* Investment banks' fee income in Russia down 63 pct in 2014
* Ukraine crisis, sanctions add to pessimism
* Fear of redundancies as banks assess bleak landscape
By Megan Davies
MOSCOW, June 4 Russian investment banking
activity has been hit this year by the faltering economy and the
Ukraine crisis, putting pressure on Moscow bankers to get
creative in offering local firms different ways to raise capital
instead of the standard fare of international share and bond
Russian investment banking fee income has fallen by about a
third to $166 million in the year to date compared with the same
period last year, with a marked squeeze in the last few months,
according to Thomson Reuters data.
The imposition of U.S. and EU sanctions on some Russian
individuals and firms caused a sell-off in the rouble and equity
markets, forcing many companies to postpone plans to raise
equity and debt capital and raising fears amongst local
investment bankers about potential jobs cuts.
Some banks have already reallocated staff, said one
Moscow-based banker, who asked not to be named. "Some people
primarily or solely focused on Russia are now not on Russia any
more. Some people have moved back to London and don't do Russia
any more or do Russia as part of a broad scope," he said.
Major U.S. and European investment banks such as Goldman
Sachs, JPMorgan, Morgan Stanley and
Deutsche Bank have built up prominent businesses in
Moscow, where they work alongside or compete with
state-controlled banks Sberbank and VTB for
work on mergers and acquisitions (M&A), share issues and debt
"It became evident that growth slowed considerably," said a
second banker who spoke on condition of anonymity. "So I think
there are quite a few firms that are probably making assessments
on these events regarding staffing."
Russian economic growth is expected to grind to a near-halt
this year while capital outflows during the first quarter
totalled $63.7 billion - more than during the whole of 2013 -
partly as companies and households switched into foreign
President Vladimir Putin has told company bosses to bring
their assets home to help Russia survive Western sanctions and
the downturn, and has backed a drive to promote the Moscow
Exchange. And as if on cue shares in Nasdaq-listed
Russian internet search engine Yandex began
trading in Moscow on Wednesday.
But Bernard Sucher, board member of Russian investment group
Aton, said banks would still need to cut costs - mainly meaning
staff - in order to "get through the desert".
Investment banking fees in Russia for May came to just $44.6
million, compared with $75.7 million the same month last year,
Thomson Reuters data shows.
One lawyer who is leaving Moscow said law firms would
probably put off making any redundancies until early next year
once it is clear how 2014 shaped up, but cautioned it could be
tough for expatriates, many of whom come from London, seeking
employment back at home. Russian companies have tended to raise
foreign capital in London, partly due to its proximity and close
timezone with Moscow and its deep and liquid markets.
"A lot of people will find it hard to get back in the market
in London as it is full of good bankers and lawyers and it's a
crowded market," the lawyer said.
But the fears have not yet led to widespread job cuts
because foreign banks are keenly aware that it is hard to
rebuild a business in a country where having political goodwill
A source at one of the major global banks in Russia said
that headcount was largely flat and there were no cuts happening
at the moment.
The situation in Russia is trickier for U.S. institutions,
the heads of which were advised by Washington not to attend a
high-profile investment forum last month in St Petersburg.
U.S. banks in Russia have had mixed fortunes this year,
according to Thomson Reuters data. Goldman ranks 22nd so far
this year in terms of fees earnt, down from ninth place this
time last year, Citi has risen to the top spot from sixth and
JPMorgan is sixth, down from third. Some European banks have
gained ground, with Deutsche Bank at the third spot, after
coming in 20th this time last year.
The data is based on publically available information and
data submitted by the banks and may not include every deal.
"There's been some slowdown in M&A. But if you take a
broader look at corporate banking including M&A, trade, credit
and forex, we are 20 percent up this first four months (of 2014)
compared to last year," said Pavel Teplukhin, chief country
officer for Deutsche Bank Group in Russia, adding that there
were currently no plans for any staff reductions.
Spokespeople at GS, JPMorgan and Morgan Stanley all declined
to comment on staffing.
LOCAL FINANCING PRODUCTS
Transactions such as the share listing of German retailer
Metro's Russian wholesale business and Russia's
long-delayed privatisation programme have been put on hold due
to the Ukraine crisis. Meanwhile Moody's credit agency said on
Tuesday it estimated that the volume of new corporate rouble
bond issuances over the next year will fall to its lowest level
As standard types of transaction have been frozen, bankers
have seen opportunities for alternative products as foreign
companies make contingency plans for their Russian subsidiaries
or local companies look for alternative ways to raise capital.
Foreign companies, concerned about deploying more capital
abroad to finance units in Russia, have been inquiring about
local financing for their subsidiaries, said Dimitri Casvigny,
head of Industrials at Sberbank CIB. This keeps financing on a
local level and can offer some protection to the headquarters.
"(Companies) are designing capital protection and trying to
stay (in Russia) as long as they can," said Casvigny. "It is a
hard market to re-enter if you have a good business here."
Other products such as mezzanine financing - a form of debt
and equity which gives the lender the ability to convert into an
equity interest if a loan is unpaid - are also growing in
"I expect further changes towards a mezzanine type of
financing rather than equity," said Teplukhin. "It is better
protected and low-yielded. I would say mezzanine would be a more
fashionable product for the rest of this year and maybe the
beginning of next year."
However, bankers are also hoping that there could be an
improvement in the autumn with a window possibly reopening for
initial public share offers, provided that the geopolitical
And while debt markets have been almost closed since
January, the domestic rouble bonds market has started to show
signs of improvement in recent weeks, said Pavel Sokolov,
co-head of IB, Sberbank CIB.
"I believe that we will see more transactions in the
domestic debt capital market in the coming weeks," said Sokolov.
"I think that there is a chance for an improvement in the second
half of the year."
(For a graphic on investment banking fees in Russia: link.reuters.com/kuc89v
(Reporting by Megan Davies; Editing by Mark Trevelyan and Greg