Features : Annual Survey: Stars Of The New Russia


Making the most of their newfound spending power, Russia’s consumers are boosting the fortunes of the country’s banks and corporations.

features3-1 With Russia’s economy fueled by petrodollars, Russian consumers are on a spending spree that has made them Europe’s largest consumer market. Although some analysts say escalating inflation could slow spending, most agree that Russians, who have long forgotten the days of Soviet shortages and rationing, still have lots of shopping days ahead.

Rising disposable income, a growing middle class, a flat income tax, and subsidized housing and utilities are helping to keep Russia’s shopping malls teeming with customers. According to Troika Dialog, an estimated 60% of Russians will have per-capita purchasing power parity (PPP) disposable income (after household expenses) of $350 per month this year, the highest level ever. Per capita GDP will near $15,000 this year in terms of PPP.

“The situation causes a snowball effect, with increasing consumption fostering increased retail sales and lending,” says Giedrius Pukas, managing director at Troika Capital Markets in Moscow, a division of Troika Dialog. Pukas feels the Russian consumer boom is still sustainable for several more years. “I don’t foresee any major reasons why it would stop,” he says. Russian oil and other commodities are expected to continue benefiting from high global prices, keeping the nation’s economy on a solid footing. Annual GDP grew by 8.1% in 2007 and 7.4% in 2006. Though officials expect the growth rate to begin to slow down, they still expect the economy to expand by 6.7%-7% this year. Consumers share the optimism, with the consumer confidence index rising during first-quarter 2008 from fourth-quarter 2007, making its first move into positive territory since the index was launched in 1998.

Retailers are delighted. According to Rosstat, the country’s statistics agency, Russian retail turnover was 10.7 trillion rubles ($450 billion) in 2007, up from 8.7 trillion rubles the year before. Private analysts contend the official data may underestimate actual figures. Several large international retailers have already set up shop in Russia, and others are on their way. Wal-Mart Stores, the world’s largest retailer, this year appointed Stephen Fanderl as president of Wal-Mart Emerging Markets-Europe to explore opportunities in Russia.

Local retailers are also expanding. X5 Retail Group, a major Russian food retailer, announced plans to pay up to $970 million to acquire Karusel, a local operator of hypermarkets, in a bid to take a greater market share. The situation makes large local retailers appealing targets for acquisitions by local and foreign investors alike.

However, local suppliers are hurting as imported goods flood the market. In April Russia’s prime minister, Viktor Zubkov, expressed concern over rising imports of consumer goods, which have soared by nearly 500% since 2000. Zubkov says imported products account for about 49% of consumer goods sold in Russia, for which he recommends that the government support domestic producers through fiscal and tariff measures.

Big-ticket Sales


It seems there are few limits as to what Russians are buying, both domestic and imported. By 2004 the country had already become Europe’s largest market for cell phone usage, hitting the same mark for washing machines in 2005. “We expect the Russian car market to become the second largest in Europe in 2008, and the Russian advertising market in dollar terms to become the third largest in Europe by 2010,” says a report published by Troika Dialog.

Automakers, cheered by Russian buyers who often enter car showrooms with cash in hand, are rolling in. France’s PSA Peugeot Citroën announced plans to build a new assembly plant in the central Russian region of Kaluga, with an investment of E300 million. Japan’s Mitsubishi also announced plans to invest $200 million to build a plant in the same area. Last year US automaker Chrysler was in talks with local automaker GAZ to produce Chrysler models through a joint venture, while South Korean automaker Hyundai said it will invest $400 million to open a new assembly facility in Russia.

Food and drinks companies are also attracted by Russians’ increased disposable income and changing tastes. In what amounts to the single largest investment in the country’s food and drinks sector, PepsiCo last year acquired a 75% stake in Lebedyansky, a Russian juice maker with a 30% market share, for $1.4 billion. Rival Coca-Cola had already acquired Multon, Russia’s second-largest juice producer, for $600 million. Other recent transactions include Kraft Foods’ opening of a $100 million plant near St. Petersburg to produce instant coffee, and Unilever’s acquisition of Inmarko, Russia’s largest ice cream producer, with an 11% market share, for an undisclosed sum.

