Ben Aris in Moscow -

The entrepreneurial era that created Russia's investment banking sector has come to an end as the big boys move in and square off in an increasingly competitive market.

Deutsche Bank's Russian subsidiary announced in an emailed press release on March 30 that it was subsuming its investment banking business into the Russian parent and had cancelled the license of ZAO Deutsche Securities, which was home to its brokerage and equity business, in order to "more efficiently use the opportunities opening up in the Russian securities market."

The decision effectively brings to an end the investment bank that grew out of a merger with local brokerage United Financial Group (UFG).

Next year, Deutsche Bank will celebrate 130 years of working in Russia, but the bank returned to the Russian market following the fall of the Soviet Union in 1998 with a classical trade and commercial banking operation. Deutsche Bank then added a brokerage operation with a deal in 2006 to buy 40% of UFG, which was set up by American entrepreneur Charlie Ryan and his partner, the former Russian finance minister Boris Federov. The bank bought the rest of the stake in a deal that closed just before the 2008 crisis struck, but was settled after the financial maelstrom had started without renegotiating the price. "That's the advantage of doing business with the Germans," Florian Fenner, a partner in UFG, said at the time, who is German himself.

Deutsche Bank didn't have an easy time building up the business, suffering within a few months of taking control of UFG a raid by the newly formed VTB Capital, the investment banking arm of the state-owned VTB Bank, which hired away most of its equity trading and sales team, as well as the bulk of its research department. The takeover was so extensive that VTB Capital continues to send out a daily newsletter as a pdf using the same file names as its analysts previously used when they were at Deutsche Bank. "It is a normal part of business," Dimitri Agishev, head of Deutsche Bank Russia's communications department, tells bne. "Other banks have used us as a school; they let us train the staff and then they poach them. It happens everywhere."

Ironically, the crisis probably helped, as while the other leading investment banks shed workers by the boatload, Deutsche Bank was one of the few banks in the market that continued to hire throughout the crisis as it rebuilt its team.

Shifting landscape

However, Russia's investment-banking landscape has shifted since Ryan founded UFG, who is still employed as a consultant by Deutsche Bank on the asset management side. The appearance of VTB Capital represented a serious challenge to the existing investment banks and last year became the biggest investment bank in Russia with $1.2bn of equity and $10.2bn of bond deals out of a total of $32bn of deals in 2010, up by more than half from a year earlier, according to Dealogic.

And another monster entered the investment banking business in March when Russia's largest bank and retail giant, the state-owned Sberbank, announced a $1.25bn takeover of leading privately owned investment bank Troika Dialog.

Critics complain the state now dominates the investment banking sector, leaving Renaissance Capital as the only independent investment bank of any size on the market. Even the up-and-coming Otkritie Financial Corporation, which is the best placed of the second-tier banks to take on the top tier, is 19% owned by VTB Group.

But the government says it was powerless to prevent the Sberbank deal and wouldn't have blocked it on principle. "It was natural that Sberbank has an investment banking arm, simply because it is the biggest bank in the country," Arkady Dvorkovich, chief economic adviser to Russian President Dmitry Medvedev, tells bne in an exclusive interview. "Sberbank hired consultants which said that creating an investment bank from scratch was too expensive and it was not really a rational option compared to buying an existing investment bank. They looked around and decided that Troika was the best they could find... The other side of the coin is the state cannot restrict Sberbank's place in the market, as how can we say to the minority shareholders there is a cap on the bank's ability to compete?"

Dvorkovich admits that the deal will increase the state's share in the investment banking sector in the short term, but points out that Russia's National Banking Council has discussed a deal to sell 7.58% of Sberbank to private investors and ultimately the Russian government intends to reduce its stake in the bank below 51%.

While several other foreign banks such as Barclays Bank have recently retreated from the Russian market due to the increasing competition, Deutsche Bank Russia is digging its heels in. "We are committed to the Russian market and have enjoyed a tremendous track record of success here. We are not going to leave this market," says Deutsche Bank's Agishev.