Subscribe to this pageAlfa-Bank is having a splurge. But, true to form, it's a bargain sort of splash out — more Kmart than Saks Fifth Avenue. The Russian bank snapped up a shell NASD-regulated operation in New York called Compass Financial for an undisclosed sum, and a 100% stake in Trade Bank NV in Amsterdam for a song at $10 million. (Six creditors had obtained a court order to arrest the bank's assets and sell them off.) Still, the purchases will provide a presence in New York, London and Amsterdam and mark a turning point in the bank's plans for global reach.
With these purchases under its belt, Alfa is positioning itself as a global investment player, according to Alex Knaster, the smooth Moscow-based chief executive officer who peppers his talk with references to shareholder value, financial supermarkets and the importance of enhanced customer service (not that surprising from a Harvard MBA). Knaster is persuasive and is often used by the bank to project a polished image. And Alfa has much to crow about: it has put in place a well-oiled media relations operation, flying a team of executives to London to test the waters for a Eurobond deal; its management is top-notch and mostly US educated; it audits its accounts to international standards and produces glossy annual reports chock full of pie charts and graphs. And it is immensely — and rightly — proud that it honoured its Eurobond repayments through the 1998 crisis and has repaid the debt in full. PR PROBLEMS
But despite its best efforts, the bank's image remains tarnished. Parent Alfa Group Consortium's (AGC) reputation for using Alfa-Bank as the piggy bank for the rest of the group has hurt it. And the connection with its siblings means Alfa-Bank's name is often dragged through the mud when they are criticized. A vicious battle between AGC subsidiary Tyumen Oil and BP Amoco over Chernogorneft, a subsidiary of Sidanko, is the most glaring example (although the two are finally approaching an agreement). More recently, AGC's Crown Resources purchased the international investment arm of Marc Rich & Co. (the same Marc Rich who's in exile from the US) in a merger that allowed it to jump from a company generating $5 billion in annual turnover to more than $12 billion, overnight. But, not surprisingly, it led to intense scrutiny from the US media. So, although Alfa-Bank was pleased when the New York Times wanted to interview executives on a trip to the Big Apple to promote the bank, they can hardly have been surprised when, instead of politely asking about prospects for a Eurobond deal, the reporters tried to winkle out juicy information on the Rich empire.
Fire-sale purchases of distressed companies and a colourful background don't help the bank. (An apocryphal tale relates that Mikhail Fridman, founder of AGC and now chairman of the advisory board, started life washing windows.)
Knaster dismisses many of the criticisms. He is categorical that the bank is no longer used as a handy wallet for the rest of the group. Over the last three years, AGC has instituted strict separation between the different businesses, and some parts of AGC no longer even use Alfa-Bank at all. Furthermore, less than 5% of the bank's lending portfolio is to members of the group. But although outside observers agree that the bank has made a lot of progress in cutting ties with its siblings, the process is far from complete. A recent Fitch check-up reported progress ? the agency felt positive enough to hike the long-term rating to B- from CCC+ on 26 February — but insists the bank still has some way to go. It remains “concerned about … frequent participation in transactions with, or on behalf of, other companies in AGC.” It also warned on high levels of loan growth since the beginning of last year. Knaster is ambiguous about the bank's reputation for bargain hunting. Sure, some of the companies were cheap; that allows the bank to focus on human capital, he points out. “We don't want to overpay for businesses. [Our acquisitions] are always strategic and we pay more for people than for goodwill.” That's borne out by the quality, if not the number, of hires in London. Paul van den Boogaard and Guven Giray, formerly of Donaldson, Lufkin and Jenrette, have joined in London to co-run equity, product development, sales and operations at Alfa Securities. And the bank is prepared to take bigger investments. In addition to Marc Rich & Co., Knaster points to Alfa's purchase of a 43.8% stake in Golden Telecom for a hefty $110 million.
HOME-GROWN TROUBLES
So perhaps the most serious handicap is, as the real estate adage goes, location, location, location. Investors still haven't recovered from Russia's devaluation and debt moratorium. Knaster admits that doing business in Russia is fraught with difficulty and is blunt about the weakness of investor sentiment: “There is very little investor appetite for equity. That's reflected in share prices.” The benchmark RTS peaked at 571.7 on 6 October 1997. It closed at 168.6 on 10 April. Knaster is more hopeful that bond investors will come back: “Fixed-income investors are trying to assess Russian default risk. They are assessing normalization and there are some signs of a market pick-up,” he says. Perhaps the optimistic talk is intended to help Alfa?s long-planned bond deal. Attempts to launch a post-crisis deal remain stalled even though Alfa paid off in full a 10.25% three-year Eurobond this January. Financiers suggested that they might place a bond with a coupon of 15%, but Knaster is having none of it. He is prepared to sweat it out until markets improve sufficiently for the bank to place the issue at a more reasonable price. (He declined to specify what that price might be.) Fallout on the credit rating because of the sovereign ceiling is the tip of the iceberg. Even getting deposits in Russia remains a slog because of the dominant position of Sberbank, a state-run bank that holds some 70% of the country's deposits and an explicit government guarantee. That gives it an almost unassailable market advantage. “Sberbank is completely unfair,” rails Knaster. “Almost every other bank in the country has asked the government to rescind its explicit guarantee to the bank's depositors. But of all the reforms taking place in the government, banking reform is the slowest. There has been a complete lack of progress and I see no sign that there will be any going forward."
Apart from that outburst, Knaster is hard to draw on politics, declining to give an assessment on President Vladimir Putin's record.
Much like the bank itself, the nascent state of development of Russia's financial markets and reforms means even the timing of the sales is hard to measure: a stroke of foresighted genius or a risky gamble? Alfa has wisely cherry picked a limited staff but the timing seems off: the launch comes just as the cold wind of economic slowdown is reaching Russia. Predictions this year are that the economy could slump to zero growth after the oil-fuelled boom that saw GDP grow at 7.7% last year. And with the direction of the US economy anyone's bet, emerging markets are unlikely to prove a strong asset class (witness the correlation of the RTS to NASDAQ). Knaster knows the ups and downs of Russia's financial markets only too well. At the time of the ruble devaluation, he was head of CSFB's Moscow office, then one of the largest investment banks in the country. The subsequent downturn was catastrophic for the firm's Russian presence. Knaster is unrepentant when asked what his mistakes there were. “I learnt two things at CSFB. The first is that in Russia you can do really well if you're the leader in one area. We were the leader in equities. The second lesson is that there are benefits in diversification. Part of your business is always successful that way … I can't say that we were too ambitious — the traders were taking very large proprietary positions and were too enthusiastic on the Russian market. The lesson is that it's best not to be the principal.” Still, there's no proof that Russia is fertile ground for banks in addition to the cosseted Sberbank, and Alfa will have its work cut out to persuade investors to the contrary.
