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Deutsche Bank buys into UFG

Ben Aris spoke to the Russian bank’s CEO about the rationale behind the deal and the outlook for Russia.
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In the midst of the worst political scandal President Vladimir Putin has faced since taking office, Deutsche Bank announced a groundbreaking deal by buying 40% of top five Russian investment bank United Financial Group. It was the first time a foreign bank had bought into a Russian bank since the 1998 financial crisis.

On October 25 2003, officers of the federal securities service arrested Mikhail Khodorkovsky, CEO of Russia’s biggest oil company Yukos and Russia’s richest man. Yukos has been the poster boy for change and good corporate governance over the past four years and Mr Khodorkovsky’s incarceration sent shock waves through the stock market, sparking fears that the Kremlin was about to launch a mass re-nationalisation campaign.

As investors ran for cover, Deutsche Bank and UFG announced the completion of a deal they had been working on for months, a testament to what had been seen as Russia’s flourishing economy. UFG CEO and chairman Charles Ryan was one of two dozen bankers called in to the Kremlin byMr Putin a few days after Mr Khodorkovsky’s arrest.

Stable achievement

Mr Ryan recalls: “Putin said that he recognised that one of the achievements of his presidency is that the macro and political stability he brought made [the current strong] investment possible. It is a point that is often missed – that stability is more important than high oil prices. The implication was that he will not do anything to undermine this stability.” Mr Putin reassured the bankers that it was not the start of a wider campaign but was about enforcing what was effectively a gentleman’s agreement between the so-called oligarchs and the government that Mr Putin offered shortly after taking up the reins four years ago: “Don’t interfere in politics and you can keep your companies.”

Mr Ryan says that despite the current uncertainty, the rationale of the deal remains unchanged. The economy is now growing faster than at any time in the past 30 years and looks as appealing as ever. Mr Putin promised to continue the reforms.

“Every time the president has done something it has been liberal – even though there are some crazy guys making some scary statements [in government],” says Mr Ryan. “In the history of this country the government has never reformed when the cotton is high. Yet [under Putin] they are using the money wisely and simply not spending the surpluses. If this was the Yeltsin years, there would be an investment orgy.”

One of Russia’s leading investment banks set up in 1994, UFG decided to tie up with Deutsche Bank as it had grown as much as it could on its own. “We had got to a point where we and [the other leading investment bank] Renaissance Capital had pulled away from the other local firms,” says Mr Ryan. “We both have about 18% of the market share, while [market leader] Brunswick UBS Warburg’s share is 28%. We couldn’t penetrate that last bit and to get there we needed a global partner.”

Deutsche Bank is the second largest European bank in terms of assets and has been in Russia since 1881. It had a brief hiatus in the Russian revolution but returned during perestroika and is now one of the largest foreign banks in the country. It brings its global clout to the partnership and paid an estimated $70m for the UFG stake.

The two banks hope to play to each other’s strengths. The corporate finance business will be split, with UFG supplying its local expertise and contact base, while Deutsche Bank brings its weight to deals. It will outsource portfolio investments to UFG, which will run the research and equity operations.

Global preference

“The real driver to the deal was corporate finance,” says Mr Ryan. “Western customers were already over the need to just go to global banks in Russian deals and we are the only local firm with a creditable M&A business, but the problem was with Russians, who are more ‘brain conscious’. Customers would like the ideas but then, worried about how it would look to the rest of the market, would take our ideas to global banks.”

UFG has established credentials, acting as a lead manager for the placement of 5.6% government stake in Russian oil major LUKoil on the London stock exchange at the end of 2002. And in early 2003, BP retained UFG as the only local representative in its historic $7bn-plus merger with Russian oil company Tyumen Oil, the single largest foreign investment into Russia in modern history.

Says Mr Ryan: “It is about being relevant; doing things that are going to shape this country. And to do that you have to be involved in the big capital flows. If you are going to do this like we do, a client-orientated way, then you need a big partner. With M&A volumes doubling every year, we expect that after the [March 2004] presidential elections, the next two years in Russia will be surprisingly good.”

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Read more about:  Central & Eastern Europe , Russia