How can Russia's small and underfunded equity brokers break into the more lucrative areas of investment banking? By joining forces with foreign institutions, according to the conventional wisdom. But one local broker may have found a different way to turn itself into a major player. In mid-August, details emerged of a deal that brings together Russia's largest securities broker, Troika-Dialog, and the city of Moscow, likely to be one of the country's major sources of financing business over the next few years. The Bank of Moscow, in which the city of Moscow holds a majority stake, will form a strategic alliance with Troika-Dialog. After completion of a share purchase for an undisclosed sum, Bank of Moscow will own 20% of Troika and Andrei Borodine, the Bank of Moscow president, will have a seat on its board of directors.
The alliance is the latest in a series of deals that have shaken up the Russian brokerage sector this summer. In July it was announced that the International Company for Finance and Investment would merge with Renaissance Capital Group to form MFK-Renaissance. This may emerge as the only other Russian firm that can compete with foreign investment banks without outside help, thanks to the deep pockets and powerful political connections of its major backer Uneximbank. The announcement of the MFK-Renaissance merger was followed a week later by the news that SBC Warburg was joining up with Brunswick to form a joint venture, Brunswick-Warburg.
Troika-Dialog itself has long been courted by a number of foreign banks, and has consistently declined all buy-out offers. But the Bank of Moscow's relationship with the city government, as well as the chance for the Troika management team to remain in firm control, may have made this deal too good an offer to pass up.
Henry von Blumenthal, director of Denholm Hall, which acts as financial adviser to the city of Moscow, explains: "The municipal government is already one of the most important non-sovereign investment-banking clients in all of eastern Europe. With the upcoming $500 million Eurobond tranche scheduled, there is possibly up to a billion dollars in transactions from Moscow that may take place within the next year. Troika-Dialog, with their new link to the Moscow Bank, could now perhaps become a significant player in part of this."
The Bank of Moscow, by virtue of its close links to the city of Moscow, as well as minority shareholders that include Unexim, Sberbank, Most Bank and Unicon Bank, is in an excellent position to take advantage of the large-scale financing plans envisioned by the city. Moscow is one of the few municipalities in Russia that has its own successful privatization programme. Indeed, the city of Moscow is fast becoming one of the most powerful financial entities in the country, just behind the Russian Federation itself and the energy giant Gazprom.
Under the leadership of mayor Yuri Luzhkov, a likely strong contender in the next presidential election, Moscow prides itself on its astute financial management. Luzhkov has long aspired to transform the capital city and allow it to join the league of the world's prestigious cities along with Paris, London and New York.
Luzhkov wants to show all of Russia what he can do with Moscow as his strategy for winning Boris Yeltsin's job at the Kremlin. As the next election approaches, Moscow's financing programme will bring a huge amount of new funds into the city's coffers and a string of healthy fees to the investment bank responsible for helping to manage it.
The link with the Bank of Moscow may also allow Troika to break into another market with strong potential. Asset management, especially with regard to personal savings, is just starting to take off in Russia. The Bank of Moscow has an extensive retail branch network throughout the Moscow region, and any personal finance product managed by Troika-Dialog and distributed through the bank's network is likely to grab market share. Theodore Kim