Of all the changes in Russian investment banking over the last five years, none has been more remarkable than the relentless rise of VTB Capital.
As international banks have pulled back from Moscow after the imposition of western sanctions in 2014, the firm has leveraged its state ownership and hefty balance sheet to achieve an unprecedented market dominance.
Since the start of 2015, it has accounted for 22% of Russian primary equity flows, 27% of international debt capital markets issuance and a quarter of M&A business, according to Dealogic.
VTB Capital’s rise also reflects other changes in the Russian market, in particular its increasingly domestic character.
“The role of the domestic investor – whether strategic, private equity, family office or portfolio – has gone up massively in the past five years,” says Alexei Yakovitsky, global chief executive of VTB Capital.
He attributes this to global “de-offshore-ization” efforts, the emergence of a sizeable pension fund sector and falling interest rates.
“Other than physical cash, the traditional saving mechanism for private individuals in Russia is bank deposits,” he says. “That’s no longer yielding significant returns, so people are increasingly looking to capital markets and investment products.
“We have reached the point where we can say that domestic demand is anchoring Russian capital markets to a significant extent.”
As Yakovitsky notes, this is precisely what global fund managers had been hoping to see in Russia.
“It means there is a domestic investor base to pick up the ball when volatility hits the market,” he says. “Hopefully it means that when things become a bit rosier, western funds will feel even more comfortable investing here.”
In the meantime, Russian capital markets have also been receiving support in the form of flows from new international sources.
“Some of the withdrawal by western investors is being offset by money coming in from the Middle East and Asia,” says Yakovitsky.
This new capital has the advantage of being longer-term than western fund flows, he adds.
“Western capital has always been more speculative, with a time horizon of maybe two years,” he says. “Asian and Middle Eastern capital is less driven by the search for yield and is more patient. By definition, the strategies and time horizon of a sovereign wealth fund are different from those of a hedge fund.
“For the Russian economy, this is a positive development. We need more long-term money for investment-driven, infrastructure-driven growth.”