Tourism shouldn’t be confused with emigration

Date: 30 May 2011

Source: Kommersant

Ruben Vardanyan, CEO of Troika Dialog, speaks about the benefits of being a government investment banker

Last week the final details were officially agreed to in the deal for Sberbank’s purchase of Troika Dialog, a Russian investment bank. The merger between the largest state-owned bank and Russia’s oldest investment bank is viewed by market participants as part of a growing trend on the Russian financial market toward a monopoly of state-controlled players. In an interview with Kommersant, Ruben Vardanyan, CEO of Troika Dialog, speaks about why negotiations on the deal lasted more than half a year, how adding the prefix “gov-” helps to secure deal mandates, how the resignation of Herman Gref would benefit Troika’s top executives and why it is important to keep an eye on ambulance routes.

Sberbank’s Management Board held a meeting on May 19 where final approval of the deal was confirmed. The legally binding documents were signed on May 25, so the deal is in fact finalized and cannot be reversed. As for integration, Sberbank, together with the purchase of Troika Dialog, is continuing to build its team, functions, and divisions, including with its commercial investment banking division, which up until now hadn’t existed in full. Certain approaches are fundamentally changing, for example – in terms of risk management accounting for international operations, broadening the product line and client base. Three levels of cascading tasks have been set. The first is to establish Sberbank as a global group with operations outside Russia. The second is to build a full-fledged CIB (commercial investment banking) business. Lastly, third, which directly results from the second, is integration with Troika Dialog. The main decisions have been made: who will head business lines, how the main departments will function. Of course, they will formally take effect following receipt of all necessary regulatory approvals and deal closing. In particular, both Alexander Bazarov and I will report to Andrey Donskikh regarding overall business development, while Anton Rakhmanov for asset management, Igor Sagiryan for the investment banking business, and Jacques Der Megreditchian for global markets. Currently on hold are decisions regarding the alternative investments businesses: Private Equity and Real Estate. A committee on integration has been formed, which will be headed by Elena Shilina from McKinsey. In addition, we have the key parameters for what we want to do next year. Of course, we don’t only aspire to be the leaders in Russia, because we already are the leaders. The merger has provided us a double effect, which we want to increase three- or five-fold. Yes, we face some challenges in our work, but many questions can be answered with simple technological solutions. Our main task is to create a platform for business development not only in Russia, but elsewhere in the CIS and certain international markets, primarily Eastern Europe.

Regarding Andrey Golikov’s departure, I don’t know all the details, but according to my information, the decision was made before the deal and had nothing to do with it. Furthermore, he remains an active participant in the integration process. As for Bella Ilinichna, I hope we will successfully work together for many more years, and that she will participate in all processes as productively as before, since she will become a member of Troika Dialog’s Board of Directors. She oversees a large block working with privatization, government relations and major projects. She will also supervise over asset management. All this is on top of the large block of legal and depositary activity that remains in her purview. Generally speaking, negotiations on personnel questions were very constructive, although it’s true that situations like these are never easy. After all, not to be melodramatic, but such issues decide people’s fates. During the initial drafting of the deal, ten negotiating principles were formulated and strictly upheld. For example, the principle of meritocracy, according to which managerial positions should be occupied by the most capable people, regardless of their social and economic origin, when the best are chosen. Also upheld was the “one window” principle, a lack of duplicate structures (in particular, there won’t be two desks), etc. The main principles are increasing profits rather than cutting costs, and respect for people.

We started the negotiations in July-August of last year. In the fall we formulated the principles of approaching the deal and by the end of the year the main agreements were in place. Of course, the negotiating process with its principles wasn’t a smooth, straight line, but rather a system of coordinates making it possible to return if there were strong objections. Overall, there was quite a bit of free will shown by both sides during all processes, discussions, strategy planning, etc.

The final sum, essentially, remained just that, and deals are always negotiated through bartering.

