Monday, 18 August 2008

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.

Sunday, 17 August 2008

Irish passport-holders play waiting game in Armenia

The Irish Times Saturday, August 16,


EIGHT Irish passport-holders are nervously waiting in a hotel in the Armenian capital of Yerevan before deciding whether to return to Georgia.

The group, mainly Georgians with Irish passports and some Irish nationals, were among 50 people evacuated via the Armenian border at Gugeti when fighting broke out in South Ossetia.

Kerryman Dr Mike McCarthy, who runs the International Medical Support Services (IMSS) clinic from Tbilisi, assisted in evacuating the Irish and Georgian passport-holders by helping with transport and logistics through the eastern side of Georgia to Armenia.

"The people evacuated were going to come back, but the reports about renegade Ossetian militia looting near the capital have spooked them.

"Most of the other Irish and passport-holders have made their way back to Ireland or gone on holiday," said Dr McCarthy.

His wife's Georgian family mostly live in the bombed port of Poti and have been affected.

"Her cousin was killed and another cousin was badly injured when the Russian attack helicopters bombed Poti. She hasn't been able to reach her father since the first bombs fell a week ago."

Telephone and mobile communication in Georgia has been difficult. Dr McCarthy's wife Nina, who is seven months pregnant, was supposed to go to Ireland for the birth but will not move until she hears news of her father.

Dr McCarthy's IMSS clinic, which employs expatriate and internationally-trained Georgian doctors to service foreign embassies and the oil and gas industries, has been providing help to the capital's overwhelmed hospitals.

"We have appealed directly to the Americans here and Micheál Martin to provide aid and basic medicine," said Dr McCarthy, who first came to Georgia 11 years ago to work on a major oil project.

"Poti is bombed back to the last decade, Gori is flattened and life in Tbilisi remains okay. All just as the economy was outperforming India; it has now been blown to bits," said the doctor, who has had to cut his 20 medical staff to a skeleton crew of eight.

Fellow Irishman Jeffrey Kent runs a contracting firm in Georgia which drills for gold and copper on behalf of a Russian company, and had to evacuate his Romanian drillers via Armenia.

He said: "I had to get the Romanian guys evacuated last Friday by crossing the border into Armenia. As they were passing a military airfield at Marneuli near the border some Russian Mig planes just dropped in and bombed the runway. They were only 300m from the explosions and did not get injured, but they were very traumatised. They are in Romania now and do not want to come back."

Originally from Terryglass, Co Tipperary, Mr Kent is a contractor for a Russian miner in the town of Kazreti, about a 90-minute drive from Tbilisi.

"I will stay here and work from here until things settle down. My only concern is if the locals take it out on the Russian company."

© 2008 The Irish Times

Tuesday, 12 August 2008

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.

Monday, 11 August 2008

Ten years on: Russia bounces back

Dow Jones - Financial News

Jason Corcoran in Moscow
11 Aug 2008

Russia surprised the world this week by going to war with its neighbour Georgia over the future of breakaway province South Ossetia. The military conflict is a marked change from 10 years ago this week, when it took three days for the global markets to react to Russia defaulting on its sovereign debt. When the news sank in, investors panicked. Their haste to buy safe assets in place of risky securities heavily damaged the world’s largest hedge fund, Long-Term Capital Management, and brought the world close to financial meltdown

The default was as unexpected as it was unwanted. Russia defaulting on its debt was the last thing anybody wanted to hear in 1998 and many tried to persuade themselves that the Government would never do it.

The US and European Union had spent billions of dollars supporting President Boris Yeltsin since he stood on a tank in 1991 to defend democracy against the Communists, and the International Monetary Fund and World Bank were making fresh loans to the former Soviet republic – a default would be madness, but Russia did it.

The fallout resulted in a host of western bulge-bracket banks leaving or scaling back their activities in Russia and heralded the growth of local banks.