Credit Craze


With interest rates falling from near 75% amid Russia’s financial crisis in 1998 to around 5.5% a decade later, many consumers are resorting to credit to make their purchases. VTB, Russia’s second-largest lender, expects to double its consumer credit portfolio to $13 billion this year through VTB-24, its retail banking unit. According to Alfa-Bank data, the mortgage market grew 140% in nominal terms last year alone, despite the fact that only 10%-15% of real estate sales in Russia involve mortgage loans.

Not all Russians have the money or credit to shop, though. An estimated 13% of the population still lives below the poverty line, set at $122 per month in income. An even higher 32% of Russians polled by Levada, a local polling firm, felt they were under the poverty line.

The consumer and credit boom are beginning to raise concerns over inflation. Last year inflation closed at 11.9%, driven partly by more than $80 billion in capital inflows. The government’s 2008 inflation target is 8%-9.5%, though UniCredit predicts the rate will end the year at 10.7%. To tackle inflation, the central bank increased bank reserve requirements and raised the refinancing rate by a quarter of a percentage point. The government has also imposed price controls on a long list of goods and services.

For newly inaugurated president Dmitry Medvedev, curbing inflation is a key priority in 2008, his first year in office. “This is the price that we are essentially paying for our presence in the club of world economic powers,” Medvedev stated in a press interview, explaining the uptick in inflation rates, which are now being reported on a weekly basis for the first time as part of a push for greater transparency.

“Inflation is the function of a lot of different things in Russia,” says Jeffrey Anderson, director of the European department at the Institute of International Finance. “One factor is oil prices, which provide a windfall to the government and finance a very substantial increase in government spending for wages and social programs.” Anderson feels that a drop in oil prices could slow consumer spending and credit growth, but unmet credit demand, especially in areas outside the country’s major cities, could continue to spark growth.

Analysts say Russia’s consumer boom presents some interesting investment opportunities. “Consumer stocks are under-represented in the local stock exchanges, and most of the consumer sector is still not traded,” says Pukas. He says consumer sector IPOs went from less than a dozen in 2006 to some 20 in 2007, and he predicts there will be even more this year.

Several sectors are particularly appealing. Troika Dialog expects stocks to outperform this year in low penetration sectors, including banks, real estate, retail and broadband communications. Higher penetration sectors are also expected to outperform, including mobile telephony, media, automobiles and consumer goods.


BEVERAGES — Baltika Breweries
Baltika’s beers are consumed in 46 countries and account for more than 70% of Russian beer exports. The largest brewer in Eastern Europe and second-largest in Europe, Baltika’s sales volume rose 19.3% year-on-year in 2007 to 1.17 billion gallons, while export volume jumped 22.9% to 52.8 million gallons. Market share in Russia, where it operates 11 breweries, rose 1.2% to 37.6%. Net sales rose 29.5% to E2.25 billion ($3.56 billion), while net profit jumped 20.5% to $399 million. Its healthy finances allowed Baltika in 2007 to pay off its debut bond issue, a 1 billion ruble ($43 million) deal launched in 2004.
• Anton Artemiev, president

CONSUMER — Pharmacy Chain 36.6


Pharmacy Chain 36.6’s name is derived from the ideal human body temperature—36.6° Celsius—reflecting the company’s focus on health and wellness. The company’s success as a health and beauty retailer is founded on offering high-quality products at affordable prices, while opening new stores in growing cities with more than 250,000 inhabitants. By the end of 2007 the retailer operated 1,224 pharmacies in 29 Russian regions, with new stores often added through acquisitions of competing chains. Its Veropharm division is an important pharmaceuticals producer. In 2007 the group posted a 65% year-on-year rise in consolidated sales, to $872 million.
• Artem Bektemirov, CEO

GAS — Gazprom
A $20 billion investment plan is helping Gazprom, the world’s largest gas company, maintain its position. The company’s gas holdings account for some 17% of global proven reserves and 60% of Russian reserves. It exports to 32 countries. Gazprom, 50.002%-owned by the Russian government, audits its new gas fields yearly to adjust volumes and estimated values of each field. It has audited 95% of its proven natural gas reserves according to international standards. Its capitalization grew by more than a fifth in 2007 to $330 billion.
• Alexey Borisovich Miller, chairman of the management committee

