Vivid Picture of Russian Finance Market – Where Are the Professionals?

THIS POST WAS ORIGINALLY PUBLISHED JUNE 28, 2007

Vivid Picture of Russian Finance Market – Where Are the Professionals?

Russian financial market is seeing a biggest ever change in its history. Recently PricewaterhouseCoopers released the data that within the next three years the volume of assets that are turned into private asset management shall increase 30-50% annually. National Association of Securities Market Participants (NAUFOR) reports that over the last six months the number of private investors in Russia increased from 350,000 to 500,000. This is a visible result of “people’s IPOs” in SBERBANK’s (RTC:SBER) case about 30,000 and VTB (RTD:VTBR) – over 130,000 private investors. NAUFOR further expects that by the end of 2007 there would be about 700,000 Russian private investors. Other stats data also show this trend: in Q1 2007 open mutual funds attracted about 15.8 billion RUR ($ 600 million) – 50% increase as compared to Q1 2006.

This stat data raises the inevitable question – who is going to manage all assets? I wrote earlier about the “War for Talent”, and the problem seems to be heating up every day. PricewaterhouseCoopers reports in its study that only 26% of 43 polled investment banks think that they will be able to fill their vacancies for the staff within the next three years. And more and more ‘white spots’ in the Russian financial market map are being filled up every day. When we look at the map we may notice that practically all major players are already here: JPMorgan (NYSE:JPM), Merrill Lynch (NYSE:MER), Goldman Sachs (NYSE:GS), Citigroup (NYSE:C), HSBC (NYSE:HBC), Raiffeisen International (WBAG:RIBH), Societe Generale (OTC:SCGLY), ICICI Bank (NYSE:IBN), Intesa (BIT:ISP), UniCredit (BIT:UC), Nomura (NYSE:NMR), and many others. Just this week it was announced that Toyota (TYO:7203) Bank officially received its license in Russia; we awaiting for Barclays PLC (NYSE:BCS) and Industrial & Commercial Bank of China (ICBC) (SHA:601398). However, the share of foreign capital in the aggregate capital of Russian banks is 18.3% ; since the beginning of the year it has risen by another 2%; with 3-4% expected increase by the end of 2007. This week it was reported that VTB (RTD:VTBR) is seriously considering establishing their own investment banking division and this is not cheap – experts believe that the bank will spend at least $ 100 million. And German BayernLB Bank announced this week about opening its office in Moscow.

I mentioned earlier about good life of Western investment bankers in Moscow, and I guess this will continue for a while. Russian new business elite is still growing and the lack of qualified experts here in Moscow is evident. According to some experts the investment managers in Moscow are overpriced – in the last year the salaries saw 50% increase. And the “War for Talents” is in full swing. Almost every bank announced their intension to boost their staff in Moscow. Recent battle reports come from Renaissance Group that has some new people on board: Richard Bruens, Executive Vice President and Head of Investor Relations at ABN AMRO (NYSE:ABN), is now on the Group’s Executive Committee as Head of Strategy, Communications and Investor Relations; Petri Kivinen, the global head of debt capital markets at Dresdner Kleinwort, will join the RenCap’s emerging markets investment bank.

 

Vivid Picture - Update with Compensations

VEDOMOSTI DAILY released a report today “Investment banker – Sounds Expensive” which has some interesting numbers. It cites the manager of one of the headhunter companies: “ there are lots of publications that create excitement for the issue – many calls come from New York - the people want to go to Russia. They think that you get money for nothing. On the contrary, the selection is quite tough: there is a need for experience of working in Russia, understanding of clients and “international class”. The paper cites numbers for annual compensations in Top 10 investment banks:
- Managing directors/heads of investment banking divisions: $0.8-3.0 million
- Executive directors/ heads of back office: $250,000-500,000
- Heads of asset management divisions: $0.6-1.2 million
- Heads of securities trading divisions: $0.6-1.2 million
- Directors of corporate finance: $0.5-1.5 million
- Heads of analytics departments: $0.6-1.5 million 

Some other calculations reported by VEDOMOSTI:
For Renaissance Capital the average annual compensation of the Board members is over $ 2.0 million, while for an average employee the monthly compensation is $ 20,800. For Troika Dialog the average monthly compensation for the employees increased by 30% as compared with 2006, and is $ 16,400.

