21 October 2003 01:51
FINANCE: Competition intensifies: INVESTMENT BANKING IN RUSSIA: Brunswick UBS is a successful model that other investment banks seek to emulate, reports Arkady Ostrovsky
Jeffrey Costello considers himself lucky. A former New York theatre producer,
he has played several impressive parts in Russia's dramatic business
environment. His latest - and so far most successful role - is that of the
country's leading investment banker.
Mr Costello, who has also tried himself as a lawyer, presides over Brunswick
UBS, Russia's leading investment bank which has been voted the best
brokerage firm in Russia by Thomson Extel Survey. The bank's success is
the result of a joint venture between UBS, a Swiss investment bank, and
Brunswick, a Swedish privately-owned brokerage in Moscow which catered for
the interests of foreign investors.
"We have domestic presence and the distribution muscle of a global
bank," says Mr Costello. It is a model that other investment banks are
trying to emulate. Deutsche Bank in particular is said to be close to a deal
with United Financial Group, which would give it local presence in Russia.
In contrast with other investment banks, Brunswick UBS emerged from the debt
default relatively unscathed. "You can call it lucky or you can call it
smart, but Brunswick UBS did not have any fixed income business, so when
Russia defaulted on its domestic debt, we did not blow up," Mr Costello
says.
It did, to be sure, lose money on its equity positions and, along with other
banks, had to cut its headcount by two-thirds from 280 employees before the
crisis to just 95. Today, it employs 130. But in contrast to other local
banks which lost credit lines with large institutional investors, Brunswick
UBS continued to trade shares with its foreign clients. "For the first
few months, we were the only game in town and this allowed us to accumulate a
very significant share of the market," Mr Costello says.
The crisis changed the nature of Brunswick's business which was
originally set up to sell Russian equities to foreign investors. "Before
1998, the flow of money was simple: western capital in, Russian cash out.
After the crisis, there was not a single Russian stock to sell, but foreign
investors still held their Russian shares and needed to trade them," Mr
Costello says.
The crisis - and the subsequent recovery - also changed the type of investors
in Russian assets. Before 1998, about 70 per cent of all Brunswick's
business was done with dedicated Russian funds, specialised emerging markets
funds. Today, these investors account for just 30 per cent of the bank's
business as global funds came to dominate foreign flows.
By their nature, these were large investors who feel more comfortable dealing
with large international banks than with Moscow-based brokerages. "Once
again, we were lucky. We could tap into the client base of UBS Warburg. As
far as the investors were concerned, they were dealing with UBS."
UBS Brunswick does not disclose its profits, but its turnover increased
three-fold since 2000 and was last year estimated at Dollars 13bn to Dollars
15bn.
With Russia's recent upgrade to investment grade, many global investment
funds are likely to increase their allocations in Russia. Brunswick UBS
stands to benefit from these flows. "For these investors it is less
important to compare two Russian oil companies to each other than it is to
compare the top Russian oil companies with their global peers such as BP or
ExxonMobil. We can provide them with research into both," says Mr
Costello.
However, a recent wave of corporate activity by Russian companies, including
mergers, asset sales and capital markets borrowing, presents new
opportunities for investment banking. UBS derives the vast majority of its
business from brokerage operations - and Mr Costello is looking to strengthen
its investment banking services. But with renewed interest from large
European and US banks in Russia, including Deutsche Bank, Merrill Lynch and
Goldman Sachs, Brunswick UBS faces tough competition. At the same time, it
will have to fight for Russian money with domestic institutions, such as
Renaissance Capital, United Financial Group or Troika Dialog. "I must
admit our competitors are better placed to tap into Russian pools of money
than we are," says Mr Costello. It may need more than luck to stay ahead
of the game.
[FTI [The Financial Times]] |
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