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Putin Pushing Russian Banks Points ‘Two Tanks’ at Western Firms

Employees operate a lie-detecting automated teller machine (ATM) on the OAO Sberbank stand at the St Petersburg International Economic Forum (SPIEF), in St Petersburg, Russia. Photographer: Andrey Rudakov/Bloomberg
Employees operate a lie-detecting automated teller machine (ATM) on the OAO Sberbank stand at the St Petersburg International Economic Forum (SPIEF), in St Petersburg, Russia. Photographer: Andrey Rudakov/Bloomberg

Dec. 14 (Bloomberg) -- Russia’s government is tightening its grip on capital markets by expanding the investment-banking arms of two state-run lenders at the expense of Western firms.

OAO Sberbank, Europe’s third-largest bank by market value, and VTB Group, Russia’s second-biggest, are boosting their corporate and brokerage businesses as foreign lenders, including Italy’s UniCredit SpA and Paris-based Societe Generale SA, retrench and pull cash from the region amid a spreading debt crisis in their home markets.

“The Kremlin has driven out some of the biggest Western retail banks and now has two tanks on the investment-banking lawn,” said Eric Kraus, an independent asset manager in Moscow who previously worked as a strategist for Otkritie Financial Corp., a brokerage partly owned by VTB. “Sberbank’s arrival will make the competition nervous because VTB’s investment bank almost destroyed Deutsche Bank in Russia.”

Barclays Plc and HSBC Holdings Plc, both based in London, are among Western lenders that have abandoned retail operations in Russia as state banks increase market share. Now the competition is shifting to investment banking, which foreign firms have dominated since the collapse of the Soviet Union.

The Kremlin is building its own champions to prevent a repeat of 2008, when foreign banks cut credit lines to Russian issuers after the bankruptcy of Lehman Brothers Holdings Inc. and a 5-day war with Georgia, said Liam Halligan, chief economist at Prosperity Capital Management in Moscow, a Russia-focused fund with about $5 billion under management.

Troika Dialog

Sberbank, the former Soviet savings bank with 20,000 branches and about 240,000 employees, said it will complete its acquisition of brokerage Troika Dialog by mid-February, while VTB this year bought Bank of Moscow and OAO TransCreditBank. The deals give state-owned banks, which control 65 percent of retail deposits, more than 60 percent of the domestic bond-underwriting business, up from 34 percent last year, according to data compiled by Bloomberg.

VTB Capital, the lender’s investment-banking unit, has 12.8 percent of the combined domestic and foreign debt-underwriting market so far this year, followed by state-controlled Gazprombank with 6.8 percent, Sberbank with 6.6 percent and Troika with 5.8 percent, Bloomberg data show. VTB Capital was also first in equity sales, with a 29 percent market share, including the government’s sale of 10 percent of VTB Group for $3.3 billion in February. Deutsche Bank AG, based in Frankfurt, was second with 17 percent, followed by Bank of America Corp. at 11 percent.

Russian ‘Champion’

The emergence of VTB Capital and Sberbank has meant declining market shares for Western firms. Deutsche Bank went from leader in combined Russian equity and debt sales in 2007 to No. 8 last year, Bloomberg data show. Citigroup Inc., based in New York, and Zurich-based Credit Suisse Group AG, second and third that year, slipped to third and seventh in 2010.

The only way deals can get done now is by inviting VTB Capital onto mandates, said three bankers in Moscow who asked not to be identified to avoid jeopardizing their firms.

“We are the Russian investment-banking champion, and we have the goal to be recognized as the global emerging-market investment bank,” Atanas Bostandjiev, hired from Goldman Sachs Group Inc. in May to lead VTB’s push outside of Russia, said during an October interview in Moscow at the bank’s annual investment conference, which Prime Minister Vladimir Putin attended. “Ultimately, we’ll be competing for clients with global players like Deutsche Bank, JPMorgan and Barclays.”

VTB Capital

VTB Capital was created in 2008 by VTB Group Chief Executive Officer Andrey Kostin, 55, who pledged to invest $500 million in the unit, including hiring people from Deutsche Bank and other international firms. Within two years, the brokerage became the biggest organizer of Russian equity sales and the first domestic company in the post-Soviet era to underwrite the most Russian bond sales.

