monopoly RZD repaid $1.5bn late last year.

A lack of regulation of Russia’s local bond market have resulted in over 100 defaults since the crisis hit. Bondholders, who have very limited statutory rights, have in some cases accused issuers of ducking their responsibilities and stripping assets.

Eric Kraus, a strategist with investment bank Otkritie: said: “By allowing the bond holders to be robbed outright, the financial regulators have ensured that no second or third-tier company will be able to raise finance again.”

Rudloff would like to see tougher regulation and the establishment of arbitrage courts to resolve disputes. He said: "There should be a review of the bankruptcy procedures. That would be one of the most important measures to establish clear procedures if a default occurs."

Rudloff, who sits on the board of oil giant Rosneft, stepped down from the Russian media company RBC due to a conflict of interest over $18 million (£11m) in debt owed to him and his friends.

RBC, which may yet be acquired by Russia’s richest oligarch Mikhail Prokhorov, has offered creditors to restructure half its debt and asked them to accept a 64% discount on the remainder.

Rudloff’s own family office has operated in Russia since 1995. As chief executive of Credit Suisse First Boston in the early 1990s, he sent bankers Stephen Jennings and Boris Jordan to Russia to scout for deals. The pair became involved in the state's pilot voucher auctions and soon left to set up investment bank Renaissance Capital.

http://www.independent.co.uk/news/business/news/barclays-and-hsbc-march-on-moscow-1813272.html

INTERVIEW: DST drives social networking in Russia and beyond

Business New Europe

October 27, 2009

By Jason Corcoran in Moscow

Yuri Milner two strong bets in the horse race for global domination of social networking. The heavily fancied Facebook is the frontrunner, but Russian challenger Vkontakte has caught the attention of some punters and is showing good form on its home turf.

Digital Sky Technologies (DST), which Milner founded with his partner Gregory Finger in 2005, leapt to international attention in May after it acquired an initial 1.96% stake worth $200m in Facebook. It was DST's first foray out of Russia where it has sizeable stakes in a string of internet companies such as the social networks Vkontakte and Odnoklassniki, web portal Mail.ru, game developer Astrum Online and the online classified business Headhunter.ru.

Facebook and Vkontakte are now going head-to-head in 12 new markets besides the Russian one, where Facebook is only the seventh most popular social network. Milner insists a conflict of interest does not arise, because DST does not interfere operationally or with its companies' products. "For us, the fundamental issue is that we don't get involved operationally and that's how we really resolve the conflict of interest situation. Vkontakte is doing what they want to do, as is Facebook, and we don't get in the middle of it," he tells bne in an interview.

DST will continue to build its share of Facebook "opportunistically" by buying from shareholders of the California-headquartered company. It initially spent about $200m acquiring 1.96% and has since invested another $100m, which increased its holding to 3.5%. Milner insists a potential merger of Facebook and Vkontakte, which looks like a clone of its US rival in design and functionality, has "never been an issue."

"It's about the vision," he explains. "It's about being long term and our mutual understanding that social networks will play a significant role going forward in the people-sharing information."

Vkontakte claims on its homepage to have attracted over 46m registered users, which still pales in comparison to Facebook's 250m-plus users. But the company has recently snapped up the domain name Vk.com for an undisclosed amount and plans to use it to brand and market Vkontakte in 12 other languages, starting this month.

Entrepreneurial spirit

From his 57th floor office in Moscow City Naberezhnaya Tower, Milner can survey the growth of the capital's emerging business district, which is close to where he grew up in nearby Kutuzovsky. Sipping on expensive bottled Voss water, Milner points out the building where he grew up and the Number 4 School he attended. A trained particle physician, Milner has not followed the typical career path of a Soviet Academy of Sciences graduate. After leaving the academy for US-based Wharton School of Business in 1989, he turned to the world of banking and worked for the World Bank for a few years helping to develop Moscow's embryonic financial markets.

Milner was lured to Bank Menatep, founded by the now-jailed oil tycoon Mikhail Khodorkovsky, to build its brokerage and investment banking arm. He left the bank and got involved in private equity before stumbling on the internet's early boom in the late 1990s. Milner's international and banking contacts have helped DST to raise about $1bn to invest in its portfolio of Russian and Eastern European internet companies. Investors include Renaissance Partners, Tiger Global, Goldman Sachs and steel billionaire Alisher Usmanov, who is rumoured to hold a 32% stake.