Established in 1993, RBC is a pioneer in Russia’s media market. Based in Moscow, it was the first Russian information agency to launch its own website and the first to create an online system with Russian capital markets trading data, and launched RBC-TV as the country’s first business television channel. It operates online newspapers and a variety of websites, focused on everything from travel and sports news to online auctions and job search engines. Its RBC Soft unit is a leading software developer. RBC-TV’s monthly audience in Moscow grew 89% in 2007 to 1.35 million viewers.
• German Kaplan, chairman and CEO

United Company Rusal is the world’s largest aluminum and alumina producer, operating in 19 countries. It has an annual output of 4.2 million tons of aluminum and 11.3 million tons of alumina, representing 12% of the global aluminum market and 15% of global alumina production. Its assets include bauxite and nepheline ore mines, alumina refineries, aluminum foil mills, aluminum packaging factories and power plants. United Company Rusal was created in March 2007, with the merger of Rusal, which was the world’s third-largest aluminum company; Sual, one of the world’s top-10 aluminum producers; and the alumina assets of Switzerland’s Glencore.
• Alexander Bulygin, CEO

OIL — Rosneft
With Rosneft’s oil production rising from 270,000 barrels per day (bpd) in 2000 to 1.6 million bpd in 2006, it estimates it has oil reserves to last another three decades. However, Rosneft is not resting on its laurels. It is introducing state-of-the-art technologies, optimizing expenditures, diversifying its resource base and expanding its asset portfolio to maintain long-term profitability. It operates more than 300 oil and gas fields and has projects throughout European Russia, Siberia, the Russian Far East, Kazakhstan and Algeria. Founded in 1993 as a state company, it emerged as a vertically integrated oil company from Russia’s oil privatization drive.
• Sergey Bogdanchikov, president

STEEL — Severstal
Hot- and cold-rolled products, roll-formed sections and pipes, section-rolling mills and coke-oven and by-products are what Severstal is all about. As a leading international steel producer, it has high-quality assets in Russia, the United States, France, Italy and the United Kingdom. The company, which has grown mainly through acquisitions, operates through four business divisions: Russian Steel and Metalware, Severstal North America, Lucchini and Severstal Mining. Revenues were up 23% year-on-year to $15.2 billion in 2007. Net profit also rose 33% to $1.9 billion. Strong domestic and export prices sparked a 27% rise in ebitda (earnings before interest, taxes, depreciation and amortization) in 2007, when sales volume also increased by 7% year-on-year.
• Alexei Mordashov, CEO

TELECOM — Comstar-United TeleSystems
Comstar-UTS keeps Russian callers connected on the phone and online. As the third-largest telecom company in Russia and the CIS in terms of capitalization, it is a leading provider of integrated telecom solutions, with operations in several Russian regions as well as Ukraine, Armenia and Greece. Founded in 2004 through the merger of several telecom providers, the company incorporates JSC Moscow City Telephone Network, a fixed-line telephone operator in the Moscow metropolitan area, and Comstar Direct, the country’s largest Internet service provider. Comstar-UTS’s revenue rose 30% year-on-year to $1.1 billion during the first nine months of 2007, when net income was $110.3 million.
• Sergey Pridantsev, president

UTILITIES — Rosvodokanal
Moscow-based Rosvodokanal has been Russia’s leader in the operation of water supply and disposal systems nationwide since 1949. The company, which in 2003 became part of the Alfa Group, one of Russia’s largest privately owned financial and industrial conglomerates, was at the forefront of the restructuring and privatization of water supply systems in Russia and Ukraine. Rosvodokanal’s business model is based on acting as a national operating company through public-private partnerships. In 2007 Deutsche Bank acquired a 10% stake in the company from Alfa Group’s A1 subsidiary. In turn, A1 has bid on other Russian utilities through its Rosvodokanal unit.
• Alex Malakh, CEO


Alfa-Bank, Russia’s largest private commercial bank, is one of only a few Russian banks operating under international auditing standards, which it has done since 1993. In 2007 it became the first Russian bank assigned a BBB- bank survivability assessment by Standard & Poor’s. It also received an upgrade from Moody’s Investors Service to Ba1 with a stable outlook. Its total assets rose from $15.2 billion in 2006 to $17.1 billion during first-half 2007, when its return on assets (ROA) remained unchanged at 1.5%. The bank expanded its network of branches and representative offices from 229 in 2006 to 280 in 2007, servicing 2.6 million clients.
• Petr Aven, president