Yuri Soloviev, Kostin’s deputy and Deutsche Bank’s former No. 2 in Russia, said Moscow-based VTB, which is 75 percent owned by the government, is using its leading position in the country as a platform for expansion to “capitalize on the problems of the global banks.” VTB Capital Inc., the company’s New York unit, has 10 employees and a license to trade in the U.S., Soloviev, 41, said in an interview. The bank also has offices in London, Hong Kong, Singapore and Dubai.

“We have seen how the global banks are cutting their presence in many countries, such as Bulgaria, Romania and Turkey, and I’m certain some will exit Russia,” he said. “This creates an opportunity and an empty space we’d like to fill.”

Emulating Deutsche Bank

VTB, known as Vneshtorgbank when it handled trade for the Soviet Union, will boost its international workforce by 25 percent over the next 12 to 18 months, said Bostandjiev, 36, who’s based in London. It also plans to open offices in Turkey and Bulgaria to compete in emerging markets with JPMorgan Chase & Co., Deutsche Bank and other Western firms, he said.

“VTB Capital wants to emulate Deutsche Bank and become a successful international investment bank,” Clemens Grafe, chief economist for Goldman Sachs in Moscow, said in a telephone interview. “But there is no precedent for a state-controlled bank to do so. Deutsche is the German champion and became an international player, but it’s not controlled by the state.”

Deutsche Bank, which has lost 100 bankers and market share to VTB Capital, sees room for competition in a market with almost $1 billion a year in fees.

‘Not Afraid’

“Sberbank will compete with everyone in investment banking, and they will try to use their lending muscles to force clients to give them mandates, but we are not afraid of them,” Igor Lojevsky, Deutsche Bank’s Russia chief, said in an interview in Moscow. “At some point, it will turn out that only desperate clients will work with them, but there will still be a place for us where you need quality.”

Lojevsky, 54, who plans to step down next year, said there are enough internal transactions that don’t require “true M&A skills” that can be given to Sberbank so they can become No. 1.

Sberbank will compete with VTB for investment-banking mandates or work with its Russian rival, depending on “what’s most lucrative” for the bank, Deputy CEO Bella Zlatkis said in a Nov. 30 interview in London.

Sberbank plans to hire as many as 40 bankers over the next 12 to 14 months, adding to the 100 it already employs, Todd Berman, co-head of investment banking at Troika Dialog in Moscow, said in an interview.

‘Colossal Capabilities’

Sberbank, founded 170 years ago, accounts for 48 percent of the nation’s retail deposits, 32 percent of consumer loans and 31 percent of corporate loans. The Moscow-based bank has a client base that includes 78 percent of Russia’s largest companies and 60 percent of mid-size firms, which can be tapped for investment-banking business, Andrey Donskikh, a deputy CEO, said in a May issue of Troika Dialog’s in-house magazine.

“Sberbank has colossal capabilities for financing investment-banking deals,” he said at the time. “With Sberbank’s participation, Troika’s opportunities are significantly multiplied.”

OAO Mobile TeleSystems, Russia’s largest wireless operator, has had a 100 billion ruble ($3.15 billion) credit line with the bank since 2010 and expects to be offered a broader array of services following the Troika integration, said Joshua Tulgan, MTS’s director of investor relations and corporate finance.

“We like to get the lowest rates possible for financing, so it’s better for Russian issuers that Sberbank and Russian banks become more sophisticated,” Tulgan said in a telephone interview.

Sberbank and VTB Capital may struggle to emerge as advisers on mergers-and-acquisition deals because they don’t have experience, “although nobody thought VTB could do Eurobonds, so don’t put it past them,” he said.

Low Fees

Kraus, the asset manager, said the government-run banks are gaining market share by keeping fees low.

“The state banks are driving out the foreign players,” he said. “They don’t have to make money on every deal.”

Sberbank and VTB are also squeezing Renaissance Capital, a Moscow-based investment bank half-owned by Russian billionaire Mikhail Prokhorov, who owns the New Jersey Nets basketball team and announced on Dec. 12 that he plans to challenge Putin for the presidency in March elections. VTB overtook Renaissance last year as the top underwriter of equity sales in Russia. Morgan Stanley, Goldman Sachs and JPMorgan, all based in New York, rounded out the top five.

“Investment banking doesn’t come naturally to state institutions,” said Renaissance founder Stephen Jennings.