Most of the US and European banks took big hits as a result of the collapse of the stock market and the Russian Government’s default on its short-term debt.

When Russia opted to default, the value of Russian treasury bills, or GKOs, went to virtually zero, leaving the banks nursing large losses. Creditors heavily exposed to Russian treasury debt included Lehman Brothers, Bankers Trust, Salomon Brothers, Credit Suisse, Nomura, and Merrill Lynch. Hedge funds and speculators such as George Soros racked up billions of dollars in losses through investments in stocks, treasury debt and dollar-denominated bonds.

Ten years later, many of the big names have returned, tempted by oil and energy prices, a high growth rate and a boom in capital markets. Credit Suisse, one of the pioneers in Russia, was heavily exposed to the debt market and sustained a loss of $500m (€323m). It scaled back after the crash but has doubled its Moscow investment banking personnel during the past 18 months in a bid to reclaim a leading position.

Lehman Brothers, which is believed to have recovered just a fraction of its undisclosed losses, this month moved into offices in Moscow after securing a broking and dealing licence in January. Peter Ghavami, Lehman’s head of capital markets in Moscow, said the rollercoaster ride was worth it, considering Russia’s superior position today.

He said: “With continued high commodity prices, record foreign exchange reserves, hardly any external debt and budget surpluses, the situation today could hardly be more different than 1998. This has led to strong capital inflows, especially over the past few years, and a massive expansion of the banking industry, with both domestic and foreign banks greatly increasing their activities.”

The collapse hit Russian banks and brokerages and led to the collapse of SBS-Agro, Inkombank, Most Bank and Russky Kredit. Local brokerages Brunswick, UFG, Renaissance and Troika emerged soon after from the financial rubble. UFG and Brunswick were absorbed by Deutsche Bank and UBS respectively, while Renaissance and Troika have resisted takeover overtures and gone from strength to strength. Renaissance and Troika have in the past three years grown from junior banks into international contenders for bookrunner roles on flotations and bond issues.

Even though Russia’s current account reserves are more than $500bn and growth is coming from outside extractive industries, the basis of the economy and more than half of budget revenues are vulnerable to the price of oil. Chris Weafer, chief strategist at financial corporation Uralsib, arrived in Russia three weeks before the crisis and remains wary of potential seismic shocks to the economy.

He said: “It is all very well to say that the economy can withstand a fall in oil price to $50 per barrel in financial terms, but much of the success or failure of this next phase in the development will depend on investor and consumer confidence, and a great deal will depend on effective management by the Government.

“A falling oil price has tested both in the past. Without any meaningful progress in reducing the dependency on oil revenues, it surely will again."

Yeltsin: defended democracy against the Communists

Timeline to the August 1998 default

How the Russian crisis unfolded...

1997: November: Russian stocks begin to drop in the wake of the Asian financial crisis. Oil and gas lead the way as global commodity prices decline.

1998: March 23: Russian President Boris Yeltsin complains about the pace of reforms and dismisses his entire cabinet, including Prime Minister Viktor Chernomyrdin. Energy Minister Sergei Kirienko is appointed acting Premier.

May 12: Coal miners strike over unpaid wages, blocking the Trans-Siberian Railway.

May 27: Financial markets continue to tumble, forcing the central bank to triple interest rates to 150% to avert a collapse of the rouble.

July 1: Russia’s lower house of Parliament, the Duma, postpones action on spending and tax reforms needed to close the budget deficit and qualify for IMF loans.

July 10: US President Clinton calls on the IMF to conclude negotiations over emergency loans for Russia after a telephone call for help from Yeltsin.

July 13: The IMF announces an additional package of $23bn of emergency loans from foreign lenders. Russian stocks climb.

July 20: The IMF gives final approval to the package but the Duma rejects some conditions for the loans and the first two planned instalments are cut from $5.6bn to $4.8bn.

August 3: Wall Street responds to the deepening crisis after the US stock market falls almost 10% in a matter of weeks.

