US investment banks led by Goldman Sachs, Citigroup and Morgan Stanley are being squeezed out of Russia's capital markets due to deteriorating relations between Washington and the Kremlin.
Data provided to bne IntelliNews by Freeman & Co, a New York-based consulting firm, shows the three Wall Street banks earned a meagre $1mn each from investment banking fees over the course of 2015. For Goldman this represented an 80% fall from the modest $7mn they earned last year. Citigroup, which has a sizeable retail presence in Russia, saw its fees slide contract by 97% from $28mn last year, while Morgan Stanley's earnings tumbled by 90% from $12mn.
JP Morgan, which advises Russia's Economy Ministry, posted a 66% drop in fees to $7mn from $15mn. Bank of America bucked the trend as its commissions jumped 146% to $15mn from $6mn.
"The big US banks are seen as closely aligned to the Obama administration and are suffering because of the growth in anti-Americanism from the top down," a veteran Moscow expat banker told bne IntelliNews. "The European banks are faring somewhat better and are more likely to get on the few deals that are out there."
Revenues earned by some investment banks in Russia almost evaporated this year as sanctions and the country's economic stagnation brought deal-making to a halt. The total fee pool dropped by 41% to $208mn from $355mn in 2014. This year has been the worst 12 months since 2001 and a far cry from the $1.36bn earned in boom of 2007, according to Jeff Nassof, a vice-president at Freeman.
"It's about as bleak as you would expect," Nassof told bne IntelliNews.
After Russia annexed Crimea in March 2014, the European Union and the US imposed financial restrictions, visa bans and asset freezes on scores of Russian companies, politicians and individuals. A collapse in the price of crude oil, the nation's biggest export revenue earner, has exacerbated the impact on the economic slump, further slowing dealmaking.
Some EU member states have waned in their enthusiasm to continue the sanctions, but Germany's insistence that Russia adhere fully to the Minsk 2 peace accords to end the conflict in East Ukraine means the prohibitions will continue for another six months at least. The US State Department is unlikely to lifts its sanctions any time soon as the US has far less trade with Russia and is in an election cycle where cosying up to President Vladimir Putin isn't expedient.
US and European firms have been steadily cutting staff and relocating key talent to London as the deal flow trickled. The drop in activity to the lowest in 14 years may now force some firms to re-examine their bet on the nation.
Big names up anchor
Foreign investment bankers in Moscow are fast becoming an endangered species, such has been the depth of departures and sackings over the past two years. 2015 saw the departures of Nick Jordan and Paolo Zannoni, co-heads of Goldman Sachs in Russia as well as HSBC Russia boss Mark Stadler and Deutsche Bank chairman Joerg Bongartz.
Royal Bank of Scotland is cutting and running. RBS, the UK's largest-taxpayer owned bank, said on December 1 it has agreed to sell its Russian operations to Expobank. Market insiders suggest Barclays Capital could be the next investment bank to abandon Russia.
Jon Laycock, a London-based spokesman for Barclays Capital, declined "to comment on market speculation" in a recent e-mailed statement to bne IntelliNews.
A trading scandal at Deutsche Bank in Moscow led to the closure of its investment bank in September and the loss of at least 200 jobs. Investigators from the US and European regulators are looking at the bank's use of so-called mirror-trading involving about $6bn of transactions over four years. The total sum of suspect transactions found by the bank could be as much as $10bn, according to latest unconfirmed reports.
"Perhaps the investigation was a blessing in disguise for Deutsche," Tom Adshead, chief operations officer at Macro Advisory, told bne IntelliNews. "This gave them a good reason to cut back on operations without saying they had lost faith in the market."
Swiss bank UBS recently parted company with its last trader in Moscow, according to a Bloomberg report. A senior source at the bank in London told bne IntelliNews that management is committed to its Russian brokerage and is seeking to replace the trader.
Russia is no longer regarded as an attractive market for foreign banks and those with consumer businesses will probably reconsider their exposure and scale back their operations due to market deterioration, according to ratings agency Standard & Poor's.
Shrinking fee pool
The remaining foreign lenders still in Russia, including BNP Paribas, Raiffeisen and UniCredit, have all been cutting headcount, shutting branches and tightening costs. The rumour mill has it that Austria's Raiffeisen may yet sell its profitable Russian business.
Banks collected $86mn advising on Russian mergers and securities sales through December 17 compared with $179mn in the same period last year, according to data from Freeman. Fees from syndicated loans shrank to $19mn from $49mn while commissions equity deals fell to $21mn from $52mn.
There hasn't been a single Russian initial public offering in London since Moscow annexed Crimea with a controversial local vote on March 18, 2014. The local equity market has managed a couple of primary and secondary listings, which were primarily marketed for domestic investors.
"Unlike in the early 2000s and prior to the crisis of 2008, foreign banks no longer view these markets as aggressive business growth drivers," S&P analysts led by Natalia Yalovskaya wrote in the e-mailed report. "Rather, they increasingly perceive them as high risk contributors, which, in turn, give rise to increasing capital charges."
As the fee pool shrank, Russian banks' share of commissions surged to 56% from 39% a year ago and 31% in 2013. European banks' share of fees slipped slightly to 29% from 33% a year ago while US banks’ share slumped to 14% from 27% last year.
The one bright spot on the horizon for bankers is debt capital markets, which posted a 9% jump in fees for bonds this year. A raft of Eurobond deals in the last quarter by Norilsk Nickel, Evraz, Gazprom and Alfa Bank offered bankers some hope that 2016 will mark a resurrection for Russia's beleaguered capital market.
Investment banks are yet to get excited about the Kremlin's efforts to resuscitate its much-maligned RUB1 trillion privatisation programme. The sale of state assets has stalled in the past three years as the government sought to sell companies at unrealistic prices.
The Finance Ministry hopes that the privatisation in 2016 of a 19.5% stake in oil giant Rosneft could help bring 550bn rubles ($7bn) to plug the budget deficit. Investment banks have yet to be mandated for the ambitious deal.