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20 | ifr special report | September 2009 RUSSIA/CIS

KIT Finance met its cash-flow challenge by selling non-core group assets in a re- structuring that took place throughout the first half of the year. Among the assets sold were shares in of Rostelecom, which were taken up by the government, two portfolios – one of mortgages and mortgage securities and another of other securities – and a real estate project. "The level of assets and liabilities of the group will be decreased from Rbs150bn to Rbs50bn," Yuri Novozhilov, head of KIT Finance Group, said at the time the restruc- turing was announced. The restructuring ensured creditors will be repaid in full, and the bank is now able to focus on its core businesses: SME lending, bank cards and retail financial products. Troika Dialog has insisted it had no urgent need for capital to keep itself going, although it is as affected as its peers by the liquidity squeeze. Nevertheless, it received a US$150m five-year loan from EBRD to provide long-term working capital. Troika’s most public problems have been related to human resources, not financing. Rumours have been flying around the market that there is discord in its ranks, prompted by a spate of departures. Among these were its three-man London-based equity sales trading team, Peter Walker, Richard Phillips and Will Lynch, who defected to VTB Capital. It recently appointed a new head of the London office, Paolo Zaniboni, who relocated from Moscow, in line with its ambition to expand the London office to extend its European reach. To this end it is working on a tie-up with Standard Bank, which has taken a 33% stake in the Russian bank. Many senior staff at Troika are understood to expect Standard Bank to acquire the rest of it at some point in the future.

Back home, it also named Igor Sagiryan as president, who joined from Renaissance Group, where he was also president.

Grounds for optimism Although Russian banks have been harder hit than many of their European peers, they will find it easier to stage a comeback than their Western European counter- parts, due to the relatively straightforward

nature of their businesses, said Dmitriev. “Russian banks will stage a quicker comeback than many Western banks because their balance sheets are not so complicated by leveraged debt structures and derivatives,” he explained. That said, sophisticated instruments are gaining penetration. This summer Renaissance Capital established an equity- linked group, having identified demand from clients for a broad spread of fundraising structures, complimenting its secondary market trading business. It covers public and private market issues, private investment in public equity structures and hybrid issues. It will also soon offer research coverage

for convertibles. The team is led by John Porter, with origination covered by the existing ECM team: Ed Higenbottam, Simon Matthews, Arie Kravtchin and Dimitry Brovski.

The development does not imply great volumes for Russian convertible bond issuance, which is constrained by a lack of certainty over shareholder approvals. This can mean primary shares cannot be issued to meet conversion terms.

With a number of loans falling due in the second half of this year, there have been concerns that a second wave of the financial crisis will hit Russian banks this autumn. Yet that fear is now receding, amid a growing consensus that Russian companies will be better placed to service their debts as aggressive restructuring plans and falling interest rates gain traction.

By the end of 2009, Moody’s expects non- performing loans to increase to 20%, from 11% of total loans at the beginning of Q2. In a June report entitled Russian Banks: Major Challenges Amid The Economic Downturn, it calculated that an additional 10%-15% of loans have been restructured to avoid payment default.

Standard and Poor's has said that problem loans could soar to 35%–50% of total lending in Russia, Ukraine and Kazakhstan – although it predicted that actual loan losses would not be more than half that level in Russia. Meanwhile, the central bank has estimated Russian banks have restructured 20% of their bad loans.

Government support Analysts said that strong central government support is facilitating a Russian recovery. A state guarantee scheme is being launched in the third quarter that will see Rbs460bn injected into banks to sure up their capital adequacy ratios, helping them withstand rising bad loans and to kick start lending to the real economy. The programme, which will be implemented principally via the country’s state banks, will see Russia spend Rbs150bn in 2009 and Rbs310bn in 2010 on recapitalising bank balance sheets. The funds will be raised by an OFZ treasury bill sell-off.

Russia's central bank chairman, Sergei Ignatyev, has said the chances of the country facing a second wave of banking crisis are “negligible”, but he has neverthe- less made bad loans and stagnation in the credit markets his main priority. “We now believe that the catastrophic scenario has been avoided and that the second wave of the crisis will be smoothened,” said VTB's Dmitriev. “While it is certainly too early to claim that banks are out of the woods, they are definitely doing their homework with both operational changes and close work with clients to collect debt and/or work on re- structuring.”

For the future, Russian banks are seen focussing on corporate sector lending, which is both shored up by the central government and also offers high margins with short-term risk exposure. “Russian banks have the opportunity to make profits in corporate lending,” said Dmitriev. “They will cut down on mortgage lending, since unemployment is set to rise and there is still major asset de- terioration in Russia in terms of the housing market.”

The state run corporate market comes with an explicit government guarantee. In June, Russian Prime Minister Vladimir Putin told state banks to boost lending by more than US$15bn over the next three months to help the economy. And in July he instructed state bank VEB to lend Rbs75bn to Gazprombank, the banking arm of Russia's gas export monopoly Gazprom.

Although Russian banks have been harder hit than many of their European peers, they will find it easier to stage a comeback than their Western European counterparts, due to the relatively straightforward nature of their businesses.

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