Corporate Communications

Russia's VTB Capital steps into the breach as Wall Street firms retreat

31 March 2009

The Edge Singapore

March 30, 2009

Herbert Moos has a knack for going where opportunity is. Born to a German father and Russian mother, he studied in London and has worked in both UK and Asia, rising to become chief financial officer of Lehman Brothers' Asia-Pacific ex-Japan business in 2007. He left last year, just before the storied Wall Street firm collapsed, to join VTB Group Russia's second-largest financial institution.

Now, Moos is CEO of the London unit of VTB Capital, the investment-banking arm of VTB Group. He also fills the role of VTB Capital's head for Asia. Although VTB Group has had a presence outside of Russia for some time - it has offices in both London and Singapore – it was only in March last year that the group decided to create a separate investment-banking business. And, Moos figures the timing couldn’t be better.

Amid the global financial panic, major investment banks have been pulling out of Russia. “Foreign banks see Russia as an opportunistic play,” Moos explains. “So, if for example, a US investment bank is experiencing problems, it would certainly look to concentrate on its operations in the US first, and Russia would not be a priority for it. We’ve seen a lot of people just retreating from the marketplace.” That’s created an opportunity for VTB Capital to seize market share by stepping into the breach.

This isn’t the best time to be in the investment banking business, of course. New listings, corporate activity and securities trading have slowed. And, the Russian stock market has dived almost 60% from its height in 2007. But VTB Capital is in a position of relative strength, Moos says. The investment bank was started recently with US$500 million ($754.4 million) in backing from its parent VTB Group. And, because it is new, it isn’t burdened by a mountain of debt and worthless assets like its more established peers. “We don’t have any investment-banking luggage,” Moos says.
At any rate, VTB Capital doesn’t plan to go down the same route as the big Wall Street firms that relied on enormous amounts of leverage to generate their earnings. Indeed, with much tougher credit markets now, it probably couldn’t even if it tried. “Today, the investment-banking model is being challenged significantly,” Moos says. “So, we’re looking to study and understand the new economic environment. We are looking to build a new investment bank for the new markets.”

Essentially, VTB Capital aims to help its Russian clients identify and realise opportunities in Asia, and help Asian companies find and structure investments in Russia. “There are virtually no houses that focus on [Russian investment banking], “ Moos says. “So, in that respect it’s actually a very compelling and very required service in the current market requirement.”

Still, will nervous Asian investors flock to a market like Russia, where big business has a reputation of being dominated by politically connected oligarchs? And, are Russian companies going to be welcomed as investors in the Asian region?

Alexey Yakovitsky, CEO of VTB Capital’s Moscow operations, readily admits that Russia can be a difficult place. “The corporate culture is different, the political aspect of things is hugely important, rules of the game are less clear in general, and it is significantly more a relationship-based business, which really requires above-average understanding of how things are done,” he says. That’s why anyone who ventures to Russia ought to be armed with good advice and a well-connected banker like VTB Capital, he adds.

VTB Capital’s parent is 77.5% owned by the Russian government, and it has established itself as a strong player on its home turf. In terms of trading volumes, the company claims to be ranked among the top five of the Russian Trading System, Russia’s US dollar-based exchange, and among the top 10 on the Moscow Interbank Currency Exchange (MICEX), its rouble-based exchange. “And we’ve gotten there in only six months, which is also global head of research and global co-head of equities for VTB Capital.

The big question is whether investors will find Russia attractive enough to compensate for the risk. Both Moos and Yakovitsky are betting that big emerging markets like Russia and China will gradually attract more capital and widen their investor following. “The world is changing,” Moos says. “The traditional investment markets for Singapore are being substituted by the new markets.”

Yakovitsky adds that the time to start looking for investments in Russia is now, when asset prices are just coming off their lows. “Russia is a very high beta play, which means that when things go sour, Russia underperforms on the way down. But when things go well, and demand for Russia’s main foreign-trade items, such as commodities, is high, Russia outperforms,” he explains. ”So, it gives you speedy returns. And the higher risk that you take by investing in Russia is fully justified because, on the way up, you generate excess returns to make up for this risk.”

In fact, Yakovitsky can’t conceive of any scenario under which Russia doesn’t emerge from this global recession with relative strength. “It’s a big exporter of commodities, and commodities will rebound first, even before the underlying health returns to the developed markets like the US.”
The signs of a turnaround might already be unfolding. Since the beginning of the year, the MICEX Index, Russia’s benchmark stock index, has surged 36.4%. Policymakers have stabilised the rouble somewhat by raising interest rates, curbing bank refinancing and threatening to intervene in the foreign-exchange market. And, oil prices are edging higher. Meanwhile, geopolitical concerns sparked by Russia’s invasion of neighboring Georgia in August, and its hardball tactics in focusing higher gas prices on the Ukraine, are gradually abating.

For Moos, this could be next big opportunity. Conversant in Russian, German, English, Ukrainian and Japanese, he is now hitting the trail around Asia drumming up interest in the huge country that spans 11 time zones. “The fact that this environment exists is certainly an opportunity,” Moos says. “And we are appropriate financial and political strength. And we have the financial expertise.”

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