Yes, but the question is how to view the deal. If we believe that we won’t earn anything and the sum due for payment during the deal’s first phase is the only thing we will receive, then such logic can be considered correct. But if we assume that we will earn good money, then the logic will be different. We truly believe there is a legitimate chance of earning around $1.5-1.7 bln. This is the target level that was announced, which isn’t that different from the numbers you mentioned. The question is how to ensure that the deal is accurately perceived by the whole community, so people remain motivated to work. We had to find a reasonable balance in the interests of shareholders, for whom it is important to receive money and ensure the best interest of those working in the company. It’s actually a very complex deal: this isn’t the purchase of an oilfield, where the amount of oil reserves and infrastructure are clear. In our case the main things are people and reputation. We tried to find a joint mechanism that would inspire people to work for the long term and to achieve success. So it wouldn’t be just “bought and forgot.” Negotiations are never simple. I’ve spent all my life in negotiations, and it’s always a barter between buyer and seller. The points of overlap are one of the great things. And the task is to correctly find these. This is the key to success.

That’s not true. I know of very few companies in this business that would pass all inspections with so high a rating from the auditors. In our situation, the disputed areas totaled less than 5%. I think this is a very good result for a financial company with capital in the area of $900 mln. In this regard, we are a unique institution with a high degree of transparency across the company. We provided the company’s buyers with a maximally clear picture of the business. No one disputes the difficulty of the matter; different valuations exist. But there aren’t any arcane assets on our balance sheet which could be used to formally increase the financial result. Absolutely, there are assets that weren’t included in the deal perimeter which do not appear in Troika’s PNL statement. These belong to a consortium of investors, so we drew a clear distinction between what belongs to Troika has and what belongs to the consortium. This task was settled. Neither profits nor losses on these assets affected the amount of capital or value of the deal.

No, the other way around. All the agreements are already legally binding, and following receipt of regulatory approval the deal cannot be pulled back. Clearly, Troika’s management is deliberately moving towards integration. We won’t function as separate companies, but we’ll begin working in the CIB framework. There won’t be separate notions of Sberbank and Troika, but rather the idea of the commercial investment banking business and certain standalone entities that will remain as Troika. But the idea of independence is gone, and a 100% subsidiary company is being built. However, one must realize that we sold not only the present company, but the future company as well. And the current valuation is greater than the one indicated in the sum for payment during the first stage. And we believe that Sberbank is no less interested in developing this business and in future value growth. If a change of management happens at Sberbank, then in my opinion, it will be fair to base ourselves on the new management’s plans. Perhaps they will be averse to working in the investment banking business. In this case we, according to the terms of the agreement, will receive our fair value as presently defined. If the new management wants to further develop the business – great, and if not, then no one will claim that we sold the company for less than we should have, the team suddenly changed and we received nothing in return. In this sense, the model that was built seems entirely fair. It indicates that in the event of a change of Sberbank’s management and policy, it will be possible to receive today’s fair value. Perhaps it won’t be as large as it could be, but here, as they say, the owner has the final say. If management believes it is necessary to work only in retail, they are fully entitled to this. But in this case, they should settle at a fair value with the business’s original owners.

The price written into payments which Sberbank has stipulated for us. However, I want to say that the numbers recently mentioned in certain respected media were inaccurate. And these aren’t penalties, but the company’s market value as of today.

This point was present in our negotiations from the very beginning. If 100% of the company is acquired, there should be guarantees that the strategy won’t change.

Any changes are always perceived painfully. When lots of things are changing, this causes a mass of questions, concerns and rumors. And usually people live more through rumors than through reality. I think there are several things that will be understood by people capable not only of feeling, but of thinking. There are only a few banks at such a scale that lack a full-fledged investment banking division. Every employee can ask himself several questions: will I grow professionally, acquire experience, will I have interesting deals, unique operations because of the merger? Given the scale of the business and the opportunities that have appeared, including for managers, the answers to these questions become obvious. In terms of clients and products, Sberbank and Troika Dialog provide a unique combination. There’s one more important question that employees can ask themselves: how fair will my compensation be? In this regard, the newly built business model is no less unprecedented, assuming, first of all, payouts amounting to 50% of net profits in the form of bonuses, and second, decisions on payments continue to be made by Ruben, and third, the motivational part, which depends upon business results, is explicitly stipulated. I should also mention that many employees have recognized the newly created advantages and prospects and see the deal as the logical continuation of Troika’s history of success. Lastly, 98% of the company’s partners supported this merger.

