Russia's "War for Talent"
Director of Equity Financing, FINAM Investment Company, Moscow
The Industrial and Commercial Bank of China is hiring in Moscow
Every week we learn about more foreign banks coming to Russia. In a previous post I mentioned Barclays PLC. Now it is time for the Chinese ICBC. Some time ago the bank announced of its plans to extended operations in Russia and focus on corporate banking. It applied for a license in 2005 and was expecting to start operations in 2006. Now in 2007 it becomes a reality -- ICBC's Russian recruiting campaign has been under way since February. Everyone remembers its global IPO of $22 billion last year. With 355,000 employees worldwide the bank can easily start operations in Russia, but many experts point to the fact that it may require at least three years to undertake full scale operations in this country.
Some time ago I wrote that in order to efficiently manage its operations in Russia any company, especially a bank, needs to have a team that is well-seasoned with domestic personnel. The financial services industry's awareness of this fact is reflected in the latest piece of business news from Russia. This week it was reported that JPMorgan Moscow lured the entire analytist team away from MDM Bank, including its director. This is a good illustration of what we here in Moscow call "the war for talent". There is a huge shortage of experts in investment banking, primarily in the top management category. And this deficit is increasing day by day.
The Battle for Talent Spreads to Russia's Regions
As of March 2007 there had been 35 rotations in investment banks in Moscow -- twice as many as in all of 2006. One example is Nicholas Jordan, co-head of Deutsche Bank's investment banking business in Russia, who left his position earlier this year after eleven years with DB to run Lehman Brothers' new Moscow office. Russian firms expanding their operations plus announcements from Western investment banks add more fuel speculation about who will be the next executive to jump to another firm.
Goldman Sachs wants to add about 25 bankers to its Moscow office to keep pace with its rivals, including Morgan Stanley. Barclays PLC plans to open a Moscow office this year and "quickly'' expand it to 200 people. On top of this fierce competition between incumbents in the market, banks from Japan, China, and Cyprus are all committed to opening new offices in Moscow, and Toyota and Ford will soon commence retail banking operations in Russia.
Of course each bank may bring some of its own staff to Russia, but they would definitely need to hire local experts too. I have personally been involved in this "the war for talent". What I found out is that most of the graduates from Russia's prestigious financial colleges have already been employed for 1-2 years by Western financial institutions (and by the way, their salaries are very good for recent graduates). Some of the employees at my present employer, the FINAM Investment Company, are regularly being approached by our competitors.
The issue of finding qualified staff will remain hot for the next three to five years. Young investment banking neophytes still need time to mature. This problem was illustrated by another piece of news this week - Kostroma's Sovcombank and the Novosibirsk-based ARKA Finance Group, owned by the Netherlands' TBIF BV, have set up a holding company with $400 million in assets to develop retail banks in Russia's regions. Market participants call it a good idea but add that it may not work out as fast as expected due to the lack of skilled employees in the regions as well as in Moscow.
President Vladimir V. Putin's initials - VVP - are the Russian equivalent of "GDP"
St. Petersburg International Economic Forum Continues to Pay Dividends for Russia
Over the past week the world news media has continued to discuss the St. Petersburg International Economic Forum (see my previous post "More Bullish Views on Investing in Russia"). Russia's RIA Novosti news agency reported that 8,966 people from 65 countries registered for the forum, with 9 presidents, 40 ministers, 40 ambassadors and many international luminaries such as former World Bank chairman James Wolfensohn, former Russian Prime Minister Yegor Gaidar, and noted author Francis Fukuyama in attendance.
In addition to the guest list, the business deals announced at the conference were also impressive -- contracts worth $13.5 billion were signed between Russian and international companies, including a deal between Aeroflot and Boeing. As a bullish follow-on to the Forum, this week Russia's Federal Statistics Service published a report on the first quarter of 2007. In Q1 the Russian economy expanded at the fastest pace recorded in the last six years, as production of building materials increased to keep pace with Russia's construction boom and consumer demand remained strong. Russian GDP rose at an annual rate of 7.9% in the period, compared with 5% for Q1 2006. Industrial output increased 7.9% (compared to 4.1% in Q1 2006).
During the St. Petersburg conference, Russian President Vladimir Putin held a behind closed doors meeting with over 100 foreign business leaders. In his remarks, President Putin called for a new round of investment in shipbuilding, aviation, high technology and other strategic growth sectors. In general, most attendees at the Forum voiced positive comments. In a previous post I mentioned one of the best quotes from the conference, by Daniel Thorniley, Senior Vice President at the Economist Group: "Business in Russia is the best-kept secret in the world. More rubbish is written or spoken about Russia than any other country on earth." Thorniley also accused the Western media (led by the Wall Street Journal and CNN) of scaring foreign businessmen away from Russia.
Western Investors Versus Pundits, Politicians Views of Russia
A few days after the conference, two major articles appeared in Newsweek International, one written by the Ranish Sharma, director of emerging markets at Morgan Stanley (you can read excerpts from his article here) and another one ("The Irrational Fear of Putin") by Barton Biggs, a managing partner at Traxis Partners, a hedge fund that invests in Russian equities. Mr. Biggs writes that:
Russian President Vladimir Putin is in the world's doghouse because he does not appreciate sanctimonious lectures or missile batteries on his border. He and President George W. Bush patched things up a bit at the G8 summit last week, but the tension remains. Ironically, we as investors should be grateful. As a result of this alleged increase in political risk, the Russian stock market and its oil stocks in particular have been falling even as both emerging markets and energy equities have climbed. After a week in Russia, I am convinced there is no business reason for this stumble; it's all about the media rhetoric...
