After a decade of snuggling up together, Russia Inc. and the global capital markets that finance it are starting to drift apart.
Russia’s first deputy prime minister, Igor Shuvalov, this week encouraged domestic companies to delist their shares from overseas stock exchanges, where giants like OAO Gazprom (GAZP) and OAO Sberbank (SBER) trade, for the sake of “economic security.” At the same time, U.S. and European banks such as Citigroup Inc. (C:US) and Deutsche Bank AG are putting their business with Russian companies under the microscope as the Ukraine crisis continues.
The moves on both sides herald a partial decoupling of Russia from the global financial system as the European Union and U.S. threaten economic retaliation for President Vladimir Putin’s annexation of Crimea. That would make it harder for Russian companies to obtain foreign capital while hurting efforts by global banks to expand in an important emerging market.
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Despite the turmoil, big overseas banks remain committed to doing business in Russia -- though individual deals are getting trickier to execute.
Citigroup has set up a special working group within its investment bank to review Russian business, according to a person familiar with its operations. At JPMorgan Chase & Co. (JPM:US), dealings connected to Russia are being escalated higher within the compliance department, requiring more stringent sign-offs than before, two people said, declining to be identified discussing internal procedures.
Bank of America Corp. (BAC:US) and Deutsche Bank are subjecting Russian business to similar scrutiny, with the U.S. bank setting up an informal group to examine deals, people familiar with their operations said.
“Banks are being extra-cautious, and they’re in territory where each will individually, with their advisers, have to make a call as to how far they will take that caution,” said Sergei Ostrovsky, a partner at law firm Ashurst LLP in London.
Representatives for Citigroup, JPMorgan, Deutsche Bank and Bank of America declined to comment.
U.S. and European leaders are studying further curbs on business and investment in Russia amid continuing instability in Ukraine, particularly in eastern regions. Jacob Lew, the U.S. treasury secretary, yesterday warned Russia of “additional significant sanctions” if the situation worsens.
To reduce Russia’s dependence on the global financial system, Putin has called for the country to develop an indigenous payment system similar to those run by Visa Inc. and MasterCard Inc. Those companies stopped processing cards for two Russian banks targeted by U.S. sanctions.
Some of Europe’s largest deals of the last several years have originated in Russia, including the $55 billion re-organization of oil venture TNK-BP in 2012. Last month, German utility RWE AG (RWE) sold its Dea oil and gas unit to a fund controlled by Russian billionaire Mikhail Fridman for about $7 billion, the largest European energy transaction this year.
The London Stock Exchange (LSE) lists 68 Russian companies, while social-media operator Mail.ru Group Ltd and OAO Lukoil, the country’s largest private oil producer, are among the Russian corporations listed in New York. Shuvalov, the deputy prime minister, this week said “the capital market is becoming more complicated and more closed to Russian companies.”
Russian companies have raised more than $13 billion in U.S. and U.K. share sales in the last five years, data compiled by Bloomberg show.
Business between global banks and Russian clients is still getting done. Metalloinvest Holding Co., an iron ore producer owned by billionaire Alisher Usmanov, on March 19 secured a $1.2 billion loan from banks including Credit Suisse Group AG and Societe Generale SA (GLE) to refinance debt. A week later, Credit Bank of Moscow raised a syndicated loan for up to $500 million arranged by Morgan Stanley (MS:US) and HSBC Holdings Plc, among others.
The chief executive officers of Goldman Sachs Group Inc., Morgan Stanley and Citigroup are all shown as scheduled to attend a Putin-hosted event next month, the St. Petersburg International Economic Forum, according to a list dated April 4.
Retail banks, too, are sticking with their Russian businesses. Citigroup in March opened its 51st Russian outlet, in a Moscow suburb.
Yet banks remain wary of deeper ties with Russian companies, the people familiar with the situation said. They’re concerned about complying with current sanctions, avoiding clients who could be targeted by future sanctions, minimizing reputational risk, and limiting exposure to the increasingly fragile Russian economy. Standard & Poor’s last month cut credit outlooks for state-controlled energy companies OAO Rosneft (ROSN) and Gazprom, a move followed by similar warnings from Moody’s.
While sanctions have remained relatively mild so far, some potential mergers and acquisitions are already looking less likely. Electric utility Fortum Oyj (FUM1V) had planned to spend much of the proceeds from sales of its distribution grids in Finland and Sweden on acquisitions in Russia, plans that are now being re-considered in light of the Ukraine crisis, according to a person familiar with the situation.
In the same sector, Moscow-based Rosatom has considered buying the Slovakia business of Italy’s Enel SpA (ENEL), but any deal is probably off the table due to EU concerns over selling a member state’s electric grid to a state-controlled company from Russia, the person said.
And Donskoy Tabak, Russia’s largest independent tobacco seller, may have to halt an effort to find a buyer because few acquirers want to expand in Russia right now, a person familiar with the process said March 28.
Fortum and Donskoy Tabak declined to comment. Rosatom says it has never held formal negotiations with Enel over the Slovakia business, and notes that it’s continuing work on a new nuclear plant in another EU member state, Finland.
Morgan Stanley has been the most active adviser in Russian M&A since 2009, working on about $100 billion in deals, or more than a quarter of the $363 billion in takeovers involving Russian companies in the past five years. Deutsche Bank isn’t far behind, at $95 billion.
If stiffer sanctions are imposed, Russian companies dependent on access to the international financial markets will suffer much more than foreign banks, said Charles Geisst, author of “Wall Street: A History” and a finance professor at Manhattan College in Riverdale, New York.
“Investment from domestic Russians and their allies is not enough,” he said, “to support the domestic markets and keep the ruble stable.”
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