Russia’s biggest investment bank, VTB Capital — which advises on most of the cross-border deals and trade involving Russian companies — had looked to Asia as a source of new revenue after sanctions and collapsing energy prices cast a shadow on its US and European ties.
So far, that has not proved as fertile ground as many had hoped, but VTB's first deputy president and chairman, Yuri Soloviev, sees grounds for optimism that the strategy will eventually bear fruit.
In the first half of this exclusive interview, Soloviev set out how VTB was building its business in China and making an impact in debt capital markets. Today, he discusses cross-border mergers and acquisitions, as well as the prospect of Russia tapping Asian equities markets.
Q Have you been advising on any deals involving Asian companies investing into Russia?
There are some deals in that respect, but fewer than those with Russian companies investing into Asia. One of the major ones is [Chinese e-commerce giant] Alibaba signing agreements with a number of Russian banks, including VTB, to help them expand their retail and payment operations in Russia last year.
Q What activity have you seen involving Asian countries other than China? There was the Rosneft-Essar deal in India recently, for instance.
A The biggest deals we have recently seen have come out of India. In October, VTB Group advised on the sale of 98% of Essar Oil for $12.9 billion to Rosneft and a consortium of investors led by [Swiss commodity trading firm] Trafigura and [Russian investment group] United Capital Partners. The enterprise value is about $13 billion, equity and debt combined, and it is the largest foreign direct investment in India ever.
We weren’t advising on anything like this five years ago, so it underlines the growing relationship between India and Russia.
This year we saw four strategic deals, three of which we advised on, involving Indian oil companies and Rosneft assets.
Q I understand there is also interest in Russia from Japanese investors?
A Yes, we are involved in negotiations with Japanese conglomerates looking to buy strategic stakes in Russian companies. One of the potential deals is a Japanese company looking to finance the building of a medical centre in Moscow. It’s not a big project — approximately 100 million euros ($105.5 million) — and we plan to help them with raising financing for it.
Q There have been Russian deals in Southeast Asia as well, such as Indonesia. Can you talk about your strategy for that region?
A Southeast Asia is much less of a focus for us than China or India. We do have a joint venture with a bank in Vietnam and we’ve done a number of deals there, but this is a small part of our business.
Q Looking beyond DCM and M&A, has VTB seen much traction in equity capital market business in Asia?
A Not so much. Over the last 10 years we’ve had a small history of placing deals in Asia. The most remarkable is Rusal, the Russian aluminium company that listed on the Hong Kong stock exchange in 2010.
A lot of Russian companies are looking into listing in Hong Kong, from our energy sector down to the banking sector. But we have yet to see a lot of progress because the liquidity and the investor base are not there. So it’s going to take a long time for it to happen while the groundwork for this is laid down.
Q Which Asian countries and sectors do you expect to see Russian companies do most business with in the coming years – in terms of DCM, M&A and FDI – and why?
A In the long-term, we expect increased demand from Asian state and private corporations, particularly from those interested in investing in other emerging markets. In terms of sectors, companies in natural resources, transport and infrastructure, healthcare, real estate and agriculture will be most active.
There is increasing interest from Chinese investors to acquire Russian assets, primarily in partnership structures with existing Russian shareholders. This type of transaction allows both Russian and Chinese banks to support the capital structure.
Enhancing Russian legislation to protect foreign investors, improving financial infrastructure and expanding business ties will lead to increased investments and deal flow between the two countries.
Q What do you see as the biggest challenges you now face regarding inbound and outbound trade and investment with Asia?
A Flows have improved, but we need government support on both sides, as well as educating and informing investors about the opportunities and market regulation. Big companies like [Chinese conglomerate] Fosun are investing in Russia, but we need more of these success stories.
Q But you remain optimistic that they will happen?
A Russia has such vast investment potential that inbound flows will materialise. We have a massive natural resource base and a huge need for infrastructure investment. And China and other Asian countries — such as Japan and Korea — have all done a phenomenal job in building out infrastructure.
Asian money and expertise and Russian investment potential is a marriage theoretically so ideal that it’s surprising it’s not happening much faster. Foreign investors need to take a more active position on entering this niche.