Of course, such logic is understandable. People wonder how decisions will be made, how dependent upon the system they will be. Here, first of all, one should realize that Sberbank has undergone strong changes over the years and continues to change. It hasn’t yet become a sufficiently dynamic and client-oriented bank, but the changes, not only outside but inside as well, are apparent to everyone. The new team, led by Herman Gref, has demonstrated a lot through their actions. Second, we agreed that the investment company will retain its operating independence. This means that many support departments won’t be included in the Sberbank system, remaining separate structures. Third, I should mention that Sberbank’s top managers overseeing the investment block, Andrey Donskikh and Alexander Bazarov, arrived from the market. They are private bankers who understand this business very well. We won’t have any crossovers with retail, where there are thousands of Sberbank employees. Our business is directed more at working with corporations, and the people working in this area have a good understanding of business processes from the perspective of the investment banking segment. And lastly. Everything must be paid for, and there are always things for which one must be prepared. There will be more meetings and more approvals, but in return – a bigger balance, more operations and more clients. We hope it will be possible to offset the drawbacks and maximize our result through the uniqueness of the Sberbank – Troika combination.

Throughout the deal, the only person who signed the non-competition agreement was me. No one else was presented with the corresponding requirements. This is a unique deal, so it is always possible to hire anyone for any position. We have a big company – 1200 people, including numerous businesses. People will come and go. But this story is so interesting that hiring good people from the market will be quite easy. We don’t have a system in place that strictly binds employees. Yes, some people left, but new ones arrived in their place.

Well, it isn’t the prefix “gov” that helps. But we have sensed what it means to have an enormous client base that comes to you on their own, rather than you running after them. Of course, it will be easier for us to work with clients and receive mandates for deals. We already have around 20 mandates received together with Sberbank. However, it is important not only to secure these mandates, but to professionally and skillfully fulfill them. Even though Troika had a successful history and a lot of respect in the West, our name wasn’t always recognized. Sberbank, however, ranks among the world’s top 100 brands, which provides us with more opportunities.

We always competed honorably, understanding that VTB Capital has a good team, professionally using their unique platform. But on the other hand, Troika Dialog, lacking a large balance sheet and an ordinary commercial banking license, demonstrated an entire range of competitive advantages on a number of platforms. For example, we’re running neck and neck with VTB Capital in terms of bond placements, and we’re number-one in research and asset management. Will we overlap? Yes we will, but competition is a good thing. After the crisis, companies started to be judged by their scale: nowadays, not only do clients judge a firm’s professional prowess, but the size of its business, and the possibility to provide liquidity. Now the most important criterion is “Who will die last?” meaning which of the financial institutions in the event of a cataclysm will be the most viable. The client now assesses professionalism, flexibility, dynamism and institute strength.

Yuri Solovev is, to be sure, a highly respected person on the market, but in this situation it merits separating apples from oranges. The creation of VTB Capital and Sberbank’s purchase of Troika Dialog are two entirely different deals. It’s a simple matter of arithmetic. In 2008 VTB invested $200 mln basically only in buying people, and all this happened during the crisis, when the prospects for this business seemed foggy. Sberbank now at once receives a team, working infrastructure, market share, unrivaled volumes, a set of licenses, including foreign ones, etc. Furthermore, the bank is essentially paying $120 mln. Everything else relates to cash and assets Troika has on its balance sheet which the auditors have confirmed.

The negotiations were quite comfortable. Everyone at Standard Bank perfectly understands that the alliance with Sberbank considerably strengthens the business, all the more so because one of their shareholders is China’s ICBC, which strongly resembles Sberbank. They understand that the creation of a large base platform within the country is an important element of success. They remained in the deal and for another 2.5 years will be our partners.

We should always concentrate on what is more important for the client, based on today’s situation. Today, in times of mass state takeovers, it is important to have a large balance sheet and presence on international markets. Doing all this on our own would take more time and be far more difficult. In today’s conditions, it became apparent that the variant of an alliance with a government structure will allow us to build a business system satisfying the market conditions. The industry is experiencing not the best of times. According to forecasts from a major consulting company, returns in the investment banking business will lower to the level of 8-12% (they’re forecasting 15% in the best case) over the coming 3-5 years. But this pertains to emerging markets. Russia has a unique advantage in this sense: Sberbank is showing 23% return on equity. As for clients leaving, I’m ready for the possibility that a certain percentage will prefer to go. This is their right. But I’m seeing that the majority, on the contrary, will happily continue to work: they understand that now we will be able to provide them with a large volume of services. And many clients will come, including from abroad.

