Financial News-us.com: Staff the winners as banks race for talent in Russia

Jason Corcoran
20 Dec 2007
Political unrest continued to play havoc with deals
 
A war for investment banking talent in Moscow during the past year led a senior executive at Deutsche Bank in Russia to compare the hiring spree with “a French farce”.

Competition between bulge brackets and domestic banks to sign Russia’s leading rainmakers resulted in remuneration packages comparable with those of footballers. Ed Kaufman is reputed to have been lured from UBS, where he was head of Russia, to become chief executive of investment banking at Alfa Bank by a guarantee of $20m (€13.6m) over two years while managing directors can net an average $3m pay packet, according to research by US publisher Forbes.

A boom in consumer spending, oil tilting toward $100 a barrel, record numbers of initial public offerings and a high growth rate spurred the scramble for talent.

Deutsche’s Russian operation, under chief executive Charles Ryan, has been hit by more defections than most. Its top Russian rainmaker Nick Jordan left for Lehman Brothers and his investment banking co-head Ilya Sherbovich is quitting next year to start a boutique. Several colleagues followed in their wake.

Ryan, whose contract expires next year, is nonplussed by the comings and goings. He said the bank continued to rank high in the capital markets league tables.

He said: “I have seen this movie before. Moscow is not a get-rich scheme because you need to have all the pieces of infrastructure in place, like we do. A lot of our competitors are becoming desperate because they can’t achieve scale. They are playing tennis without a net.”

Goldman Sachs, Lehman Brothers and Nomura returned to the country this year having fled after the 1998 financial crisis. The entrants have yet to make an impression on the league tables, where Deutsche, Merrill Lynch, ABN Amro, JP Morgan and Russia’s Renaissance Capital dominate. Russia’s much-anticipated IPO boom petered out in the autumn thanks to a combination of the credit crunch and investor apprehension ahead of the political elections.

Politicians and bullish analysts had forecast tens of IPOs for every quarter of the year, but the summer listings of state-controlled banks VTB and Sberbank – and their subsequent poor performance – sapped liquidity and investor appetite.

Chris Weafer, chief strategist at Uralsib, predicts total IPO business will reach $40bn in 2007, compared with $33bn last year. He said: “It wasn’t quite the big banner year many people expected.”

The US sub-prime problems sparked a sell-off in emerging markets and led to Russian IPOs being postponed during the final quarter.

Rusal, the world’s largest aluminum producer, pulled its $9bn London flotation in late September and was followed by several others, including Zenit Bank, Prosperity Capital and X5 Retail.

Igor Lojevsky, head of global banking and capital markets for Russia at Dresdner Kleinwort, said: “There was supposed to be a flood of institutions coming to the market this year but it didn’t really happen. Institutions have been distracted by the credit crunch, with many Russian companies putting off capital-raising plans since the end of September.”

The arrest of Deputy Finance Minister Sergei Storchak last month on charges of attempting to embezzle $43m raised the question of whether there is a serious rift between Kremlin factions about economic policy.

Storchak, who is allied to the Finance Minister Alexei Kudrin, is responsible for the country’s stabilization fund and some think his arrest might be connected to the debate about how to invest oil reserves.

Kudrin supports an approach similar to that of Norway’s future generations fund, while it appears the Kremlin’s statistics think all the money should be made available for spending on infrastructure and to develop strategic industries.

Weafer said: “I hope it’s not an attack on Kudrin. He and his allies are seen as a stabilizing pro-market force. Any suggestion that he is under attack is bad news for the economy.”

The blurring of lines between politics and business was made explicit when two oil companies, Royal Dutch Shell and BP, ceded control of assets in Russia following pressure from the Kremlin. Shell was forced to cede control in Sakhalin-2, the world’s biggest liquefied natural gas project, to gas monopoly Gazprom, while TNK-BP had to sell its giant Kovykta gas field to Gazprom.

The case of beleaguered oil company RussNeft had echoes of Yukos, which ceased to exist from November following the carve-up of its assets during the summer and the continued incarceration of its former owner Mikhail Khodorkovsky in Siberia on tax evasion charges.

RussNeft’s owner Mikhail Gutseriyev fled the country for London, claiming he was the victim of political persecution. His private company, once the country’s seventh-largest petroleum producer, was saddled with back-tax charges and was seized by a court.

Oligarch Oleg Deripaska looks set to be the benefactor of Gutseriyev’s misfortune, having applied to the anti-monopoly service to acquire RussNeft’s assets.

Deripaska, whose estimated $20bn fortune includes Rusal, one of the world’s largest aluminum companies, is Russia’s leading dealmaker of the year.

Rusal was formed this year through a three-way merger of Russian Aluminum, Sual and the alumina assets of Swiss trader Glencore.

Deripaska also emerged as a 5% shareholder in US carmaker General Motors while his investment vehicle took a 20% stake in Canadian car manufacturer Magna and sizeable stakes in European construction companies Strabag and Hochtief.

Rusal looks set to acquire a blocking stake in Norilsk Nickel, the world’s largest nickel and palladium producer, in a deal that could create a Russian national champion in the metals sector with a market value of $100bn.

Deripaska, a former Soviet army sergeant with close ties to President Vladimir Putin, still appears to be serving his country. He alarmed investors this year when he declared himself as little more than a caretaker of assets for the state.

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