Yuri Soloviev, Global CEO of VTB Capital, about the way the business should be built up regarding new conditions
“VTB Capital” is the first Russian investment bank created by the state. At the start of the project, which was last spring, VTB had aggressive plans for consulting services for companies entering the public market. Due to the crisis, the bank changed its orientation. Today, “VTB Capital” participates in projects designed to save the economy from the crisis. How the investment bankers make money now, why there are government interventions on the equities market and what VTB Group saves on during the crisis, all that in an interview for “Ъ”, CEO of “VTB Capital”, YURI SOLOVIEV.
- Before you came to VTB you held the position of a first deputy CEO of Deutsche Bank. How does the work at a government-owned investment bank differ from work at “daughter” company of a large western investment bank?
- In terms of characteristics and profile of work, investment business in Deutsche Bank and VTB is the same. The transition itself did not change anything. The main difference, especially during the crisis, is that now the priority is to participate in projects aimed at saving the economy from the crisis.
- How did the work on capital markets and the payment for your consulting work change?
- The payment for some of our deals stayed at the same level as it was before the crisis. Sometimes, clients are even ready to pay more due to the desire to finish the deal sooner. In general, the level of prices has to do with supply and demand. On one hand, many players overseas are reducing their staff. As a result, supply on the investment services market has fallen sharply. On the other hand, demand for these services has fallen as well, but we are waiting for the recovery. Some companies will simply not be able to survive on their own and they will have to merge with competitors.
- Does it ever happen that you, as a state bank, conduct financial analysis free of charge and just because you were asked to?
- If we’re asked, we do it.
- It is heard of that VTB gives out many potential issuers credits under the condition that after the crisis “VTB Capital” will conduct their IPOs…
- Yes, that’s true, while giving out credits we try to sell investment services at the same time. The team that came to VTB Capital from other western banks based their decisions on two reasons. First, we now have a universal platform where we can offer all investment services coordinating them with a powerful commercial and retail bank. Secondly, we have been attracted by the huge client base of VTB, to who we can come to with our services. . As an investment bank we work on finding ways and means of restructuring of debt. Especially in such a way that will allow the client to service that debt, and for us to have an instrument that will show in the best possible way the risk that we take upon us. For example, if company profits have fallen very sharply and it gets hard to service debt, we can transfer part of the debt into convertible debt, for instance.
- VTB is now at the center of attention directed at troubled assets. It was VTB that investigated the financial condition of “KIT Finance”, and Svyazbank…
- You are right, however, I would prefer not to comment on specific deals, especially because they were successfully closed without our participation. It’s important to also note that there are deals not only with troubled assets, but also with clients who simply have temporary troubles with liquidity.
- There are companies left in Russia that don’t have problems?
- Of course.
- Really? In what sectors?
- In those, where there wasn’t much debt.
- You don’t want to name anyone in particular?
- Even construction companies are in different positions. While some of them are closing up their business, others are trying to buy out competitors. The main thing here is the factor of debt level, not the factor of what sector they’re in.
- “Uralkaliy”, for example, didn’t have much debt, yet is still faced with problems…
- Their situation doesn’t have much to do with the global financial crisis. A company can have such problems regardless of the conditions on the market.
- Still, however, many companies now, from small retailers to Vneshekonombank, are coming to Victor Sechin asking for financing…
- Before anything else, banks need additional capital in order to strengthen their condition and provide it with long-term assets. This is needed so they can normally function and credit their partners in the real sector. However, credit issuing has drastically slowed down right now in the world. The main reason for the crisis occurrences is that the world factory of credit issuing has stopped working and its mechanisms went on strike. In order for this factory to start working and for money to start flowing into the economy, banks need long-term money. And even though we keep working with western creditors, unfortunately, many of these markets are now closed.
- Are there really still western creditors that provide financing?
- Yes, they still exist. Nevertheless, on the basis of the goals that we have in front of us, these sources are not enough.
