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Font of prosperity

Having ignored his banking interests in favour of oil and metals, oneof Russia’s oligarchs has now discovered the cash cow that is retailbanking. Ben Aris writes.Vladimir Potanin ignored his bank until a few months ago. One ofRussia’s classic seven oligarchs that came to the fore in the 1990s andthe owner of Interros industrial group, he was concentrating ondeveloping his core metallurgical companies such as Norilsk Nickel.
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But

a boom in the banking business and the prospect of billions of dollars

to manage in nascent private pension funds have made him change his

mind, and quickly. He has returned to the banking business and at a

stroke created Russia’s second largest retail bank.

Mr Potanin made his first fortune with Uneximbank, formerly a household

name until it defaulted on more than $1bn of credits during the 1998

financial crisis. The remaining good assets were transferred to

Uneximbank’s smaller sister Rosbank and when the dust settled the two

banks were merged after all the outstanding debts were settled with

creditors on amicable terms in July 2000.

“All Uneximbank’s liabilities have been restructured with the agreement

of all the creditors and all were settled with the issue of $40m of

Eurobonds,” says Alexander Popov, CEO of

Rosbank.

Not much happened after that. With the biggest banks taken out of the

picture, medium-sized banks like Rosbank took over their clients and

built up a solid business as the economy recovered. But they were small

and uninfluential compared with their predecessors.

Banking genesis

Most of Russia’s leading businessmen had a bank at the core of what

came to be called the financial-industrial groups. However, after the

crisis most abandoned the banking business or left their banks to tick

over while they turned their attention to industrial holdings and oil

companies that were still making money.

Mr Potanin bought Rosbank shortly after the 1998 crisis but a year ago

Yevgeny Ivanov, Rosbank’s chairman of the board, complained that

Interros had little interest in investing into the bank because returns

from investments into the real economy were better.

“Our credit portfolio is $1bn and we could easily increase by another

$2bn with the pre-approved loans already made, but we lack the

resources and our shareholders still see better investment

opportunities for capital than banking,” said Mr Ivanov in May 2002.

With little interest in banking and none in retail banking a year ago,

Mr Potanin has made a sharp about turn in the past few months. As

household deposits in commercial banks overtook corporate deposits for

the first time earlier this year, there has been a mad scramble into

the retail banking sector in the past six months.

At the same time, the booming economy, increased competition for the

business of Russia’s top 40 raw material exporters, and a growing layer

of successful and expanding small and medium-sized enterprises (SMEs)

has made banking both an attractive and profitable business again.

Rationalisation process

Mr Potanin’s renewed interest in banking is part of a wider

streamlining of his holdings. In September, he announced he was selling

off the last of his oil and gas holdings, but he increased investments

in gold mining, utilities and agriculture.

His first big move in the financial sector came in July when Interros

announced a tie-up with the American Investment Group (AIG) the world’s

11th largest company, to float a $500m private equity investment fund

that would tap the Russian success story.

“This is an important sign as it shows growing investor confidence in

the Russian market,” Interros deputy director Andrei Bugrov said after

the announcement was made. “In 1997, we mostly had portfolio investors,

whereas now we see foreign direct investments.”

AIG was already investing in Russia during the Soviet-era, when it was

involved in several insurance companies. In 1994, it launched AIG

Russia and AIG Life insurance companies as well as the Russian-American

Investment Bank.

In 1996, AIG set up a 10-year AIG Brunswick Millennium Fund with about

$300m under management. And two years ago it started the $100m Russia

Growth Fund, which it manages with the Menatep group (the latter

controls oil major Yukos).

“In the past, Russian companies tried to build financial-industrial

groups. Now we see them trying to manage assets the way it is done in

the West,” says Ivan Rodionov, executive director at AIG Brunswick

Capital Management, that manages several investment funds in Russia.

“There is a trend toward separating ownership from management and

investment decisions.”

Then in September, in a surprise move, Interros bought the First OVK

retail bank for $200m – the single largest investment ever in Russia’s

banking sector – and hired western consultants to reorganise its

holdings.

First OVK is the rump of failed SBS Agro and together with Rosbank will

boast the largest retail bank network of 450 branches, albeit a

distant second to state-owned Sberbank’s 25,000-plus branches. Next

year Rosbank plans to boost the number of branches to 600 and will

invest $70m to $85m in an attempt to capture 6% of the market.