Russia has the fastest excess money growth in the world (8.6 percent), and in the past the Russian stock market has had a perfect correlation with money growth. But not this year. Instead, the market has fallen since January, in part because of the tremendous volume of equity issuance, which consumed the liquidity. (With far fewer IPOs scheduled for the remainder of the year, this drag should be eliminated.) But the big reason is that Russia under Putin has far more potential and much less risk than most pundits claim.
Russia Funds Shift Weighting from Energy to Consumer Sectors
The gap between how Western politicians and pundits view Russia versus how international investors view the country is widening into a chasm. Many politicians and journalists in the U.S. and Great Britain acknowledge Russia's economic growth, but dismiss it as an accident brought about by higher oil prices - certainly not the results of the flat tax and land privatization implemented by the Russian government.
If extracted resources were the only profitable sectors in Russia, we would expect international and domestic investors to continue to overweight these areas in their portfolios. In fact, most of the leading Russia funds, including the Neptune Russia & Greater Russia Fund, are shifting their weighting away from energy, finding higher returns in the booming consumer-driven sectors of the economy.
Here in Moscow, it seems like 90% of Russian financial analysts have recently mentioned the "lackluster performance" of Russia's stock market since January of this year. Neptune Investments' Robin Geffen has a positive take on this: he believes that the current dip provides an excellent buying opportunity, and points to the solid growth after a correction last year as evidence. Mr. Geffen notes that Russian markets often follow the pattern of a strong first quarter, a correction in the second, a consolidation period in the third, and another even stronger quarter to finish out the year. This year that history is repeating itself.
The Neptune Russia & Greater Russia Fund shifted its focus to consumer sectors well over a year ago, significantly reducing its exposure to energy. The fund has maintained its consumer exposure and at the end of April, it had 22.4% in consumer staples with 19.3% in energy, 16.6% in telecoms, 12.4% in materials, 9.6% in financials, 8.4% in utilities, 6.4% in cash, 4.8% in industrials and 0.1% in consumer discretionary. Mr. Geffen says: "The fund continues to benefit from the widespread misunderstanding of the Russian market. Historical perceptions of the Russian stock market being resource-led are no longer accurate."
Another news highlight from this week is a remarkable survey, the results of which have been published by the Clifford Chance Law Firm. The Economist Intelligence Unit surveyed 455 executives around the world in April 2007 about their perceptions of the challenges and opportunities they face in doing business in Russia. Some 40% of the respondents are based in Russia, and the remainder are split between respondents in Asia-Pacific regions, North America and Europe. The respondents come from a wide range of industries, and approximately 65% of those answering the poll represent businesses with annual revenues of more than $500 million. You may download the survey at this link, but I just want to point out some of the most interesting results::
- When asked about the profit growth potential of the Russian market over the coming two-year period, 54% of respondents called it "high" or "very high".
- In a number of areas, American firms appear significantly more sceptical than their global counterparts about the Russian market.
- There is money to be made in Russia: Respondents were very bullish about growth prospects, both in absolute terms and also relative to other major markets around the world.
This supports an argument I have made in many blog posts - businessmen here on the ground in Russia, both foreigners and Russians, are far more optimistic about investing in this country than outsiders still scared by the negative political headlines. As another piece of evidence for this contention, I present this table, showing the difference of views between people operating and trading in Russia and those who are not.
U.S. Chickens Coming Home to Roost in Russia
A U.S.-based supplier of broiler breeding stock and technical expertise for the chicken meat industry is in Russia. This week we learned that after two years of extensive efforts to enter the poultry industry in Russia, Cobb-Vantress is sending its first shipment of poultry breeding stock to our country, and forming a new business alliance with Russian poultry distributor Broiler Budeshego (a Russian subsidiary of the U.S. firm Stromyn Breeders LLC).
"This is our first strong move to establish our brand of birds as a major breeding stock in the Russian market. Broiler Budeshego is a local Russian company who will widely distribute our stock throughout the country," said James Young, vice president of European and South American divisions of Cobb-Vantress. Budeshego is constructing a new farm and hatchery complex near Moscow and is expected to produce 2.5 million chickens initially, increasing to more than four million once its facilities are fully operational, according to the Cobb-Vantress press release.
A sign advertising for the Magnit supermarkets in Moscow
The Russian Supermarket Boom
In other news from the food industry in this country, Research and Markets published their Russia Food & Drink Report for Q4 2006. Russia's broad-based consumer market is clearly booming. The report significantly upgraded the total value estimate and forecast growth scenario for the Russian mass grocery retail (MGR). The MGR market should hit $17.45 billion for 2006, growing to $39.76 billion by 2010, with an average compound annual growth rate (CAGR) of 23.3% over five years.
Local discount giant Magnit is gearing up for an IPO and launching a trial run of its new supermarket chain catering to wealthier regional consumers (just as in the United States, organic and "whole foods" stores have been more profitable than general grocery stores of late). Emerging local players such as Lenta and international firms Auchan and Metro are expanding in local markets as well. The food sector is prospering, with local players such as leading food processor, dairy and beverage producer Wimm-Bill-Dann, restored to profitability in large part due to booming regional markets.
Baltika - a popular beverage on the train from Moscow to St. Petersburg
Meanwhile, internationally-backed players, such as the St. Petersburg-based brewer Baltika (owned by Scottish & Newcastle and Denmark's Carlsberg), are benefiting from both regional growth and strong profit margins driven by higher sales of their premium brands. The Food & Drink report summary concludes that Russia's food distribution sector offers massive growth potential today and well beyond 2010.
You can read the original post at Vladimir Kuznetsov's blog, Equity Financing in Russia. The views expressed in this post and on his blog are the personal opinions of Vladimir Kuznetsov, and are reproduced here solely for educational purposes. To read more Russia Blog posts about Russian capital markets, click on the finance section or type www.russiablog.org/finance in your web browser.