Goldman Sachs Natural Resources Index

Original Article

Wall Street Becomes Bullish on the Bear
UK Financial Times
By Catherine Belton and Peter Thal Larsen
March 9, 2007

Lehman Brothers' chase to hire Nicholas Jordan, the banker who led Deutsche Bank through the worst and best of Russia's market transition, comes as Wall Street banks rush to return to Russia's booming market - in some cases, at any cost.

One by one, banks burnt in Russia's spectacular financial meltdown in August 1998 have been
re-opening offices in Moscow. While competitors such as Goldman Sachs and Merrill Lynch have been slowly developing a local presence, Lehman has been weighing the risks of a return.

Several banks have been considering buying local investment banking boutiques, but others have traditionally tried to serve Russian clients from London, a four-hour flight from Moscow. "One of the main constraints on the business is the number of seats on a Boeing 767," says a Moscow-based investment banker.

Lehman, however, now looks to have bagged a seasoned rainmaker with close Kremlin ties to
help it crack a market that has soared in recent years on the back of Russia's oil-driven economic resurgence.

Last year, Russia was the world's number four in terms of initial public offerings and has up to
$30bn of IPOs planned this year.

Mergers and acquisition activity is soaring as the state takes over chunks of the economy and
petro-cash starts to be channelled into the rest of the economy. State-owned energy majors are racking up record loans. Cross-border transactions are growing too.

"To call yourself a global investment bank, you have to be in Russia," said Roland Nash, chief
strategist at Moscow investment bank Renaissance Capital.

"The financial revolution taking place in Russia is extremely attractive for western investment banks." But amid the bankers' bonanza, risks still loom large. At Lehman and other US banks, some executives have expressed concerns about the reputational fallout from working with the wrong clients, as well as worrying about guaranteeing the security of staff.

Western banks may also be in danger of doing deals they would not normally participate in.

Not all Russia's planned $30bn in offerings this year will make it, especially as investors begin
to steer clear of risk amid increasing volatility on global markets.

A record offering by Sberbank last month has already fallen short of hopes it could raise up to $12bn.

"Not all the IPOs brought to the Russian market are grade A," said Charles Ryan, chief executive of Deutsche Bank in Russia. "A lot of western banks are doing deals they wouldn't do in normal circumstances."

As western banks seek to enter a market where the Kremlin holds such sway, many agree to deals for low fees and grant cheap loans to state-controlled companies. "Russian companies at
this point are in the position to pay minuscule fees, particularly in the case of Gazprom and Rosneft," says one Moscow banker. "The banks have the impression that participating in these deals is a ticket into doing business in Russia: if you're not part of the big syndicates, you're not really in the game."

Some deals barely make economic sense. In state-controlled Sberbank's recent share
offering, underwriters JPMorgan and CSFB agreed to fees of just 0.08 per cent, according to Moscow newspaper Vedomosti.

"The amount of responsibility, liability and cost associated with taking the company to market is not justified by the fee," another Moscow-based banker said.

Rosneft is poised to raise $24.5bn in the biggest loan in Russian corporate history to help fund
acquisitions, including the remains of Yukos, due to be auctioned off under bankruptcy proceedings at the end of March.

According to one banker with knowledge of the situation, the loan will be extended at 20 basis
points over Libor, way below the cost of capital for the Russian government, which stands at 120bp over Libor.

"Rosneft should not be able to borrow cheaper than the Russian Federation when the government has three times more cash than Rosneft's market cap," said the banker.

Original Article

Goldman Makes Measured Return to Russia
By Peter Thal Larsen in London
Last updated: March 8 2007 23:24

When Goldman Sachs opened formally for business in Moscow in January, it did so with little fuss, reports Peter Thal Larsen.

The contrast could not have been greater with June 1998, when the bank opened its office with a lavish party attended by guests including George H.W. Bush, the former US president.

Two months later, the Russian government defaulted and Goldman quickly scaled back its presence.

So it is no surprise that some concluded Goldman's decision to once again beef up its
presence in Moscow is a sign the market is overheating again.

The bank is taking a more measured approach. The Russian office, which employs about 80 people, is headed by Magomed Galaev, poached from Morgan Stanley last year, and David Schwimmer, who helped orchestrate the New York Stock Exchange's merger with Archipelago.

Goldman has joined the local exchanges and started extending loans to, and organising bond issues for, Russian companies. It is also one of several banks chosen to help arrange the initial public offering of Vneshtorgbank, the state-owned lender, which plans to list in both Moscow and London this year.

For more on Russian IPOs, scroll down in the business section of Russia Blog (www.russiablog.org/business) or click on the articles below: