#11 - JRL 7253
Financial Times (UK)
July 17, 2003
Banks again booking seats on Russian flights of capitalists
Strong growth has lured back even the losers in the 1998 crash to prospect for new deals
By Charles Pretzlik and Arkady Ostrovsky

It was one of those Moscow parties western bankers still talk about.

In June 1998, Goldman Sachs rented the lavish House of Unions - used in the burial ceremonies of Lenin and Stalin - to celebrate Russian capitalism and the opening of its new offices. The US bank flew in George H W Bush, former US president, to entertain the assembled Russian powerbrokers. Two months later Russia defaulted on its domestic debt, devalued its currency and caused panic in the international financial markets.

Five years on, there are no lavish openings of new offices, but business class seats on British Airways to Moscow are booked weeks ahead, the city's five-star hotels are full and Dollars 100-a-meal restaurants are doing a brisk trade - all indicating that western bankers are back in town.

Edward Kaufman, head of investment banking at Brunswick UBS Warburg, the Swiss bank's Russian joint venture, says: "Every time I fly BA, I see three to four new bankers coming to town."

Peter Weinberg, chief executive of Goldman Sachs International, says: "Russia has changed enormously in the past 10 years, let alone since 1998. It is hard for any foreigner to appreciate the magnitude of this change - but with this comes huge opportunities for both Russians and foreigners."

Foreign bankers have been attracted back by strong economic growth - 7.2 per cent in the first half of the year - improving corporate governance and a buoyant equity market at a time when the rest of Europe is still shak ing off the bear market. Their hopes of finding a rich seam of deals have been bolstered by high-profile transactions such as BP's recent deal with TNK, the Russian oil company.

Russian companies are also looking to raise capital in the international bond and equity markets and then there is the biggest prize - a promised Dollars 2bn-Dollars 3bn sovereign bond issue next year.

Western bankers are attacking the market from three directions: retail banking, corporate banking and investment banking. In the last few months Rothschild, dormant in Moscow since 1998, has reopened for business. Deutsche Bank has begun talks to buy a significant equity stake in Moscow's United Financial Group (UFG), which could cost it at least Dollars 40m.

Even those that lost most five years ago are returning. Credit Suisse First Boston, which made billions of dollars in Russia but then lost Dollars 1.3bn in 1998, is expanding there again. Barclays, which lost Pounds 250m, is rediscovering its appetite under the stewardship of Hans- Joerg Rudloff, chairman of its investment banking arm.

Most large international investment banks, including Barclays and Goldman, are timid about opening full-scale operations in Russia and prefer to keep most of their Russian experts in London-based teams, dispatching their bankers for specific deals, hoping to avoid the ill- disciplined, semi-autonomous empires of the 1990s.

Russian banks, though, see this as an opportunity. "There is a new term here called BA banking, which is banking done between BA flights in and out of Moscow," says Charles Ryan, head of UFG. "By the time they (international banks) show up, we won't be that easily ejected."

While large foreign banks are cutting headcounts at home, Moscow banks are hiring. "There is a real influx of foreign bankers coming to work for Moscow banks," says Dominic Gualtieri, head of equities at Alfa Bank. He says most of Alfa's top managers are foreigners.

But for all the excitement, the Russian market is still shallow. Western bankers are bumping into each other in their clients' corridors and the breakfast rooms of Moscow's hotels.

Most bankers admit there are only a few dozen clients worth pursuing in Russia. Some admit the number of serious corporate clients may be fewer than 10. McKinsey estimates that, for investment banks, the total revenue pool available today, excluding proprietary trading, is Dollars 500m-Dollars 600m. This is still tiny, but the consultancy expects the sum to triple over the next five years.

Bankers say that how much more aggressively they push into Russia will depend partly on whether President Vladimir Putin takes a more heavy-handed approach to its oligarchs.

If warning signs were needed, the recent crackdown on Yukos has provided them.