Yet Milner, 46, says his most prized contacts are the young internet entrepreneurs running his portfolio companies rather than the bankers and investors. "The founder of Vkontakte is 25 and the chief executive of Mail.ru is 30. The internet is mostly the game of the young. Social networks started in colleges and grew, which means these guys started these businesses young and will run these companies for another 15-20 years."

Milner says his business model is more long term than other private equity firms investing in technology. An IPO is the favoured exit for investors, but only when the investment climate is absolutely right. "We would rather DST goes public and gives them liquidity that way. I don't have a date for that. A lot depends on the market and other things we don't control," he says.

Some warn that the growing investor interest in online social networks like Twitter and Facebook could yet feed another dot.com bubble, which burst spectacularly at the beginning of the decade. Milner is conscious of past mistakes and he has own experience of launching three Internet businesses during the same period. The e-commerce vehicle failed to take off while the online auction site Molotok and the Geocities-styled Narod have since been folded into Yandex and Mail.ru, respectively. "The problem with e-commerce was transaction trust and low penetration, because you need a critical mass of buyers," explains Milner. "Russia is still not today a perfect play for e-commerce, but in a few years it will be."

DST's portfolio companies have been pioneers insofar as showing their western counterparts how to monetise and to make social networking a profitable enterprise. Vkontakte and Odnaklassniki generate their incomes from the traditional model of online advertising, but have also experimented successfully with premium paid services and micro-payments, allowing users to buy and sell items with the site taking a portion of the revenue.

Russia's other competitive advantage is its legacy from the Soviet system of producing great mathematicians. Milner cites how three teams from Russia featured in the top four places of last year's 32nd Annual ACM International Collegiate Programming Contest World Finals. Russian students from St Petersburg and Saratov rose to the top against 6,700 teams from 1,821 universities globally in the event, which is seen as the Olympics of computer programming.

Milner added: "Russia could encourage sectors outside natural resources and the technology sector could be one. We have a competitive advantage because we have always produced good mathematicians and Russians have the entrepreneurial flair too which is required."

VTB Capital: Putin's favourite bank ?

Financial News

September 22, 2009

By Jason Corcoran in Moscow

Russian markets bounce back after rollercoaster ride of a year 28 Sep 2009
VTB Capital can expect to be informally crowned Russia’s investment banking state champion by Prime Minister Vladimir Putin at its inaugural investor forum starting tomorrow in Moscow. It will be the first time the Russian leader has appeared at a brokerage event, underlining the rise of VTB Capital, which has become pivotal in managing the state’s interests since its launch a little over a year ago. Its parent, VTB Bank, is 77% owned by the Russian Government.

More than 300 international investors are scheduled to attend the “Russia Calling” forum, which is expected to feature a three-line whip of the Kremlin’s top brass and the country’s leading industrialists. Deputy Prime Minister Igor Sechin and Finance Minister Alexei Kudrin are scheduled to attend, along with oligarchs such as Oleg Deripaska.

In an interview with Financial News, global chief executive of VTB Capital Yuri Soloviev said Putin had demonstrated an active interest in the business. He said: “The Prime Minister has a domestic-focused portfolio, and so his perspective is an important component to any discussion of the Russian economy. Prime Minister Putin has confirmed his participation in the event and it will be the first time that he will have addressed and taken a role in such an investment forum.”

VTB Capital does not have the market dominance of an energy state champion such as Gazprom but it has made enough impact for sceptics to sit up and take notice.

The business was officially launched last September amid the collapse of Lehman Brothers, the US-Government backed bailout of insurer AIG and the destruction of confidence in global banking. Its parent had committed in the first half of last year to spend $500m (€341m) over three years in building the investment banking business. At the time of its launch, the heads of Moscow’s largest brokerages were privately scornful that a Kremlin-sponsored investment bank could prosper in a highly competitive market.

However, the global credit crisis has since wreaked havoc on the Russian investment banking landscape, forcing market leaders Renaissance Capital and Troika Dialog to cede sizeable stakes to stay afloat, while KIT Finance and other banks have been effectively nationalised. Meanwhile, state-controlled financial institutions such as VTB, Sberbank and Gazprombank have come to the fore as lifeboats for cash-strapped oligarchs and indebted corporates.

