The last 12 months have been tough for investment banks in Russia. Just as capital markets were starting to shake off the effects of western sanctions and economic slowdown, another round of sanctions – this time on individual oligarchs – stopped them dead in their tracks.
It also cast a further chill over the already lackluster M&A market, says Ruslan Babaev, co-chief executive at Renaissance Capital.
“International buyers who are looking at Russian companies are taking much longer to finalize deals than previously,” he says.
Meanwhile, domestically, the increasing state dominance of the economy has boosted the role of state-owned banks in the segment – or, indeed, removed the need for any intermediation.
“Some state transactions are done directly between companies without the banks,” says Babaev.
That is bad news for Renaissance, Russia’s largest privately owned investment bank, which had been hoping to revive its M&A franchise following the appointment in October 2017 of ex-Goldman Sachs and VTB Capital banker Petr Molchanov as head of Russian investment banking.
Despite these headwinds, Renaissance has managed to build an M&A pipeline and, once market conditions stabilize, Babaev hopes to take advantage of opportunities created by western investment banks cutting their client lists in Russia and pulling back from the mid market.
“That is a very interesting segment and will likely be the most prosperous part of Russian banking business in the next couple of years,” he says.
In the meantime, the firm can rely on revenues from its unrivalled markets franchise, which covers not only Russia and the Commonwealth of Independent States (CIS) but also key African economies, including Egypt, Kenya and Nigeria.
Babaev says this geographical diversification is key to Renaissance Capital’s appeal for international investors.
“As long as you only do Russia and the Commonwealth of Independent States, clients can’t trade with you,” he says. “It’s a small part of their portfolio. You need to offer a broader spectrum of markets.”
He notes that this is in line with broader global trends.
“In every country, margins on anything market-related are going lower and lower,” he says. “Investment banks everywhere are trying to diversify their revenue streams because the plain vanilla business that worked 10 years ago doesn’t work today, especially as more and more trading is going electronic.
“The world is changing, and everyone needs to find an angle. You need to be able to provide clients with something more, whether that’s a platform or an ecosystem. You have to evolve to survive.”