- Everybody now complains that foreign markets are closed for them. Why then are some of these markets open for VTB?
- I’m not saying that they are open for us. For instance, recently it was time for one of the western banks to exercise their put option, meaning they got the right to ask for the extinguishment of debt. We negotiated with them and agreed to extend the term. Generally, markets are now closed, but theoretically speaking there are pockets for liquidity that can be used.
- Practically immediately after FC “Otkritie” began to financially restore the Russian Bank of Development, information popped up that VTB is obtaining a share in this company. What interest do you have in the possibility of purchasing FC “Otkritie”?
- The business of “Otkritie” is developed in those segments in which we are not present in. For example, “Otkritie” services professional participants of the market as a broker. Lately, due in part to the weakening of some of the competitors, “Otkritie” significantly improved their positions. They were able to create a number of innovative products in the fields of retail and development. These factors served to stimulate initial interest on our part. Second opportunity that we got interested in was that the management of the “Otkritie” corporation wanted to actively participate in financial restoration of troubled financial institutions. At the moment, they are restoring the Russian Bank of Development. VTB is a large-scale, public structure with a wide regional network, issuer of a number of Eurobonds. At the same time “Otkritie” is not a big-time player, it’s more dynamic and it doesn’t have such a wide variety of tasks in front of them as VTB does. Therefore, the financial corporation “Otkritie” is theoretically interesting as a platform on which it would be possible to put banks with a task of restoring them and later reselling them. It is a kind of joint partnership: our investment bankers can help other financial institutions in the execution of restructuring processes, healing and further reselling. So, quite possibly, it makes sense to look at the potential players, especially “Otkritie”, as a base for such business. Besides that, banks sometimes have numerous non-core assets – from construction to some sort of licenses for the mining of natural resource deposits. VTB Group has a rather unique platform and we, for example, can find some unfinished projects and offer them to one of our client-developers. In a given context, “Otkritie” could be very interesting to us.
- What stage are the negotiations in right now?
- In the stage of consideration.
- But the analysis of financial statements is already over?
- The financial statements have already been analyzed, that’s true. A lot of work has been done. It’s results are promising. The financial condition of the corporation is stable.
- Did you consider any other players besides “Otkritie”?
- Yes, we paid attention to other players as well, however, we are considering an alliance with “Otkritie” as temporary.
- So it will be a temporary alliance during the crisis, and when the situation stabilizes you will get out of it?
- Why during the crisis? If somebody told me when the crisis will be over I’d be very happy. Right now there is a certain business plan and certain expectations from these investments.
- Did “Troika Dialog” and “Renaissance Capital” make the list of potential objects for acquisition as well?
- A lot of things happened over the last three months. We spoke to many players and considered a variety of different possibilities for strategic partnerships. Companies that you have named work in a number of different sectors, so we could have negotiated with them about other assets as well.
- How much are you planning on spending for the acquisition of FC “Otkritie”? Do you plan to bring you share in the company up to 100%?
- The first step has not been made yet: it hasn’t been decided whether we will make this deal or not. It’s structure hasn’t been decided yet either. We’re working on this question now, but when we finish, the quality of the decision making should not be hurt by its speed.
- Are you interested in assets in other sectors?
- Yes, and we’re working in that direction. All over the world, including Russia, prices of assets dropped. For example, in the meantime we’re working on a business plan for the agricultural fund. Its volume hasn’t been determined yet.
- How are you optimizing existing limitations tied to the crisis?
- We are synchronizing our activities with VTB Group. In my view, all decisions were made promptly and came out to be rather effective. When our team came to VTB from a western bank, we brought with us a western technology for management of limitations. Optimization of limitations, for example, diffuses onto air travel, use of information systems and other operational components.
- Are you saying that with your arrival, Andrey Kostin started flying economy class?