A consumer loans programme has already been rolled out and is projected

to reach $50m by the end of this year. The joint bank’s loan portfolio

is a little less than $2.5bn and joint assets are $3bn. Other products

in the works are car loans, credit cards, pension funds, insurance

services and developing private banking services for wealthy clients.

Merger difficulties

Interros is still considering how it will unite Rosbank and First OVK.

Merging banks remains difficult and time consuming under current

Central Bank of Russia (CBR) rules. Mr Popov says that the two banks

will not be formally wed until after new legislation is passed to make

the process simpler; this is due at the start of next year.

Rosbank was already doing well without the added impetus from its

parent company. The sixth biggest Russian bank in terms of assets and

in the top 10 in terms of capital, the bulk of its business comes from

traditional corporate banking activities, which make up about 90% of

revenues and 80% of its balance sheet.

Having built up the bank by concentrating on servicing the needs of the

group’s industrial companies after the crisis, Rosbank has been

diversifying its client base in the past few years and weaning itself

off handling the finances of the leading raw material exporters. Today,

Interros only accounts for 5% of the bank’s assets and 20% of its

liabilities, says Mr Popov.

“We have a strategic understanding that it is not possible to be

competitive without transforming and becoming a truly universal bank,”

he says. “The competition is increasing and the margins are going down.

In order to be a leading bank we need to develop all the major banking

businesses.”

While it has not been decided if Rosbank and First OVK will be

completely merged, Rosbank is likely to continue to play to its

strengths and develop its corporate and investment banking skills.

“We remain active on the corporate banking side, but we need to develop

our investment banking services, to go from plain vanilla corporate

loans to more sophisticated mergers and acquisitions consulting through

to trade finance and beyond,” says Mr Popov.

M&A activity

And Interros is not the only enterprise that is restructuring. After

the crisis, entrepreneurs snapped up factories and plants for pennies

but with no strategic interest in developing them. These assets are

being sold on again as the process of consolidating Russia’s industry

is well under way – Interros itself being a good example – and the

number of mergers and acquisitions has been growing fast in the past 18

months.

“M&A is a very large niche for Russian banks and SMEs are actively

restructuring or merging at the moment,” says Mr Popov. “M&A as a

share of our business is growing rapidly as entire sectors, like

telecoms, restructure, develop.”

First securitisation

Likewise, Rosbank has been casting about to make more of what it has.

As part of its increasing sophistication, it plans to complete Russia’s

first securitisation in the next six months.

Rosbank controls United Card Services (UCS), which clears and settles

three quarters of all Russia’s credit cards transactions. The bank

hopes to securitise the foreign credit card receipts – the payments UCS

receives from abroad after foreigners visiting Russia use their credit

cards – and use them to raise significantly cheaper funds on the

international capital markets than it can raise on its own.

Credit Suisse First Boston and Merrill Lynch will lead manage the deal.

A special purpose legal vehicle (SPV) will be set up abroad and given

the right to collect these payments. The spv will then issue a note

backed by these super-safe receipts. As the entire set-up is outside of

Russia and independent of whatever happens to Russia, these receipts

should be issued with interest rates an order of magnitude lower than

those that Rosbank, with its associate Russia risk, can hope to attract

on its own.

Mr Popov says the bank is hoping to raise up to $200m in this way,

which will be used to lend on to domestic enterprises, but everything

depends on the note being awarded an investment grade rating by the

ratings agencies.

Rosbank is preparing, along with the other banks, to be a player on the

nascent asset management market. It owns two of the 54 private pension

funds that were recently cleared to handle the portion of Russian’s

pay-as-you-go pension contributions that can be invested into private

pension funds.

In the past few months, every worker in Russia has been receiving what

the local press has dubbed “happy letters” (a play on the chain letter

pyramid schemes of the early 1990s) listing their employers’

contribution to the state pension fund as well as a form to specify

which of the 54 companies they would like the investable part of their

contributions to go to.

Exciting possibilities

Analysts disagree about how much this business will be worth by the end

of next year, with estimates ranging from $200,000 to $1.5bn, but

bankers are excited by the possibilities.

Rosbank has already made a start and set up mutual funds with some

$120m under management. But this is small potatoes against the sums

that the current pension reforms are expected to generate.

“We have a five-to-seven-year time horizon. We estimate in the first

phase of the pension reforms some $1.5bn of pension fund money will be

created and available for investment by next year. But this could rise

to as much as $10bn within the next five years,” says Mr Popov.

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