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.