- A director of the level that Andrey Leonidovich Kostin is has a certain number of tasks, answer to which can decide the faiths of tens of thousands of people inside VTB Group, as well as on the financial market as a whole. A director’s workday lasts for over 18 hours and asks for the highest level of responsibility. Therefore the most comfortable conditions have to be created for them so they can work more effectively. As the Japanese say, a man at work has to think about work and at home he/she also has to think about work.
- So what do the savings consist of then?
- First of all, VTB drastically lowered the number of flights. Secondly, it has been decided who needs to fly business-class. For example, people who just arrived from business schools probably should not fly business-class, especially for short-distance flights. Also, certain limitations for minor expenses arose, for example expenses on client meetings. The place of the meeting can always be chosen according to current capabilities.
- VTB is prepared to spend $500 million in two years for the development of the investment business. How much money has been spent this year and how much has been earned?
- At the current moment, I’m not prepared to state the amount for a number of reasons. This year was transitional. Just recently we registered “VTB Capital” as our legal name. For half a year we’ve worked on the system of risks and jus launched a whole row of businesses and just started trading stocks. We keep building up our system. First thing is, there is a budget for creation of a bank. Second – a budget for new business, where we start making new products, entering new countries. Third – old business that we inherited from VTB Group. According to the plan, next year we will have to return all the investments that will be put into us.
- These investments will be less than $500 million?
- Yes, they will be significantly less than $500 million.
- How do you plan to return such investments in a year?
- Using profits from new business.
- But the work on capital markets will not bring any profits?
- Other than the equities market, which is not seeing any IPOs happening now, there is also a debt market. In my view, years 2008-2009 will break all records for Russia in terms of volume of ruble bond issuing. In this segment VTB is an unquestionable leader. In addition, companies actively make private placements and we participate as consultants for many of these deals in different sectors – retail, development, and logistics. Better than that, we can now proudly show off our first place for the volume of REPO transactions for stocks and bonds, where we significantly surpass our closest competitors. Profits from M&A and IPO deals are not principal for the investment bank, but always attract a lot of attention. Nobody writes about significant volume of business that has to do with currency, interest-bearing and credit deals. Many companies take out loans in rubles and then conduct swap operations, allowing them to borrow with very little or negative rate of return in other currencies.
- Who earns money this way?
- This is advantageous to companies that lower the level of disbursements for the servicing of credits and banks that service them. The swap market sales volume reaches trillions every day. Every company that wants to hedge its risks does this – oil and gas companies, mining companies, retail companies, etc. And on each one of these steps the broker earns money. Besides, our experts conduct a large variety of projects. For instance, now we are working with equity share committee of China with regard to questions of double listing. The realization of the project will enable Chinese investors to buy shares of Russian companies. Also, recently we got the approval to open an office in Dubai.
- What tasks are you faced with for the next two years?
- We have to finish building the investment business of VTB Group and bring it to the first place in all aspects of its work. Development of the investment bank is like a very delicate, very beautiful and fruitful plant. But in order to raise it, a lot of effort has to be put into it: protect it from wind, pick out the best seeds, so it can become a stable and beautiful tree that would bear fruit. Trees don’t grow in three-four months. Two-three years are necessary for the business to grow and the team to form. We don’t have all the technological processes ready yet. They need to be carefully worked on, so there aren’t any situations, like in some banks, where one trader brings multibillion dollar losses.
- The crisis reaffirmed international investors’ cycling interest in the Russian economy. When will their interest come back?
- I don’t think that the demand will come very soon. This depends on the health of the world financial system. The factory of credit and debt manufacturing needs to be restored.
- In your view, do you think that the government is correctly carrying out the stock market support?
- In my opinion, the goal shouldn’t be to keep the price quotes on a certain level. During the current market condition all artificial attempts will probably be useless. When carrying out interventions on the stock market, the government needs to follow three main rules. Investments need to be long-term and aimed at the growth of cost of money, essentially, resources of tax-payers and the retired. So, first of all, the market needs to be analyzed and direction for prospect with the horizon of investing for five-ten years needs to be found.