Arriving in Moscow in 1994, Citi was one of the first international banks to set up shop in the new Russia, where it now has more than 3,000 employees. Its more than 400,000 consumer banking and credit card customers are serviced through more than 60 branches and 300 ATMs in six cities: Moscow, St. Petersburg, Samara, Yekaterinburg, Nizhny Novgorod and Rostov-on-Don. Citi launched retail operations in 2002 and offers a full range of services to corporate and retail clients, including investment banking, corporate finance and equity capital markets products. For multinational companies in Russia, Citi is a familiar partner.
• Vikram Pandit, CEO

UralSib offers corporate and retail banking through more than 1,000 bank and insurance offices throughout Russia. Following an acquisitions spree, the group merged its five major banks—NIKoil IBG, Avtobank-NIKoil, Urals-Siberian Bank, Bryansky Narodny Bank and Kuzbassugolbank—in 2005. UralSib, which saw assets grow from $11.6 billion in 2006 to $15 billion in 2007, manages its business through six regional boards.
• Nikolai Tsetkov, president

INVESTMENT BANK — Renaissance Capital
Renaissance Capital is helping Russia’s corporate sector to grow by bringing companies to market. In 2007 it participated in a 5 billion ruble ($213 million) deal for Gazprom and AIZhK, a 2 billion ruble placement by Bank Renaissance Capital and a 5 billion ruble placement for Ursa Bank, among others. It was also a joint bookrunner for the $8 billion IPO by VTB, Russia’s largest-ever banking sector IPO. The investment bank is headquartered in Moscow but has a presence in sub-Saharan Africa, the Middle East, the CIS, New York and London.
• Alexander Pertsovsky, CEO

The largest bank in Russia and Eastern Europe, Sberbank services more than 1.4 million corporate clients throughout Russia, including over 90,000 small and medium-size companies. Its clients can access a network of more than 20,000 branches nationwide. Sberbank, controlled by Russia’s central bank, holds a 31.8% share of the country’s market for commercial loans and a 25.4% share of aggregate assets within the nation’s overall banking sector. The bank reported total assets of $181 billion through September 2007. As part of a regional expansion drive, it acquired CJSC Bank in Ukraine in 2007.
• Herman Gref, CEO

Citi has been in Russia since 1994, when it established Citibank ZAO as a local bank, and has since grown to serve more than 400,000 consumer banking and credit card customers. In 2002 the US bank launched its Global Consumer Group operations in Russia, offering its full portfolio of consumer banking products, including credit cards, personal loans, investment products, multi-currency checking and savings accounts and payroll services. Russian clients also enjoy the convenience of Internet and phone banking and 24-hour customer service.
• Vikram Pandit, CEO

Russia’s second-largest bank aims to become the country’s leading international bank, with its foreign exchange services forming part of its strategy. VTB, which had assets of $92.6 billion in December 2006, is focused on domestic companies engaged in foreign trade. The bank offers them a variety of forex trading services as well as consulting services on exchange rate formation, domestic forex market operations, and trading on exchanges, while also conducting international settlements for its clients.
• Andrey Kostin, chairman and CEO

Alfa-Bank provides a wide range of trade finance solutions. The bank arranges export loans to local companies through key foreign export credit agencies, including Germany’s Euler Hermes, Italy’s SACE, Austria’s OeKB, The Netherlands’ Atradius and Switzerland’s ERG. It also uses credit lines granted by some of the world’s leading financial groups. Alfa-Bank is broadening the nation’s trade sector by lending special support to medium-size businesses. The development of innovative structured debt instruments, including trade finance products, remains one of the bank’s stated priorities.
• Petr Aven, president

Deutsche Bank, which has been doing business in Russia for more than 125 years, is a market leader in servicing documentary operations between the CIS countries and the Baltic States. The bank’s clients include some of the largest Russian and multinational companies involved in foreign trade, principally in the oil, metals, manufacturing and food processing sectors. It offers worldwide trade and risk management, settlement of letters of credit, bank guarantees, short-term foreign trade finance, forfaiting and foreign exchange services.
• Charles Ryan, chief country officer (Russia) and CEO