Soloviev accepted the importance of his operation’s relationship with the state and its luck in escaping the brunt of the financial crisis. He said: “We were quite fortunate that we managed to stay away from the most turbulent time of the crisis because we were rehiring, rebuilding, managing the whole franchise. So we didn’t go into an abyss together with other market participants just because we had to provide liquidity.”

Kremlin connections are vital and VTB Capital has secured business from its parent and other state entities during the economic crisis. Bankers have been seconded for long periods by the parent to lead restructurings, under which companies agree to sell non-core assets or pledge their holdings as collateral for securitised loans.

State-run diamond monopoly Alrosa last month disclosed it would sell two oil and gas assets to VTB, its main creditor, for $620m (€420m). In a complex deal, VTB Capital is advising Alrosa and is also expected to resell the asset on behalf of its parent for a considerable profit.

Bankers from VTB Capital and other VTB subsidiaries have also been involved in restructuring clients in Russia’s heavily indebted real estate sector. VTB Bank has acquired a controlling stake in Sistema-Hals, the real estate subsidiary of Russian industrial group Sistema, for a mere $2m. A year ago, it had a market capitalisation of $1.7bn.

Soloviev said: “The team was extremely busy working for VTB as our biggest client. With the market down by 70%, there was a huge portfolio of loans against the shares and we were immediately put to work on a number of those.”

VTB’s bankers expect to play a key role in a wave of privatisations when the state lenders put seized assets back on to the public market, as a reward for rolling debt owed to its parent.

With the international credit markets shut for most Russian issuers this year, VTB took advantage to dominate the rouble bond market. According to data provider Cbonds, it arranged 15 issues in the first half of the year and is the second-biggest arranger this year of Eurobonds in Russia and the Commonwealth of Independent States, according to Thomson Reuters. VTB Capital also benefited from its parent’s balance sheet in areas including derivatives trading, credit and foreign exchange.

Soloviev said: “Almost anyone can issue a Eurobond, but what differentiates us from local competitors is our ability to offload that from the balance sheet and sell it on.”

Soloviev is keen for the business to stand on its own two feet and points to several secondary public offerings, where companies issue more stock following their initial public offering, and convertible bond mandates won independently from the state.

VTB recently headed a syndicate in which steelmaker Evraz raised $900m in a combination of convertible bonds and equity. It also co-arranged with Merrill Lynch a $265m convertible bond issue for Russian oil producer Alliance Oil in June and is slated to arrange a $300m secondary public offering for supermarket chain Magnit this year. However, government connections will continue to bring in business and Soloviev is confident VTB will play a big role when Russia issues $15bn in sovereign Eurobonds next year.

Critics suggest VTB will struggle to win mergers and acquisitions mandates in the non-state market although Soloviev maintains its bankers have had success but declined to comment further.

Soloviev’s next big challenge is to reorganise VTB’s asset management activities, which are split into three divisions for public funds, venture capital and infrastructure and real estate. VTB Asset Management was launched several years before the investment bank and has yet to make much impact.

A consortium led by VTB’s infrastructure team won a competitive tender to revamp St Petersburg’s Pulkovo Airport in what is set to be Russia’s first big public-private partnership. Soloviev acknowledged VTB’s relationship with the finance ministry, the transport ministry and the regional St Petersburg government in charge of the project.

VTB has set up joint ventures, including a private equity partnership with Deutsche Bank to invest in prime real estate in Russia’s cities.

The private equity team also made its first noteworthy deal this month, by joining US buyout firm TPG to buy a 35% stake in grocer Lenta.

Sunday, 27 September 2009

Barclays To Launch Funds Unit In Russia

Wall Street Journal Europe

September 20, 2009

By Jason Corcoran

Barclays is planning to launch an asset management business in Russia, building on its retail and investment banking activities in the country.

The bank will launch an asset management group focused on wealthy onshore clients and, potentially, the pension scheme and corporate sectors. Bob Foresman, who last week joined Barclays Capital as local chief executive and country head from Renaissance Capital, will lead the venture. Foresman’s appointment at BarCap was first revealed by Financial News on Friday.

Hans-Joerg Rudloff, chairman of Barclays in Russia, said the recruitment of Foresman demonstrated the bank’s commitment to the country.