Another action that could be considered a priority is investments in companies with small free-floated shares. The government can spend rather small amount of money and buy a blocking portfolio of companies with low capitalization and small free-floated. Such investments will greatly decrease the number of shares in free circulation and they, in turn, will decrease the negative effect of price quotes of these companies. This type of investment would support the market as a whole because the number of sellers would decrease.
And finally, investments in companies which have fundamental discrepancies can also be considered promising. For example, the company has more money than the whole entire capitalization.
- So the government now is carrying out investments with a goal of supporting the index?
- I can’t comment on this question. But according to mass media, investments have been made with the goal of supporting the index of MICEX at a certain level. Such strategy can have a positive effect only for a short period of time. Long-term effect of such tactics can be achieved only if tens of billions of dollars are invested.
- How should investors act – should they buy those shares in which the government is investing?
- This type of thinking carries certain logic. The government is a large shareholder of “Gazprom”, Savings Bank and other companies. Hence, it is more informed about the conditions of these companies than all of us. Besides that, they see a clearer picture of future prospects, for example, in the field of reformation in the gas sector and taxation of the oil sector. In one word, the government is a very informed buyer and I would invest the same way that they do. The same logic is applicable to LUKOIL, management of which buys stocks of the company.
- At what mark do the stocks of VTB have a level of support? Below what level could they never fall?
- Now, shares are firmly held at current levels. As a manager of a bank I can’t comment on dynamics of our shares. However, in my view, the market overestimated the influence of negative processes on the banking system. Obviously, VTB is one of the system-making banks that are important for the government. I consider shares of the Savings Bank, for example, very cheap as well.
- Do you invest in the stock market yourself?
- Of course, I have a moderate-size portfolio and consider myself a long-term investor. I don’t have neither time, nor desire to track short-term tendencies.
- In what currencies or assets do you hold your savings?
- In a basket of assets.
- Dollar, euro, yen, ruble?
- The basket holds a British pound as well as real assets, for example, precious metals. Most European countries will start using fiscal leverage and start building up large debt. There are different ways to get out of it. One of the easiest ways is the enabling of a printing press, which sooner or later will mean a somewhat high level of inflation tendency. This will have impact on a tremendous number of currencies. Then real assets, denominated in these currencies will greatly rise in price.
- When will Russia turn on the printing press?
- In the early 90s Russia has suffered a hyperinflation. In my opinion, today thanks to the professionalism of the Central Bank’s management and government officials we will be able to elude that. All the steps that the government is taking now are rather adequate.
Yuri Soloviev was born on April 13, 1970 in the city of Ulan-Bator. In 1994 he graduated from the Russian Academy of Economics of G.V. Plehanov, and later London Business School where he received his Executive MBA. From 1996 to 2002 Soloviev headed the department of equity trading on local capital markets in the American investment bank Lehman Brothers in London. In 2002 he transferred to Deutsche Bank where he held lead managing positions, was a first deputy chairman of the board of Deutsche Bank Russia and oversaw the investment block for Russia and CIS. From April 2008, Soloviev is the Head of the Investment Business of VTB Group – CEO of “VTB Capital”. This year, Mr. Soloviev became the first Russian banker to be included in the top ten investment bankers of an annual rating of 100 most influential persons on European capital markets, created by the British publication Financial News. Married.
“VTB Capital” is the investment business of VTB Group. It was founded in April 2008. It carries out its operations from offices in Moscow, London and Singapore. “VTB Capital” organizes issuing of debt and equity shares, development of direct investments business, trading operations, operations on the global commodities markets, asset management, client consulting services for deals on capital markets and in the field of M&A in Russia and outside its borders. Financial statements of “VTB Capital” are not released. According to MICEX, the total volume of trading of VTB’s investment branch on the equities market in November was 20.2 billion rub.
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