Ben Aris in Moscow -
In a radical move, Russia's leading investment bank Renaissance Capital has bought a bank in Africa and hopes to be the first Russian bank to break out of its traditional stamping ground of the former Soviet Union by conquering these new emerging markets.
CEO Stephen Jennings is a doyen of the Russian financial system and after the bank nearly collapsed in 1998, he has built up Renaissance Capital to become one of the leading banks in the region with assets of over $1bn.
Like most of the other Russian investment banks, Renaissance Capital has been expanding recently to take advantage of the booming economies across the whole of the Commonwealth of Independent States (CIS), opening affiliates in places like Kazakhstan and Ukraine.
However, the purchase of a significant minority stake in ETI, the largest pan-regional bank in west Africa, last year sent the Russian bank in a totally new direction. Since then Jennings, who has the dubious distinction of being named one of only two non-Russian oligarchs by the British newspaper The Independent, has been spending 70% of his time in Africa building up the Renaissance team and looking for business.
The man charged with coordinating the push into the Dark Continent is Neil Harvey. Harvey, who was born in Kenya, says the move is less surprising than it first appears, as there are lot of similarities between Russia and Africa.
"If you look at sub-Sahara Africa, we think that the business model we have developed in Russia fits very well into that segment of Africa, which is why we are focusing on sub-Sahara Africa rather than Egypt or South Africa," says Harvey.
Having cut its teeth in the chaos of Russia during the 1990s, Renaissance knows what it is to work in unstable markets. Jennings was a co-founder of the bank he set up in 1995 together with business partner Boris Jordan (Russia's other non-Russian oligarch), but he bought Jordan out in the wake of Russia's 1998 financial crisis, which left the bank with heavy debts and teetering on the verge of bankruptcy.
Since then, the bank has built up a string of businesses and raised more than $15bn for clients more than any other investment bank in the country and hopes to leverage both its experience in Russia and its various business activities to capture a chunk of what Renaissance sees as one of the few markets left in the world that has been bypassed by emerging market investors.
"Renaissance Capital is not just an investment bank, it is an investment group. It has a consumer finance business; it has an asset management and a wealth management business; it's got the investment bank and investment business; it has merchant banking," says Harvey. "We take the complementarily of all these businesses and the way we work in emerging markets and we think it is a strong business model in its own right. We have seen a market like Russia develop. We have seen where it has come from. We have seen the politics. You see the industries develop. We think that we have a bit of an edge watching a country going from nowhere through a lot of changes. I am not saying that Africa is going to be exactly the same, but looking how Russia has developed - and it is not just oil and gas, there is mobile telecom, retail and property - we think that skill can be applicable."
Russian into the heart of darkness
Renaissance's timing looks good. Russia has been growing fast, but its companies have been expanding abroad even faster. And this dovetails neatly with the Kremlin's increasingly obvious policy to promote Russian companies on international markets in the hope of building up a set of competitive but Kremlin-friendly multinationals to represent Russia's interests in the global marketplace.
The Russian economy and population maybe dwarfed by its BRIC (Brazil, Russia, India, China) peers, but last year it overtook all the other big emerging markets to become the biggest overseas investor, according to a UNCTAD report. Direct investments made by Russian companies abroad totalled $140bn in 2005, up from $20bn in 2000.
Russia's economy has been booming, but economists say that the explosive growth is starting to slow as most of its industries mature. That is not to say these business are mature, but the era of triple-digit gains is over as competition rises and margins start to be squeezed. The IMF said in its assessment of global economies in April that Russia's economy is looking very healthy and that GDP will grow by 6.4% this year and by 5.9% in 2008, but the economy is starting to bump up against the ceiling.
"In Russia, growth would remain strong, although output appears to be running close to capacity in the face of robust domestic demand," it said in a report drafted for the spring session of the Fund.
For several years, Russian companies have been going after the low-hanging fruit in neighbouring countries of the "near abroad," as Russians call the other republics of the former Soviet Union. But even as these opportunities dry up, they are casting their nets further afield and as Africa is the only emerging market that remains untouched by foreign investment, it's the obvious big prize.