Rudloff said: “These are good long-term investments – buying a bank, rebranding and getting into asset management onshore. When you hire lots of very high-profile people in a short period of time, it shows you are committed to the country. We also confirmed our intentions when Barclays bought Russian bank Expobank last year for a high price.”

Barclays’ retail bank acquired Russian lender Expobank last year for $745m. It has since rebranded and revamped Expobank’s 36 branches in western Russia. BarCap employs nearly 30 bankers in Russia, plus 70 Russian-dedicated bankers in London.

Barclays Capital fills top Russian role

Wall Street Journal Europe

By Jason Corcoran

September 18, 2009

Barclays Capital has filled one of the most hotly-contested positions in Russian banking, hiring the deputy chairman of Renaissance Capital as its chief executive in the country, where it is leading a fresh assault on the investment banking market.

Bob Foresman, who has only recently stepped down as one of RenCap’s most senior bankers, will lead Barclays Capital, the investment subsidiary of Barclays, in Russia.

RenCap declined to comment but a source close to the group confirmed that Foresman had left to join Barclays after completing a deal whereby the state development bank Venesheconombank agreed to become a cornerstone investor in a Macquarie Renaissance joint infrastructure vehicle.

A London spokesman for Barclays Capital could not immediately be reached for comment. Foresman could not be reached for comment.

Headhunting sources said they expected a spate of mandates from Barclays for more bankers in light of Foresman’s appointment to one of the most coveted investment banking jobs in Russia.

Foresman emerged from a tough shortlist, which has featured at different stages many of Russia’s top bankers. One headhunter familiar with the situation said Foresman could command an annual salary of between $2m (€1.4m) and $3m.

Foresman joined RenCap in September 2006 from Dresdner Kleinwort Wasserstein, where he was chairman of the management committee for Russia and the Commonwealth of Independent States. Prior to joining Dresdner in 2001, he was head of investment banking for Russia and the Ukraine at ING Barings and had worked at the International Finance Corporation in various roles.

At Dresdner, he played an important role on most of Russia’s large energy sector transactions in recent years, including advising state controlled Rosneft on its $10.4bn initial public offering in 2006, and state energy giant Gazprom on its acquisition of a 72.7% stake of in oil producer Sibneft for $13.1 billion in 2005.

Hans-Jörg Rudloff, chairman of Barclays Capital, told Financial News in April that the bank was a launching a fresh campaign in Russia and would be building on its traditional stronghold in debt capital markets into equities and mergers and acquisitions.

BarCap has steadily been growing its Moscow operation over the past year having hired extensively for back and middle office functions.

Alexander Zakharchenko was recruited about a year ago as head of M&A advisory from ABN Amro RBS in Moscow, while earlier this month Stefano Marsaglia joined Barclays Capital in Russia as chairman of its worldwide financial institutions group and Nikolai Tsekhomsky became chief of its retail and commercial banking business in Russia.

Marsaglia joined from Rothschild and Tsekhomsky from state-owned bank VTB.

Saturday, 19 September 2009

Sweden publishes its recipe for recovery

By Jason Corcoran

September 14

Letter from Stockholm

Sweden’s Finance Minister Anders Borg wouldn’t look out of place carrying an amp on a heavy metal road tour. He may sport a ponytail and loop earring but he isn’t known to be a headbanger. A trained economist, Borg can still play a crowd and his recent call for European Union restrictions on bankers’ pay has gone down well at home and abroad.

Borg, who chairs European Union finance ministers’ meetings as Sweden is the current holder of the EU presidency, has argued that “the banks were partying like it was 1999, but it is actually 2009”. He said the bonus culture must come to an end when the G20 meets in the US this month.

The former chief economist at ABN Amro Bank in Stockholm in the late 1990s warned there could be “social tension in our societies” if bankers’ compensation is not reined in. However, there was not much sign of social tension in Stockholm’s trendy Södermalm district last week where its inhabitants were enjoying the sunshine in crowded outdoor bars and restaurants.

The Swedish capital seems to have been relatively insulated from the global economic crisis compared with the country’s industrial cities, where national automotive icons such as Saab and Volvo are ailing and could end up in the hands of the Chinese.