Sberbank’s bureaucratic structure is more image than reality. I should mention that I settle all questions with Andrey Donskikh within an hour, a day at the most. It’s possible that I’ve only been lucky so far. It could turn out like the joke about how “one shouldn’t confuse tourism with emigration.” Remember? So far, however, even Herman Gref, who is very busy, quickly responds to all questions. But one has to understand that Sberbank is a large structure employing more than 200,000 people, so certain things must happen more slowly in order to avoid mistakes. When I worked as the CEO of Rosgosstrakh, I was a bureaucrat and made decisions slightly differently than I do at Troika.

I think it’s important to understand that the international format doesn’t mean offices, but having products to sell. It’s one matter if you sell a Russian product in Hong Kong and Singapore, but another matter if you service a client base of, let’s say, Singaporeans, who want to invest in India. It’s difficult to imagine that our bankers could render services to Chinese businessmen planning investments in the Philippines. This is probably possible in theory, but right now I don’t see any competitive advantages in this. And so right now, speaking about international expansion, we have in mind the ability to meet foreign investors’ interest in Russian assets

It’s impossible not to be in this business. This is both a plus and a minus of investment banking: it’s difficult to be a non-working shareholder.

Operating management and being present in business are different things. Over the last six years I didn’t actively make decisions in everyday business, just as I didn’t interfere in the work of global markets and asset management. Strategy and key clients are another matter. Here nothing has changed. Now, however, I definitely allocate more time to integration with Sberbank.

Right now, like any other time, is a difficult period. On the one hand, the West understands there isn’t any way to earn lots of money on their own markets, and it is necessary to move into emerging markets, including Russia. But on the other hand – there’s a lot of nervousness due to the uncertainty of what is happening within the country, with oil, and the situation in the Middle East.

I understand that we are living in an era of changes. Unlike the West, in our country this has lasted for the last 20 years. In this regard they are newcomers, and therefore we have the competitive advantage. We’re used to this, and it’s easier for us to survive in changing conditions. The one to survive will not only be the smartest, but the most flexible, able to adapt to the situation, make very fast decisions, not be afraid. People frequently ask me about the Soviet Union: why did the Americans so easily opt for Keynesianism and government management, while we were unable to elementarily enter a market economy, becoming afraid. They didn’t have ideological near-sightedness. And now we have the same approach: if it’s good for business, it isn’t scary. If it’s the government – not bad. If it’s monetarism, Keynesianism or socialism with a human face – okay. Did you know that during the 1990s there was a special person who stood and watched: will an ambulance go to the Kremlin or not? News about the president’s health could undermine stock markets in the strongest manner. After we survived in that situation, what is happening today seems relatively stable.

Yes, although certain people still don’t understand how difficult it was back then. The Soviet system, communists in power, 1000% inflation. Because of this, I can’t say that I’m particularly nervous right now. Of course, some processes perplex me or cause concern, but this is normal concern. A citizen wants things in the country to be better, happier and more prosperous. For added value to be created. Because work goes well only on a large market – where there is healthy competition.

I think what is happening is a very clear signal that in certain industries one has to be very large. Whether we like it or not, consolidation will be necessary in the insurance business, brokerage and banking. If we want to be competitive, this is unavoidable.

This isn’t for us to decide. For our own part, we will undertake everything to prove that we can do this very well. Right now, Troika is the largest broker on the market by trading volumes in Sberbank shares.

The bank will be presented in a global format. Whereas Sberbank was previously – including during the SPO – a deposit bank working with a client base of individuals, it has now become a multi-profiled structure with numerous businesses. And now, with Troika, it is also part of today’s major changes. Sberbank has serious monetary resources, and comparatively cheap long resources. Therefore, Sberbank’s growth potential is far greater than that of competitors.

Generally speaking, the industry here is still so underdeveloped that opportunities for growth are present everywhere. But there are different cycles – before the crisis, after the crisis. And different elements provide different profits throughout these cycles. All of us struggled during the crisis, and recovery takes time. Sberbank has a colossal resource: its brand and trust in it among the population is greater than in any private bank. The investment banking business will simply drive to the result that clients will receive not only ordinary products, but also many new instruments – structured products, derivative instruments. And I think that this will be a very big growth point. All the more so because privatization will be happening in Russia, requiring large investments and enormous infrastructure. There will be a considerable number of mergers and acquisitions, consolidation of industries. And Sberbank’s participation in these projects is already apparent.