This situation, according to daily, greatly surprises headhunting agencies. As an example Ed Kaufman that joined Alfa Bank was guaranteed annual compensation of $7-8 million. And last year Goldman Sachs, (NYSE:GS) was stunned to hear suggestions of annual compensations of $ 2-3 million from securities salesmen (from URALSIB (RTC:USBN) and Alfa Bank) interviewed by them. Raiffeisen Bank (WBAG:RIBH) for the last 24 months fails to find a candidate for the head of brokerage division with compensation of $ 500,000 per annum.
VEDOMOSTI cites the manager of headhunting agency that there are banks that still are in the process of composing their teams (Lehman Brothers (NYSE:LEH) and Nomura (NYSE:NMR), just for example) – and this would further lead to more competition in compensations.

 

Russian IPOs - Review of 17th Week of 2007

THIS POST WAS ORIGINALLY PUBLISHED APRIL 30, 2007

Russian IPOs - Review of 17th Week of 2007

Alfa Bank and… Nine Commandments to Businessmen
Recently Alfa Bank issued another set of analytic papers regarding the Russians stock market. Here are some key points that relate to IPOs and investments.
As it stated in paper on strategy, everyone understands that now we have entered into the “IPO buyers market” where the issuers have to curtail their pricing appetite, or make IPO in a new sector that in not yet represented. Thus, current issuers come to more and more understanding of this trend.
Since 2007 the Russian stock market holds more than 10% of all assets of Global Emerging Markets (GEMs) – with 6.3% in 2006. Major reasons for this are numerous IPOs and other placements of equities.

The government still remains the biggest investor into stock market (with about 40% of GNP). IPO market is very confidently moving to estimated $ 30 billion mark in 2007, while 2/3 of all transactions will be done by the government owned companies. It is interesting to note that according to PwC recent report it took a total of 297 European IPOs to raise the same amount on the London Stock Exchange in 2006. Current projections call for acceleration of IPOs of electro energy companies. Agriculture is one of the most promising sectors for investments in future.
IPOs of ROSNEFT and Sberbank were in major part supported by the big group of Russian billionaires and by the companies that are controlled by them. This is one of the strongest points of the government, and it is true that Russian businessmen live up to nine commandments, formulated by the President:
- Avoid politics
- Pay taxes
- Abide the Law
- The wealthy should direct their wealth towards development of Russia and support the plans of the State
- The companies in strategic sectors should support the government plans for development of industry and economy
- The companies in extractive industries should move from export of natural resources to their processing – that should increase the value added profits in export
- Foreign strategic investors are allowed to invest in strategically important companies or projects, but no more than 49%
- For sensitive companies this number is 25% max
- International companies that propose reciprocal investments outside Russia should be treated as preferable partners of the Russian StateAnd all this may be illustrated by April 26 President Putin’s State of the Nation address. There may be an opportunity for investors to capitalize on Putin's speech by investing along the lines of his address. This would mean moving money into the atomic energy sector, where listed companies include: Machine Plant Electrostal, NZHK, Priargunsk, Energomash and shares in Izhorsky Trubny Zavod that have yet to be consolidated by former OMZ. In the shipbuilding sector, the president's address has led to favor the Baltic plant. In construction and infrastructure - Open Investments, EPH, Glavmosstroy and construction steel producers MMK, Evraz and Mechel.

… And Market’s Participants on It…
This week a conference was held in Moscow that discussed the realities of the Russian stock market:
- FFMS (Federal Financial Markets Service) Head Mr. Vyugin reiterated the need of establishment of the centralized custodian agency. He called for further governments’ activities to consolidate the market and establishing of its infrastructure that is acceptable for foreign investors. Russian exchanges will inevitably consolidate or become specialized. At the moment Russia has two vertically integrated exchanges, MICEX and the RTS, which are running independent clearing houses and depositaries and claiming the status of a central depositary. Such institutions may only co-exist if they are offering different products to their clients.
- TROIKA’s President Mr. Vardanyan called for practical steps in improving of all aspects of the Russian stock market – as the vital ingredient of the process of establishing Moscow as the key world financial center. Domestic regulations are clumsy and lead to more expenses – that is why the Russian companies chose to list in London.