ASSET MANAGER — Troika Dialog
In 2007 Troika Dialog became Russia’s first asset management firm to operate an endowment fund and launched the Troika Dialog-Life Fund, which offers shareholders a combination of life insurance and long-term capital appreciation strategies. The firm’s assets under management recently hit 250 billion rubles. The firm, established in 1996, remains a key player in developing Russia’s mutual fund sector. It opened a new trading center in 2007 that is one of the largest and best technically equipped in Russia.
• Ruben Vardanian, chairman and CEO

ENERGY & COMMODITY FINANCE — Société Générale Vostok
Structured commodity finance is one of Société Générale’s key areas of specialization. The French bank, which has been operating in Russia since the 1880s and which established Société Générale Vostok as a Moscow-based universal bank in 1993, has brought its know-how and global network to its more than 2,700 Russian corporate clients. The bank offers natural resources companies specialized products tailored to their specific needs, including pre-export financing and corporate secured commodity financing. It also offers a wide range of products for the country’s growing metals and energy sector.
• Jean-Pierre Mustier, CEO

UniCredit’s debt capital markets team is recognized for successfully raising debt financing for Russian companies through a full menu of fixed-income alternatives, including promissory notes, ruble-denominated bonds and eurobonds. Its corporate client base includes established firms as well as growing businesses seeking to expand their operations. UniCredit, which was known as Aton International until 2007 when it was renamed, is a member of UniCredit Group, a leading European financial group that gives the local operation a more global reach when it comes to fixed-income sales and distribution.
• Alexander Kandel, CEO

BNP Paribas’ growth in Russia’s market for syndicated loans continues to be driven by growth in demand for acquisition financing. Its loan and portfolio management system combines traditional bank loans with portfolio management functions by structuring, executing and managing credit risk transfer through derivatives for Russian and global clients. The bank was the world’s sixth-largest bookrunner of syndicated loans in 2006. Russian clients can tap into BNP Paribas’ global network spanning more than 85 countries.
• Baudouin Prot, CEO

When it comes to primary equities, Deutsche Bank does things on a grand scale. Dealogic and Thomson ranked it number one in equity capital markets in Russia by overall deal volume in 2007. Milestone deals included an $8 billion IPO for VTB Bank—the world’s largest IPO in 2007 and Russia’s largest banking sector IPO ever. Also noteworthy was the $1.9 billion IPO for PIK that marked Europe’s largest-ever real estate sector placement. Deutsche Bank held a 15.35% share of Russia’s equity capital markets deals in 2007.
• Charles Ryan, chief country officer (Russia) and CEO

Although Russian companies are increasingly seeking domestic banks to arrange their M&A; deals, Merrill remains on top. Dealogic ranked it number one among Russian M&A; arrangers in 2007, when the bank participated in 29 deals for $64.3 billion. This gave it a 32.6% share of the Russian M&A; market. The bank’s growing presence in Russia will allow it to develop even more business. In 2007 it opened a new Moscow office, hired a head of global markets for Russia and acquired a 10% stake in Trust Banking Group.
• John Thain, chairman and CEO

Alfa-Bank’s team of in-house equity analysts produces award-winning research products, covering company and market fundamentals, as well as global, political and technical variables. Alfa-Bank’s equity research covers all major sectors in Russia in user-friendly formats. The 27-member research team is headed by chief strategist and head of research Ronald Smith, whose prior experience includes positions with such other heavy-hitters as ING Bank, Renaissance Capital and Citigroup Asset Management.
• Petr Aven, president

Founded in 1993, MDM Bank has successfully sought specific niches within the Russian financial market, including producing the country’s most comprehensive research on domestic bonds. MDM Bank’s fixed-income research products include daily analysis on Russian and CIS debt markets, a data newsletter that provides market figures in a user-friendly format and special reports on strategy and research. As one of the four largest private banks in Russia, MDM Bank’s research enjoys widespread credibility and has developed a strong fan base among investors.
• Michael Perhirin, chairman and CEO

EUROBOND RESEARCH — Trust Investment Bank
Trust Investment Bank supplies domestic and international investors with a steady stream of high-quality eurobond research, including daily credit research on Russian and CIS eurobonds. It also provides technical data for both eurobonds and domestic bonds. Both products are generated by the bank’s award-winning in-house research team. The bank also has experience as a market player in the eurobond market, placing its own debut eurobond for $100 million in 2006 and placing similar issues for its clients.
• Michael Eggleton, CEO

Antonio Guerrero