bne -

In the 1990s, Charlie Ryan, head of the investment bank UFG (now Deutsche Bank), used to say of Sberbank: "It's the 800-pound gorilla in the sitting room." It was too big to get out of the door and too big to ignore. Commanding three-quarters of the retail bank assets in the country, to a large extent Sberbank was the Russian banking sector. These days, maybe a better analogy is to talk about the elephants in the room.

During the start of the last decade, Russia's investment banks flourished on the back of a stock market boom. Sberbank's share of deposits fell to under 50% and money poured in from abroad. However, since the stock market collapse in 2008, the two state-owned elephants are crowding out the investment-banking sector in Russia: the recently merged Sberbank/Troika Dialog (I suggest the state rename it "Sbroika Monologue") and VTB Capital.

The widespread assumption is that these two make use of their purple pedigrees to snaffle all the best business in Russia with the largest (state-owned) companies. Both banks deny the accusation (we asked them) and say there are Chinese walls between the bank and the state, forcing them into real competition with the commercial banks.

But their "quango" status means they can borrow more money for longer periods at cheaper prices than the commercial banks. They have the implicit backing of the state, which is enough to chop several percentage points off their cost of money. Competition in the banking sector is a good thing, but not when it is skewed so heavily towards the state-owned end of the spectrum.

The problem was highlighted in May when Renaissance Capital, now the last big commercial investment bank (and even this is half-owned by Kremlin-friendly oligarch Mikhail Prokhorov), sacked 40 people after racking up a $94m loss in 2011 - three-times more than the loss in 2010. Analysts warn that more sackings are on the way and owner Stephen Jennings will have to dump at least one in ten of the employees this year. It all makes Jennings' decision several years ago to get into Africa look like a very smart move.

But the rot was already advanced before Renaissance's spring-cleaning. Ed Kaufman, former head of Alfa Capital (part of the Alfa Group), told bne in an interview over a year ago that his investment bank couldn't stand on its own any more and exists only because the commercial banking clients need some investment banking services that they want to provide in-house. "The margins that we used to earn were in percentages, but now they are in tens of basis points," Kaufman said, referring to a banker's units for counting hundredths of a percent. Kaufman quit at the end of last year.

VTB wants to become a privately owned bank, but selling 10% a year means it will be at least seven years before this happens. "Sbrioka" is also included in the government's privatization programme, but it is clear it won't let the state's stake fall below 50%, which means the next sale of a 7.6% stake that is on the block will be the last.

The only bright spot is that these two elephants tend to only chase elephantine deals and ignore the raft of small and medium-sized enterprises looking for investment bank services, which is creating work for a tier of SME specialists. But for the newly laid-off star traders from Renaissance's proprietary desk, the options available to them for aren't that appealing: work for the state or do a (Wall Street's) Bud Fox and slave in the sweatshop of a second-tier brokerage.