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Once the pocket bank of Moscow's mayor Yuri Luzhkov, the Bank of Moscow used the city's business to first build a solid platform of corporate business and is now launching into investment banking where it has been a pioneer in the burgeoning leasing business. bne talks to Denis Gaevski, the bank's head of capital markets.

The Bank of Moscow emerged in the mid-1990s as one of the City of Moscow's "authorized banks" given the right to handle the capital's billions of dollars in tax revenues, ousting now-exiled oligarch Vladimir Gusinsky's Most Bank in the process.

The crisis years following Russia's financial meltdown in August 1998 were difficult, but more recently the bank has recovered. Like many of its fellow quasi-state banks, it has capitalized on its good connections to build a solid platform of corporate banking that has been a launch pad for its success.

In September 2006, the bank took a new direction. Denis Gaevski was lured away from MDM Bank, which was in the process of setting up an investment banking arm, to head Bank of Moscow's own newly-minted investment banking operation. "The bank's president decided to bring us in from MDM Bank because he understood that the demands of our clients have grown and that you have to tailor your products to be up to date and meet those new demands," says Gaevski. "The idea of the bank was to capitalize on the existing franchise of commercial banking, where we have been working with approximately half of the top 500 companies in Russia, and build up investment banking capabilities."

Today, the bank has product desks covering ruble bonds, securitizations, syndicated loans, credit linked notes (CLNs) and Eurobonds. It is also moving into corporate finance, "but for the time being we have decided not to push this area ahead as quickly as we had originally planned," says Gaevski.

Prized assets

Experienced investment bankers are in short supply and MDM's nascent department was raided by JP Morgan, which had recently set up shop in Moscow. So holding onto staff is hard, but Bank of Moscow seemed to have got it right.

"Last year, the markets were very turbulent and demand for experienced personal is high, but we have maintained a team of about 25 people, built around a core five on the structuring desk. For 2008, we plan to add about five to seven more staff to the structuring desk and maybe the same again on sales side," says Gaevski.

Starting from scratch, the new division has grown and is already collecting accolades. By the end of its first year of operation, it was ranked second amongst domestic and international banks in Russia doing securitization deals and second in terms of ruble-denominated Eurobond issues.

Securitization is the sexy end of Russian banking at the moment. The first securitisation issues appeared in the Baltic states in 2003, but the CIS has since taken up the baton. According to a recent report by Moody's, the total volume of securitisation in all "new markets" in 2007 was $7.69bn, split between 26 transactions. Half of these deals were originated in the CIS, followed by Turkey (30.5%) and the Middle East (22.9%). Russia was far the biggest issuer with eight transactions worth $1.8bn.

But what is surprising about Russia's securitization deals is not the number or the size, but the sophistication; while other countries like Turkey are still doing the "plain vanilla" deals based on packaging and reselling credit card receipts, Russia has run ahead of all its peers and is securitizing anything that moves money-wise. Bank of Moscow has been a pioneer in securitizating lease contracts. "In August 2007, we settled a debut issue of securitized Eurobonds worth some RUB8.3bn for the leasing company Business Alliance," says Gaevski.

In many ways it was a pioneering deal. The reference assets for the securitization were two leasing contracts between Business Alliance and the Moscow United Electricity Distribution Company, Moscow's electricity distribution monopoly. It was probably the largest ever ruble-denominated Eurobond solely arranged by a Russian bank. It was also one of only two lease securitization deals in Russia to date, the other having been completed by Morgan Stanley.

"The issue was a huge success, despite coming in the midst of the financial turmoil on international markets at the time. It was more than twice over-subscribed, allowing us to drive the rate down to 8.875% with a five-year maturity period," says Gaevski.

Leasing enjoys generous tax benefits and is exceptionally popular in Russia. The Russian mortgage market, which is already well securitized, is worth some RUB400bn, or about $15bn, whereas leasing is worth several times more.

The investment programme for UES alone is set at some $100bn and a large chunk of that is based on leasing, while the Kremlin has approved other large-scale projects such as the infrastructure development for the Sochi 2014 Winter Olympics or the gasification of the regions - also perfectly suited to leasing, which will add more logs to the securitization fire.

Still, this year is likely to be difficult for all of Russia's banks. The Central Bank of Russia is predicting there is more trouble ahead and is expecting a liquidity squeeze at the end of the first quarter of this year. The quasi-state-owned banks are looking forward to it. "The Bank of Moscow is in an excellent position and will not be affected. Thanks to our close links with the state, that is playing the lead role in restructuring the economy, we have no liquidity worries," says Gaevski.

"Our investment grade rating is a second pillar that supports our business; there is a new breed of investor into ruble-denominated Eurobonds, which tend to be smaller, regional banks, which have a mandate that restricts them to investment grade rated issuers," says Gaevski. "Finally, our client list is impeccable and includes many of Russia's top blue chip companies, who have already weathered may worse storms than this one."