Superficially, Africa looks similar to Russia. It is home to a large population. The economy is underdeveloped and the banking system rudimentary. Most of the countries remain politically unstable, although there has been a great deal of progress on this front in recent years. And the continent is home to mineral wealth, such as Nigeria's oil resources, that complement Russia's strengths perfectly.
Over the last two years there have been a string of Russian investments into African companies. Russia's second largest gold producer Polymetal expects to set up a joint venture with South Africa's AngloGold Ashanti to develop gold deposits in Russia sometime in the first half of this year. Oligarch Viktor Vekselberg's Renova group has been actively shifting through Africa for investment opportunities and entered into a joint venture with state-owned Tekhsnabexport to develop Namibias uranium deposits.
And the Russians are not the only ones looking at Africa. In January, Chinese leader Hu Jintao led a large delegation on a 12-day tour of the continent to strike trade and investment deals. The Chinese are also interested in tapping Africa's huge but underdeveloped natural resources base. His visit came on the heels of the "China Africa" forum that took place in grand style in November 2006, when Beijing hosted delegations from 48 of the 53 countries in Africa, including 35 presidents. Russian Prime Minister Mikhail Fradkov paid a similar visit to the continent in March.
There is no question about the potential Africa has; at issue is the timing. Harvey argues that the economies of the leading countries have reached critical mass and are starting to take off. "Nigeria just did a Eurobond. The government has pretty paid off all their debt and they haven't squandered the money for a change. Now Nigerian banks are looking to borrow on the [international capital] markets. They have the opportunity to access the capital markets for the first time in quite a while," says Harvey.
Why make the move now? According to sources in the bank, Jennings has been thinking about making the move into Africa for several years, but has been preoccupied with running the Russian operation.
"We didn't have the management bandwidth before," says Harvey. "Steven has hired a lot of people in the last couple of years to deepen the bench. We are trying to Russian-ize the Russian business more, but leverage the strength of our staff in Russia to build up the African business.
Jennings is said to be spending millions of dollars a year on new managers brought in from places like London and New York. A top tier of international calibre managers have been hired to run the various departments, but at the same time the number of employees is expected to double to around 5,000 in the next year or so, which will make the staff of Renaissance predominately Russian.
Renaissance Capital's obvious edge is the experience it has built up over the last decade of working in unstable markets, but Harvey says there is more to it than that.
"One thing is to be local and not just flying out from London. You really have to be being on the ground," says Harvey.
The bank has been hiring away analysts and traders from the handful of existing boutique brokerages and the few banks already operating in the region, and Harvey says they have been pleasantly surprised by the quality of people available. While much of Africa may remain economically backward, unlike Russia the borders were always open and a small but significant number of Africans have lived and worked in the industrialised countries.
"In 1992, the raw materials we had in Russia were so much worse than the raw materials we have in Africa. We can hire people that are way ahead of Russian in 1992. A lot people in these countries are incredibly well educated, others want to come back from abroad," says Harvey.
The bank is pleased with the results they are getting. Some of the local staff are bright and well educated, but as the capital markets are so underdeveloped they have had little to compare their work to. The bank brings these African analysts to Moscow for training and brings their research and sales skills up to scratch in the hope that the research product, for example, can be lifted quickly to international standards.
But the most important part of the new business is that it is already proving to be "very profitable," says Harvey. The key is the crossover between Renaissance's international clients. Most of the bank's institutional investors are not Russia-specific investors, but invest into emerging markets as an asset class. As the returns from the Russian markets slow last year the Russian stock market returned over 70% but this year analysts are predicting more modest growth of about 20% - these investors will be eyeing Africa for the potential triple-digit gains they have got used to from Russia.
"I don't think we are early, but we are not late," says Harvey. "If we have 100 clients there will not be 100 investing in Nigeria. There may be 10 or 20 and that will grow over time, if we are right on the macro story. We are looking at this as a long-term investment."
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