Nicholas Jordan, head of UBS AG’s Russia unit, declined to comment about the state-owned banks winning market share, as did spokesmen for Goldman Sachs and Credit Suisse.


“The international banks were cherry-picking the larger deals with higher margins,” said Troika’s Berman, 47. “They won’t be able to do that going forward. They will still be in those deals, but now you have domestic banks that have the full product capability and can back it up with capital.”

Sberbank’s $1 billion acquisition of Troika will make the bank the leading underwriter of Russian domestic debt, with a combined market share of 21.1 percent based on their performance so far this year, putting it ahead of VTB with 15.1 percent.

German Gref, 47, Sberbank’s CEO and a former Putin economy minister, said when the deal was announced in March that the takeover could make Troika “No. 1 or No. 2” for M&A in Russia, dislodging HSBC and Morgan Stanley. Sberbank ranks 32nd in M&A this year and Troika Dialog doesn’t rate, according to Bloomberg data. VTB is 29th.

Credit Squeeze

Sberbank also is buying Oesterreichische Volksbanken AG’s Eastern European unit, excluding its Romanian business, for 585 million euros ($763 million) to 645 million euros, depending on the company’s performance. Volksbanken, which operates in the Czech Republic, Slovakia, Hungary and most of the former Yugoslavia, gives Troika bankers a presence in eight countries, according to Berman.

Putin, 59, who aims to return to the Kremlin next year as president, has sought to staunch capital flight that may reach $70 billion this year, almost twice an earlier forecast, according to the central bank. Bank Rossii is “very concerned” about capital outflows that hit $64 billion in the first 10 months, Chairman Sergey Ignatiev said on Nov. 18.

International Monetary Fund Managing Director Christine Lagarde said on Nov. 9 that Russia may face a credit squeeze as Western European banks mired in the euro-area debt crisis withdraw liquidity from the region.

UniCredit, Citigroup

Russian units of foreign banks, including Milan-based UniCredit, have started lending excess cash to their parents since the middle of the year, using “central bank liquidity” and funds from their Russian operations, Deputy Economy Minister Andrei Klepach said Oct. 27.

The central bank has been monitoring foreign lenders’ subsidiaries since a credit squeeze that began in late 2008, Alexander Vinogradov, an official at the central bank’s regulatory and oversight department, told reporters Nov. 25. Societe Generale’s OAO Rosbank unit, UniCredit, Vienna-based Raiffeisen Bank International AG and Citigroup are among the biggest foreign lenders with local subsidiaries.

“Our policy on the placement of temporarily free funds is in strict accordance with the regulator, and no questions have been put to us about it,” UniCredit Russia said in an e-mailed statement on Nov. 29. “We have also not received any informal guidance.”

Officials at Rosbank and Raiffeisenbank ZAO in Moscow didn’t reply to e-mails seeking comment. Amit Sah, Citigroup’s head of consumer banking in Russia, said on Dec. 1 that the lender didn’t have any funding pressure from its parent.

‘Hand-Brake Turn’

Foreign banks “facilitated” capital flight after the collapse of Lehman Brothers brought interbank lending to a halt around the world, Putin has said. At least 10 of Russia’s 25 wealthiest businessmen faced margin calls from lenders in the final quarter of 2008 as the country’s worst financial crisis since 1998 wiped $230 billion from the value of their equity, according to data compiled by Deutsche Bank and Bloomberg.

“There was surprise and shock when Western banks decided to go from lending money to anyone to refusing to roll over loans from one month to the next,” Prosperity Capital’s Halligan said in an interview. “This hand-brake turn shocked people in the Russian administration who decided they needed to find long-term financing solutions.”

Capital Flight

Renaissance Capital’s Jennings also questioned the commitment of Western banks.

“What does it mean for building domestic banking systems and capital markets if every time there’s a shock and this happens?” Jennings said.

Moody’s Investors Service cut its outlook for Russia’s banking system to negative on Oct. 24, citing continued capital flight and reduced access to wholesale funding. Capital flight from Russia, ranked the world’s most corrupt major economy in Transparency International’s 2010 index, may reach $85 billion this year up from a previous forecast of $36 billion, Acting Finance Minister Anton Siluanov said Dec. 5.

