Vladimir Putin's Favorite Bankers
Following the collapse of Lehman Brothers in 2008, foreign banks froze credit lines in Russia, leaving some big companies scrambling for financing. Now the Kremlin is trying to make sure that history never repeats itself. “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,” says Liam Halligan, chief economist at Prosperity Capital Management, an investment fund in Moscow. Government officials “decided they needed to find long-term financing solutions.”
Russian authorities are building up the investment banking arms of state-run Sberbank and VTB Group, ranked the country’s biggest and second-biggest lenders. They have blessed or orchestrated a string of mergers and acquisitions, including Sberbank’s $1 billion takeover of brokerage Troika Dialog, to be completed in February. VTB last year bought Bank of Moscow and TransCreditBank. The deals give state-owned banks more than 60 percent of the domestic market for underwriting corporate bonds, up from 34 percent in 2010, according to data compiled by Bloomberg.
The Kremlin’s push to create national champions in banking could not be better timed. A number of foreign lenders with retail operations in Russia are retrenching because they face challenges in their home markets. At least six European banks quit the country last year, and those that have remained, such as Italy’s UniCredit and France’s Société Générale, are dialing back on expansion. Now the competition is shifting from retail to investment banking, where $1 billion a year in fees is at stake. “The Kremlin has driven out some of the biggest Western retail banks and now has two tanks on the investment banking lawn,” says Eric Kraus, an independent asset manager in Moscow who previously worked at Otkritie Financial, a brokerage partly owned by VTB.
Five years ago, Deutsche Bank ranked No. 1 in combined Russian equity and debt sales; by 2010 it had slipped to No. 8. The German bank is losing ground to local rivals in other ways. VTB’s investment banking unit, VTB Capital, has hired away 100 of its bankers in the three years it has been in operation. Igor Lojevsky, Deutsche Bank’s Russia chief, says “there will still be a place for us where you need quality.”
The government-run banks are gaining market share by keeping fees low, says Kraus, the asset manager: “They don’t have to make money on every deal.” That suits local companies fine. “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,” says Joshua Tulgan, director of corporate finance for Mobile TeleSystems, the No. 1 wireless operator. The company has had a 100 billion ruble ($3.15 billion) credit line with Sberbank since 2010 and expects to be offered a broader array of services following the Troika integration.
Three foreign bankers in Moscow, who asked not to be identified to avoid jeopardizing their firms, say the only way they can win business these days is by teaming up with VTB Capital on deals. “The international banks were cherry-picking the larger deals with higher margins,” says Todd Berman, whom Troika Dialog hired away from Bank of America last year to co-head investment banking. “They won’t be able to do that going forward.”