August 6: The World Bank approves a $1.5bn loan for Russia.

August 13: Trading on the Russian Trading System stock exchange is suspended as blue chips fall more than 20% in the first hour of trading. International speculator George Soros highlighted the crisis with a letter publishedin the Financial Times, in which he said the meltdown in Russian
financial markets had “reached the terminal phase”.

August 14: Yeltsin declares “there will be no devaluation” of the rouble and refuses to return to Moscow from his holiday.

August 16: Russian oligarchs and business leaders meet with members of Yeltsin’s administration in the White House to push for a moratorium on debt repayment.

August 17: Russia announces a devaluation of the rouble and freezes repayment of $40bn in foreign debt, triggering panic in Moscow as Russians line up to buy dollars.

August 19: Russia fails to pay its debt on Gosudarstvennye Kratkosrochnye Obyazatelstva short-term treasury bills, officially falling into default. The IMF and Group of Seven (G7) say they will not provide additional loans to Russia until it meets existing promises.

August 21: Duma calls on Yeltsin to resign as the negative effects trigger sell-offs in the US, Europe and Latin America.

August 23: Yeltsin dismisses Kirienko as Prime Minister and brings back Viktor Chernomyrdin.

August 28: Trading in the rouble is suspended. Yeltsin says he will stay in power until 2000.

September 3: Chernomyrdin appeals to Russians not to be panicked into withdrawing savings from private banks.

September 6: The European Union rules out offering Russia any moratorium on its foreign debts with its member states.

September 10: Chernomyrdin is rejected as Prime Minister in a parliamentary vote and Yeltsin nominates Yevgeny Primakov to end the stalemate.

September 21: The exchange rate reaches 21 roubles to the US dollar, meaning the rouble has lost two-thirds of its value in less than a month.

September 23: William McDonough, president of the New York Federal Reserve, convenes a meeting of the heads of nine Wall Street banks to effect a $3.65bn rescue of US hedge fund Long-Term Capital Management, whose portfolio had been undermined by the Russian crisis.

October 6: A year after hitting a high of more than 570 points, the RTS hits a low of 37.4.

October 31: The IMF refuses to release a $4.3bn instalment from the promised aid package until a realistic budget is set.

November 5: Russia reaches a deal with foreign investors to accept repayment in roubles of $40bn of debt frozen in August, but says it will not be able to repay $17.5bn of debts due in 1999 and will reschedule them.

1999: August 16: Vladimir Putin is appointed Prime Minister.

December 31: Putin replaces President Yeltsin. Russia bounces back from the crisis following a climb in world oil prices.

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

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

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.

Tuesday, 5 August 2008

Abramovich's Millhouse names a portfolio manager

The Wall Street Journal Europe

August 5, 2008

By Jason Corcoran

MOSCOW -- Millhouse Capital, the investment vehicle of Russian oligarch Roman Abramovich, has hired the general director of MDM Bank's MDM Asset Management to help run its portfolio of investments.

A spokesman for Millhouse said Pavel Natalich had joined its private asset-management division as "a department director."

Before working in the fund-management unit of Russia's MDM Bank, Mr. Natalich spent 10 years at Troika Dialog, a Moscow investment bank, and was most recently in charge of high-net-worth clients. He began his career in Russian financial services in 1993 as an assistant director at Ernst & Young.

Russian oligarchs are increasingly attracting talent to help manage their funds. Magomed Galaev, co-head of Goldman Sachs Group Inc. in Russia, was last year hired as president of Summa Capital Holding, the investment vehicle of billionaire Ziyavudin Magomedov.

"Quite a few people have gone to work for oligarchs as they get to see the big picture and can see their ideas implemented with a clear line of communication to the boss," said Jonathan Astbury, a managing director at headhunter Sandton Group. "Many help build the business to float so the long-term equity payouts can be huge."

(Copyright (c) 2008, Dow Jones & Company, Inc.)