Bright Perspectives for Future Equity Investments and IPOs- A new wave of privatization is starting in Russia, re-incarnation of the 15-years old process. The process is currently in stagnation and plan for 2006 was not exactly executed as it was supposed to be. Recently the government approved in principle the draft plan for privatization till 2010. The plan calls for privatization of over 590 Open Joint Stock Companies (OAO) and transform into OAO over 629 entities (what is called “Federal State Unitary Enterprise - FSUE”) . In 2007 the list may be added by 12 FSUEs and 95 OAOs. The big problem is that most of attractive state-owned companies already are gone, however, as some analysts think, there is a good number of juicy ones left. Currently the government owns 6,533 FSUEs, and is the shareholder of 3,997 OAO. The government representatives continuously stress that strategic enterprises shall remain in its custody. When analyzing the list of proposed companies it is obvious that there are some successful and profitable ones in it. But a lot of scientific research institutes, regional machine building plants, exhibitions are still extremely unpopular with investors and are excluded from the list. Some of very healthy companies are Technopromexport (known as Tenex outside Russia), the largest state contractor building power facilities in Russian and abroad (already in preparation for an upcoming IPO in London); Murmansk Sea Fishing Port; Machinoimport; LENFILM – a St.Petersburg film studio. One of the most interesting parts of the plan from the investor point if view is establishment by the government of integrated holdings with participation of private investors. These are already working in aircraft building, shipbuilding and other industries; with partial listing of equity on stock exchanges in the future.

Foreign Banks Continue Expansion into Russia
After the news of the last week’s acquisition of ABSOLUT Bank by the Belgian group, another player from this area of the world comes to Moscow. This time it is the French-Belgian banking group Dexia. Another proprietary way was chosen: it comes through its Turkish subsidiary DenizBank, and will establish a network of its offices in the partly Turkish owned Russian supermarket chain Ramstore. It is estimated that the bank will invest some $50 million in the first year.
It was reported a while ago that Western and Eastern manufacturers are also establishing their banks in Russia. This week Toyota Bank surfaced with the report that it was registered April 4th, and is expecting to receive the license from the Russian Central Bank. This is a natural way that is sparked by the growing sales of cars. Similar announcements were made by BMW Group and DaimlerChrysler. The sales of Toyota and BMW Group soared in 2006 by 58%, 42% respectively.

Stock Market News and Events
- The world's economies are entering a "new global paradigm," with Moscow to emerge as one of the leading financial centers by 2017, Chris Baxter, chairman of Renaissance International, said on Russian Economic Forum in London. In 10 years' time, Moscow will have become one of the top financial markets, surpassing Frankfurt and Paris, and joining global financial peers in London, New York, Tokyo, Shanghai and Mumbai. Baxter said he expected the MICEX to match the world's major markets by 2017.
- About 150 Russian companies intend to hold initial public offerings (IPO) in the next two years, which could bring in $30-50 billion, the Moscow Interbank Currency Exchange president announced on Russian Economic Forum.
- OMX starts its marketing campaign in Russia. This week one of the magazines published an overview drafted by a Swedish law firm that highly praises OMX and promotes listing there.
- The president of one IR Moscow based firms predicts the influx of companies from CIS to Russia with IPOs on MICEX and RTS- In a very strange and unprecedented move VSMPO Avisma, the world's largest titanium producer, has announced that it is turning their accounting system from US GAAP into Russian accounting system. Analysts consider this as on indication that the company decided against IPO on the foreign exchange.

IPO Candidates
- R TELECOM carrier – IPO plans in 2009
- Euroset , mobile phone retailer – IPO plans in Q1 208
- TransContainer, transport carrier of Russian Railways – step by step road to IPO with private placement of 10-15% of equity (2007), in 2008 IPO on RTS and MICEX (20-25%)
- Corbina telecommunications carrier – IPO in Moscow, London and/or New York in 2008