Russia Investment Banking Fees Evaporate as Sanctions Halt Deals

Goldman Sachs Group Inc. and Citigroup Inc. are among securities firms that have seen Russian investment banking commissions evaporate this year as sanctions and the country’s economic slump bring business to a halt.

Banks collected $70 million advising on Russian mergers and securities sales through May 31 compared with $178 million in the same period last year, according to data from Freeman & Co., a New York consulting firm. Deutsche Bank AG, the biggest foreign investment bank in the country, earned $1 million down from $16 million a year ago, while UBS Group AG, Goldman Sachs and Citigroup saw fees drop to zero in the period.

It’s “about as bleak as you would expect,” Jeff Nassof, a vice president at Freeman, said in e-mailed comments. “2014 was hardly a banner year and 2015 is currently on pace to be the worst year for Russian investment banking since 2001.”

Bond sales in foreign currencies and initial public offerings have virtually disappeared as international securities firms and investors avert Russian risk. After the country annexed Crimea in March 2014, the European Union and the U.S. imposed financial restrictions, visa bans and asset freezes on scores of Russian companies, politicians and individuals. A drop in the price of crude oil, the nation’s biggest export revenue earner, has exacerbated the impact on the economic slump, further slowing dealmaking.

Regulatory Concerns

As the fee pool shrank, Russian banks’ share of commissions increased to 59 percent from 47 percent a year ago and 31 percent in 2013. European banks’ share of fees rose to 35 percent from 33 percent a year ago while U.S. banks’ share slumped to 6 percent from 19 percent last year.

“Western banks dealing with Russia are fearful of unwanted attention from the regulator should they engage with business with Russian entities,” Anastasia Nesvetailova, professor of international political economy at City University London, wrote in e-mailed comments. “Nobody wants to be examined by U.S. authorities. The Russian market is not worth it at the moment.”

Officials for Citigroup, Goldman Sachs, Deutsche Bank and UBS declined to comment on the drop in business.

The banks along with JPMorgan Chase & Co. and Morgan Stanley were among foreign firms chosen to advise on the Russian privatization program, which has been slowed by the crisis.

Russia Retrenchment

Wall Street and European firms have transferred staff from Moscow to London as deal flow trickled. The drop in activity to the lowest since 2001 may now force the firms to re-examine their bet on the nation. In the busiest years of 2007 and 2008, Russian fees accounted for no more than 1.5 percent of global investment banking commissions, Freeman data show. That proportion dropped to 0.2 percent this year.

Russia and Ukraine are no longer attractive markets for foreign banks and those with consumer businesses will probably reconsider their exposure and scale back their operations due to market deterioration, Standard & Poor’s said in a note in Tuesday.

Citigroup, which returned to Russia in 1992 after a 72-year hiatus, is one of a handful of foreign banks that have prospered in consumer banking. It ranks fourth among foreign retail banks.

“Unlike in the early 2000s and prior to the crisis of 2008, foreign banks no longer view these markets as aggressive business growth drivers,” S&P analysts led by Natalia Yalovskaya wrote in the e-mailed report. “Rather, they increasingly perceive them as high risk contributors, which, in turn, give rise to increasing capital charges.”

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