Return of the White Russians

By bne IntelliNews April 4, 2012

Ben Aris in Moscow -

Alexis Rodzianko, CEO of second-tier investment bank Metropol, is surprisingly sanguine about the rollercoaster ride that is working in Russian finance, but then he has a longer-term perspective than most.

A US passport holder, he is also the grandson of Mikhail Rodzianko, who was a founding member of the Octobrist party set up in October 1905 during Russia's first experiment with democracy. Unlike the other main political parties, the Octobrist were firmly committed to a constitutional monarchy, but emphasised a stronger parliament that played a more active role in running the country. Mikhail went on to become the chairman of the Fourth State Duma until its dissolution in February 1917 shortly before the Bolshevik Revolution. Even after Lenin took control, Mikhail strived for compromise, presiding over the Communists' provisional government and leading the talks on the abdication of the Tsar.

However, he fled Russia in the 1920s with his family and died in Serbia in abject poverty four years later. His children, including Alexis' father, ended up as White Russians fighting against Stalin, finally ending up in the American occupation zone in Munich at the end of World War II. It was from here that Alexis' parents eventually emigrated to the US, where he was born.

Fast forward to today and Metropol is one of a slew of second-tier banks that are operating in the shadows of their bigger brethren. With Sberbank's take over of Troika Dialog and the inexorable rise of VTB Capital, Russia's state-owned banks pretty much dominate the investment banking scene in Russia. Renaissance Capital remains the only large privately owned bank left, but its owner Stephen Jennings has been remodelling the bank with a stronger focus on other emerging markets, and Africa in particular, leaving a hole in the Russian market for smaller banks to cater to the investment banking needs of Russia's small and medium-sized enterprises.

While no one would claim that Russia is booming, the economy is recovering well, and now that the political uncertainty of the elections is over, Rodzianko says he is looking forward to a pick-up in business. Just how fast things do depends heavily on how far Putin fulfils his reform promises that will affect the SMEs most. "We have several deals in the works that would be good for our bottom line if they come off," says Rodzianko. "The deals are not done yet, but the difference from a year ago is that now there are two sides to the discussions - buyers and sellers."

These smaller banks are going to have to rely on SMEs for their daily bread going forward. Pre-crisis it was easy for anyone to make money; the equity, bond and corporate banking businesses were all booming. But post-crisis most of this action has withered, though low inflation and low yields in the rest of the world has led to a slew of bond issues, which makes up a big chunk of Metropol's income. "We are a niche player, but there are plenty of firms that don't want to do business with the government-owned banks and completely open their books to the state," says Rodzianko. "However, with our brokerage things have been more difficult. We have been forced to take on more risky positions than we would have preferred, as margins and volumes have both fallen dramatically. But the bond market has been doing well in the first months of this year and investment is expected to pick up as everyone moves beyond the political questions and starts to refocus on the fundamentals."

Although there has been capital flight due to the potential risks and uncertainty, Rodzianko says he is more optimistic then pessimistic, as Russia's balance sheet has never been so strong. "There are huge amounts of money sitting about out there that will break and spread at some point... When the world is ready to seek risk again, then Russia will pop," Rodzianko says, adding that there is still a lot of re-rating in the US to go before the good mood spills over in the Russian market.

Longer term, everything will depend on Putin's commitment to reform and how he copes with the proto-opposition movement, but he believes that Russia's revolution this time around will be less violent than in his grandfather's day. "The [demonstrators] are not desperate with nothing to lose; they have everything to lose. There is now a stand-off between the two sides and the only way out is a dialogue. It's like the White Russians are back," he says. "Reforms will continue and indeed most of them are already going ahead, but at a technical level that is already making a difference. There are also some big things that need to be done - specifically with corruption and the bureaucracy - but the goal should be to grind away at these issues, rather than do anything dramatic."

However, the most significant changes will be with amongst the elite, where the demonstrations have re-focused their attention on both their legacy and their vulnerabilities: the government elite has accumulated a lot of wealth in the last 12 years, but it has done nothing to legitimise this control. "The first wave of oligarchs got control over assets and held them in their own names. The second wave - those in government - got control over the assets and their cash flows, but these assets are not in their own names - they are in the state's name," says Rodzianko. "The issue has become not what you control, but what you can sell. Changing this will be a big theme for the next six years.

Return of the White Russians

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