Locals said the social democrats, which ruled for much of the past 60 years, were winning support in the regions but were still deeply unpopular in the capital. Borg’s centre-right Alliance party, headed by Prime Minister Fredrik Reinfeldt, swept to power in 2006 with a mandate to shrink Sweden’s welfare state. The Government wants market forces to dictate outcomes and has resisted calls to rescue the struggling car industry.

Borg’s recipe for growth has been to slash taxes and to axe some unemployment and sickness benefits in the Organisation for Economic Co-operation and Development.

As US President Barack Obama uses Sweden as his template for taking over corporations outright, the Swedish Government has been busy unloading its industries. State-owned pharmacies have been sold and the Government plans to sell its remaining 37% share of telecoms operator TeliaSonera.

Last year, it offloaded Absolut Vodka, which Borg said was a core function for neither a welfare state nor a nightwatchman’s state.

Borg maintains Sweden is better positioned to recover from the crisis than the UK or US because the state did not spend money on interventions and emergency measures.

He said last week he had revised his economic prognosis for economic growth upwards to 0.6% for next year. He expects Sweden’s public finances to balance within the next four to five years, with gross domestic product growth rising to 3.1% in 2011 and 3.7% in 2012.

Some 7.9% of the workforce in Sweden were out of a job in July, which was lower than expectations of a 8.3% rate.

The property market in Stockholm has rallied strongly after a dip last year. Policymakers are expected to raise interest rates sooner than the European Central Bank if and when the recovery takes hold.
There have been calls in the Swedish press for Borg to shed his ponytail.

But one civil servant drinking in the vast Mosebacke Terass bar overlooking the city said there was a fear the finance minister could lose his radicalism without his long tresses: “He’s our Viking-styled Samson and he would be just been another politician without his ponytail.”

Fresh fundraising signals hope for Russia

Private Equity News

Jason Corcoran in Moscow
09 September 2009

Moscow-based private equity start-up Quadro Capital Partners has so far raised $200m (€139m) for its first fund amid signs that the moribund fundraising market in Russia is recovering.

Quadro was formed in April by Giedrius Pukas, the former managing director of Troika Capital Partners who quit the alternative asset manager subsidiary after a dispute over the running of the business with Ruben Vardanian, the majority owner of parent investment bank Troika Dialog.

Pukas, who has been joined at Quadro by former Troika Capital directors Vladimir Kozlov and Nikolay Sergeev, said: “We tried to buy the business from Reuben but he wouldn’t let us so we set up Quadro on our own. We have so far raised $200m (€138m) and we have a target of $350m.”

The fund, which includes several investors in Troika’s private equity funds, will invest in distressed debt and across the consumer, lifestyle and finance sectors.

Quadro joins a host of other funds raising private equity funds in the country. Russia Partners has recently raised an $800m fund while new player PPF Partners announced in June it had raised €615m ($891m) to invest in assets in central and eastern Europe, with Russia the key market.

UFG and Delta, which are closing in on final merger talks, are both currently trying to raise funds. Many of the commitments made by investors to UFG’s Private Equity Fund 11 were generated by Boris Fedorov, the firm’s founder who died late last year. A source close to the firm said some investors had withdrawn since Fedorov’s death.

Aim-listed Aurora Investment Advisors has recently raised £50m for its second fund which will be primarily used to reinvest in its current investments.

James Cook, joint founder of Aurora, believes a demand for private equity financing will return as companies who survived the crisis seek fresh capital to grow.

He said: “We are seeing heavily reduced valuations which will likely yield high returns for private equity capital invested in 2009/10. As companies continue to find debt financing hard to secure, there is increasing demand for private equity capital to finance growth.”

Private equity deals have been thin on the ground over the past two quarters as funds had their allocations reduced or pressure was exerted by limited partners not to draw down commitments for investment. However, last week it was reported that US buyout fund TPG and the Russian state bank VTB had bought a 35.4% stake in Russian hypermarket chain Lenta for about $115m.

TPG is thus far the only international buyout fund with an office in Moscow but has found deals elusive. In the summer of 2007, a protracted deal to acquire the grocer Seventh Continent collapsed over price, while in April last year, TPG signed a contract to buy half of SIA International, Russia's largest pharmaceutical distributor, for $800m. TPG later withdrew and paid a fine of $50m.