Ben Aris in Moscow -
The world's investment banks are in meltdown, but Alexey Yakovitsky, managing director of the recently created VTB Capital, tells bne that this is good time to be launching a new state-owned investment bank on the Russian market.
State-owned VTB Group, the second largest lender in Russia, has been expanding aggressively for several years now and opened branches in almost all of the other countries of the Commonwealth of Independent States (CIS). It has also been moving into new business lines - it took advantage of the 2004 mini-banking crisis to buy the troubled Guta Bank (with the help of loans from the Central Bank of Russia) and set up VTB24, now one of the biggest retail banks in Russia. And the banking group was toying with the idea of getting into investment banking.
"The original idea was to build on [the offices of VTB Europe in] London and simply do corporate finance. Work was started on this concept at the start of 2007, but this idea was quickly abandoned," says Yakovitsky, who was the second person to be hired after VTB Capital (VTBC) CEO Yuri Soloviev.
The plans quickly became bolder: Kostin wanted to add a full-service investment banking to the group's portfolio and was reportedly in talks with both of Russia's leading investment banks, Renaissance Capital and Troika Dialog. But after failing to agree on a price, VTB Group CEO Andrei Kostin decided it was cheaper to simply hire a team away from another bank and build an investment bank from scratch.
Kostin went shopping for staff and earlier this year hired away almost the entire research team from Deutsche Bank. The hiring was done in waves, with the senior people moving first, followed later by their more junior colleagues. Even the Deutsche Bank marketing team decided to switch jobs. It had to be a big team, says Yakovitsky, as this would shorten the time it takes to bring the new bank to market; clients will follow the traders and analysts they knew. The hiring was done in waves, with the senior people moving first, followed later by their more junior colleagues. Even the Deutsche Bank marketing team decided to switch jobs.
Moscow's banking labour market has been tight for two years, as most of the big international names have set out their stalls and several banks that tried to break into the investment banking business were raided, sending wage costs rocketing. VTBC hired 250 almost overnight and, according to reports, even junior analysts were demanding astronomical pay packets. However, Yakovitsky denies the bank paid over the odds and says most people were offered market rates, but were also enticed by scale of the VTBC project. No one doubts that with the state's resources standing behind the bank, it will fail to become a major player on the market. "VTBC is a dramatic project. What we are attempting to do here is build a Morgan Stanley of Eastern Europe and we have the resources to do it," says Yakovitsky. "VBTC will be successful not because of its state connections, but because we have a first-class team. When we go to a client, we need to be able to sell ourselves on the quality of our services."
The changes in Russia's investment bank business have been dramatic, but the sector was already altering before the crisis hit as the international players moved in. Russia is over-banked, but now there is only one independent investment bank left.
The first to go was Brunswick Capital, sold to USB in the 1990s. More recently, Aton Capital was bought by UniCredit Group and United Financial Group by Deutsche Bank. By this summer, only Troika Dialog and Renaissance Capital were left. But Richard Hainsworth, CEO of Global Ratings, believes that now Russian oligarch Mikhail Prokhorov has bought into Renaissance Capital, few of the other oligarchs in Russia will want to do business with the bank: Jennings will have a difficult job persuading many of Russia's biggest private companies it is still safe to work with Renaissance Capital.
Yakovitsky points out that the foreign banks are all chasing the same top 20 blue-chip firms. "If you compare this business to the size of the Russian economy, it is actually a very small volume of business," he says. "No one is pretending that we are independent, but at the same time no one has a problem with doing business with the state in Russia."
Massive changes are already underway in the way the global capital markets work and VTBC could accidentally find itself in the vanguard of a new style of international finance.
Speculation has already begun that the role of private capital in the economies of the world will be reduced, while the state's share will increase. The sovereign wealth funds were previously a source of concern for many investors, but in the aftermath of the crisis sovereign money will clearly play a more important role as one of the few large sources of capital left. "The global structure of finance is changing, as so much private capital has been destroyed. Sovereign capital will be far more important," says Yakovitsky. "The Russian government will have no choice but to use the state resources to help its companies grow. The biggest investor into Russia is about to become Russia itself and this kind of capital needs a different kind of intermediation."
Yakovitsky thinks that it will take years for the Anglo-Saxon financial centres to recover and expects the focus to turn to Asia and the Middle East, which are still home to large pools of liquidity - and unlike western capital, both these sources of capital have a large sovereign component. Western bankers are uncomfortable dealing with sovereign money, as they assume there is some sort of political agenda behind the profit motive. However, in Asia and the Middle East this mix of politics and profit is par for the course: the VTB Group has worked in this environment and Yakovitsky says steering a course between these two poles will be second nature for VTBC.
At the same time, the crisis has actually added to the odds that the new bank will be a success. With few places left to run, a lot of capital has been fleeing to the relatively security of state-owned banks; VTBC has been buttering up potential customers for months, who are suddenly a lot more receptive to the bank's sales pitch. "The launch budget has been set and we are still sticking to that budget," says Yakovitsky. "We are expecting to get a much bigger share of the pie, even if that pie has become a lot smaller."
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