It’s not all that unequivocal. They’re winding down retail. But in the investment banking business I’m seeing a strengthening; after the crisis everything is gradually recovering. Western investment banks are seriously ratcheting up staff numbers: they understand that it is necessary to have a strong local office, and not to send incidental managers from London. Moscow has a high concentration of certain advantages, including in the tax system, which makes this market attractive. Retaining the team here became more advantageous than flying from London and paying unbelievable taxes.

We didn’t directly influence the decision-making process on Sberbank’s acquisition of share blocks in MICEX and RTS. But in terms of Sberbank’s logic, this is obvious. Sberbank is the largest player on the MICEX, and it wants to ensure its influence on the combined stock market. In addition, if we assess the possibility of the stock market’s value growth, the opportunity exists and it is very strong. All this pertains to the same question about scale. If one market platform will have the status of central stock exchange, if one central depositary is created, then all this will be worth more and profits will increase. This is basically the effect of “one plus one” but in this case the sum should be three.

There are several mines here that we aren’t noticing. Normal countries are different from abnormal ones in that institutions are more important than individual people. This is an essential element. Problem number-one in Russia isn’t a question of family but a question of institutionalization. And then fulfillment suffers: many good initiatives and interesting projects never make it past the initial phase, remaining unfinished. We’re trying to bring together all possible models of development. Like in the joke about how the garter snake and hedgehog were crossbred resulting in barbed wire. But if we’re speaking seriously, Russia lacks a full understanding of the roles of oversight, regulatory and court organs. We’re living in a certain maelstrom. You know, in a country where Christmas is an official holiday and a day off, but Easter is not, many things are unclear. No one can explain this. This is a kind of, you know, inconsistency, incompleteness, and then everything in-, in-.

No, it can’t. This is one of the necessary but insufficient conditions. There has to be normal legislation, airports, quality roads without traffic, many people speaking English. There has to be a different system of arbitration courts. Meeting each of the conditions separately is insufficient, but together they make it possible to compete with such global platforms as London. As a matter of fact, the same thing is true for the question regarding business education. This is an important element of Russia’s success in the future. And a lot must be done in order to compete in this space.

No. I hope that investment banking services won’t be included in social projects. But if such tasks are set, this won’t be addressed at our level.

I was never an oppositionist, rather an inveterate grumbling optimist. I am very worried for the country I live in. I want it to be successful. And the elite’s responsibility for what is happening in the country is considerable. The departure of a large number of people to the West is a signal. Having more business projects for sale than for purchase is another signal. This means people are sensing instability and discomfort. You can repeat over and over that doing this is unpatriotic. But this is normal human logic.

I can’t be a politician for a number of reasons. And I don’t want to. But I believe that, being a person with an active life position, I am entitled to state my professional opinion. I understand a few things in economics, for example – that we need to raise trillions of dollars of investments into Russia. This is a difficult task. We must ensure we don’t have a capital outflow, that we have an inflow, and that the best professionals come here.

This is one of the problems. The thing is that the Western schools teach very few cases about Russia and the knowledge one receives there can only be applied in Western companies and countries. And if you want to work in Russia, you have to receive a good, fundamental, theoretical Western education and a practical Russian one.

No, no. I’m simply reasoning in a business format. Here’s my view: the success of Sberbank and Troika can bring good money to our country. This, of course, also might not happen. But if we do nothing, then nothing will change for sure. Of course, it’s easier to speak about certain bad examples, and everything bad that has happened in Russia. It’s easier to talk about and make films about bad things than about good things. People don’t believe in what’s good, because they’re afraid of seeming like idiots. It’s easier to believe in the bad and be surprised by the good than to believe in the good and then feel like you were once again fooled. You were told a fairy tale, and you naively believed it.

Why are they tales? I’m speaking about what is in fact true: the story of a 22 year-old man who came from Armenia, lacking a single acquaintance in Moscow, who was able to build something. The story of Troika is the story of 20 years’ success. What’s important here is that an institution was created, one respected in the West, that not one of the company’s shareholders, of which there have been many over two decades, didn’t lose their money – all of them either earned a profit, or at least returned their investments. Starting from scratch, a team of like-minded individuals built with their own hands a story they can be proud of.

Basically, yes. Hopefully with a good ending.