The outflow likely will continue after Putin’s ruling party suffered its biggest setback since he came power a decade ago in elections for the State Duma earlier this month, Elina Ribakova and Natalia Novikova, analysts at Citigroup in Moscow, wrote in a Dec. 8 report. Thousands of people took to the streets last week to protest the vote, which was marred by complaints of ballot-stuffing, sending Russian stocks and the ruble tumbling. President Dmitry Medvedev said on Dec. 12 that the allegations of electoral fraud should be investigated.

Ackermann, Dimon

The rise of Russia’s state-owned investment banks comes at the same time the government is courting heads of Western firms to advise it on developing Moscow as a global financial center. Josef Ackermann and Jamie Dimon, the heads of Deutsche Bank and JPMorgan, were among those who attended a meeting at the Moscow headquarters of Sberbank in October along with Medvedev and top executives of Russia’s biggest banks. Goldman Sachs CEO Lloyd Blankfein joined by phone.

Some Western lenders are curtailing operations in Russia. Barclays, the U.K.’s third-largest lender, in October sold the retail unit it bought for $745 million in 2008. HSBC, Europe’s biggest bank, sold part of its consumer business in the country to Citigroup after quitting retail and private banking to focus on corporate clients. Spain’s Banco Santander SA, Morgan Stanley and Sweden’s Swedbank AB are among other firms that have ended or reduced Russian retail-banking operations since 2010.

Citigroup started cutting investment-banking jobs in Moscow on Dec. 13 as “part of ongoing efforts to control expenses,” Denis Denisov, a company spokesman, said in a Dec. 12 e-mail.

Asset Sales

The government is auctioning assets valued at about 1 trillion rubles. The central bank picked Troika Dialog, Goldman Sachs, JPMorgan and Credit Suisse on June 14 to manage the sale of 7.6 percent of Sberbank. The four are also among 23 advisers for the planned sale of state assets, which has been stalled by the global economic slowdown.

The government expects to cut its holding in Sberbank to less than 50 percent by 2014, while still retaining a controlling stake, First Deputy Prime Minister Igor Shuvalov said in October 2010. It intends to sell more shares in VTB, possibly reducing its holding in the lender to less than 50 percent within three years, he said.

Sberbank, 60 percent owned by the government, and VTB complained to Shuvalov in October that foreign banks were getting most of the mandates to sell shares in the privatization program, Russian newspaper Kommersant reported. Strong domestic investment banks will better represent the state’s interest in such sales, Sberbank’s Gref and VTB’s Kostin told Shuvalov in a letter cited by Kommersant.

‘Special Mission’

VTB, like other state-run banks, has a “special mission” to provide financing for projects that private lenders shun, Putin told Kostin in 2010, according to a transcript of a conversation posted on a government website. “Real banks today have to be equipped for investment banking.”

In the 1990s, Putin built OAO Rosneft and OAO Gazprom, the country’s largest oil producer and its natural gas export monopoly, into national energy champions. Rosneft controls most of the former assets of Yukos Oil Co., once Russia’s biggest oil company, which was declared bankrupt and sold in pieces after facing $30 billion of tax claims during Putin’s presidency. Former Yukos owner Mikhail Khodorkovsky was convicted of fraud in 2005 and oil embezzlement in December 2010, pushing his prison sentence to 13 years.

‘Extraordinary Returns’

Troika Dialog’s Berman, who was hired from Charlotte, North Carolina-based Bank of America in September, said that working closely with the government was good for business.

“It’s not a question of having a state mission,” he said. “It’s a question of how we generate extraordinary returns. If there are smart deals that the government suggests are good for the economy and they make money for us, that’s terrific.”

Sberbank and VTB will compete for the state-bank role on deals, said Neil Withers, a former head of investor relations at VTB and now vice chairman of Silk Route Financial, a merchant bank in Moscow.

“Deutsche, UBS and Citigroup will now have to think about inviting Sberbank onto deals, whereas before it was VTB,” Withers said in a phone interview.

Getting a cut of government deals won’t vault Sberbank and VTB into the top tier of investment banks, said Roland Nash, chief investment strategist at Moscow-based hedge fund Verno Capital, which manages more than $150 million in Russia.

“Russia’s national banking champions want to become international champions, but they won’t be able to compete with the Anglo-Saxon model,” said Nash, a former global strategist at Renaissance Capital. “They will have to focus their activities on China, India, Brazil and Africa.”

To contact the reporter on this story: Jason Corcoran at

To contact the editor responsible for this story: Gavin Serkin at

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