Russia Hires Goldman as Corporate Broker to Boost ImageJason Corcoran
Goldman Sachs Group Inc. has been hired by the Russian government to burnish the nation’s image overseas and attract more institutional investors.
The bank has signed a three-year agreement with the Economy Ministry and the Russian Direct Investment Fund to advise on issues such as communicating government decisions and setting up meetings with investors, according to Sergei Arsenyev, Goldman Sachs’s managing director of investment banking in Moscow.
“The pool of investors that Russia talks to is the dedicated emerging-markets base, and it’s been difficult for them to break out to a wider investor pool and a global base,” Arsenyev, 41, who handles the bank’s Kremlin relations, said in a telephone interview. “We think valuations in Russia remain very attractive, and there are many interesting opportunities for investors on the public and private side.”
President Vladimir Putin last year ordered the government to improve Russia’s standing in the World Bank’s Doing Business rating to 20th by 2018. It climbed eight positions to 112 in the latest study in October. While that’s better than emerging-market competitors India and Brazil, Russia remains the worst among major economies in graft, Transparency International said in December in its annual Corruption Perceptions Index.
“We don’t know how to communicate with investors,” Deputy Economy Minister Sergei Belyakov told reporters last week.
The world’s largest energy exporter plans to raise a record $10 billion from asset sales this year, First Deputy Prime Minister Igor Shuvalov said in an interview with Bloomberg Television last month. While corruption continues to be an issue, it’s less so for foreign investors who have already committed to Russia, Shuvalov said.
Goldman Sachs is one of 23 foreign and domestic banks selected to advise Russia on its 1 trillion-ruble ($33 billion) privatization program. Last year it helped advise OAO Sberbank, Russia’s largest lender, on a $5.2 billion equity sale.
The agreement with the Kremlin “is similar to a corporate broking arrangement, which every FTSE 100 company has,” said Arsenyev, who switched to investment banking a year ago after 17 years in research. “It’s to make sure the market message is crystallized. Our work is strictly limited to the investor base and making sure the government is meeting the right people.”
British companies typically hire corporate brokers to serve as a liaison with investors and to help them comply with stock market rules. The assignments, compensated with a nominal fee or sometimes unpaid, can lead to more lucrative business such as managing share deals and advising on mergers and acquisitions.
The deal also includes advising Russia on its bid to transform Moscow into an international financial center and to attract more capital, Arsenyev said. Moscow ranked 64th on the Global Financial Centers Index in September, a survey compiled by Z/Yen Group, a London-based consulting firm.
The world’s premier financial centers have succeeded because of “good rule of law,” Lloyd Blankfein, Goldman Sachs chief executive officer, said at last month’s World Economic Forum in Davos, Switzerland.
“You want to go into a place that’s fair, where if you make an investment you can recover your investment,” he said at a panel discussion. “You can go into the U.K. and sue the U.K. government and have a reasonable chance that a court will decide that fairly. There are other places where I think people implicitly know they can’t.”
Blankfein, 58, who is a member of Prime Minister Dmitry Medvedev’s advisory committee for turning Moscow into a financial center, has struggled to build a business in Russia. The New York-based bank scaled back operations in Moscow soon after opening an office in 1994 amid a worldwide retrenchment. It returned in 1998, managing Russia’s sale of bonds a month before the country defaulted on $40 billion of domestic debt. That prompted it to withdraw almost entirely before ramping up again in 2006.
Since the default, the bank has been overlooked by Russia for three sovereign bond deals in 2010 and 2011 and $7 billion in euro bonds last year, according to data compiled by Bloomberg. Russia could borrow as much as $7 billion this year, according to the budget. The government is prepared to wait for companies to meet their borrowing needs to avoid crowding the market, Deputy Finance Minister Sergei Storchak said in a Dec. 24 interview.
Goldman Sachs, along with BlackRock Inc. and Singapore-based Templeton Asset Management Ltd. signed an accord with the Russia’s sovereign private-equity fund in June to invest in Russian companies preparing for initial public offerings. The fund is led by Kirill Dmitriev, a former Goldman Sachs banker.
The U.S. securities firm is led in Moscow by Paolo Zannoni, who took over last year from co-heads Chris Barter and Jean Raby. Barter left the firm to set up a private-equity group, while Raby returned to France with Goldman Sachs.
Zannoni, who had been chairman of Italian investment banking, previously worked in the former Soviet Union for Fiat SpA. He had been sent to Moscow in the early 1990s by then chairman Giovanni Agnelli to buy Russian carmaker OAO AvtoVAZ, which was supposed to be privatized.
The Moscow Exchange’s valuations trail the biggest emerging markets, while Russian issuers prefer to sell equities in London. Russia’s benchmark Micex Index has gained 4.5 percent this year, beating the MSCI’s Emerging Markets Index’s 1.1 percent advance.
Andrey Kostin, chairman of VTB Group, Russia’s second-biggest bank, said on Nov. 15 that the country was undervalued “because of its image of corruption and lack of necessity to comply with law.”
Companies on the Micex Index have an average valuation of 5.9 times estimated earnings, compared with 16.6 for India’s BSE Sensex Index, 19.9 for Brazil’s Bovespa and 13.4 for China’s Shanghai Composite Index, data compiled by Bloomberg show.