Energy Risk: To many observers it may seem a risky time to enter the commodities market, especially for a new bank. Can you tell us more about why VTB Capital chose to establish its commodities business now?
Sergei Timokhovitch: In Russia, the commodities market is a critical part of the national economy. We are a country rich in natural resources and, as a result, we have developed an industry around these assets to support and grow our economy. Our commodities – mainly energy, base and precious metals, agricultural products and the industries associated with them – contribute significantly to the gross domestic product and fiscal strategy of the state.
There is a natural need for companies to seek effective risk management and this is particularly true with the volatile market conditions we are currently experiencing. Up to now, however, this need has been satisfied by some Western institutions. So, VTB Capital has decided to lead the way in the domestic market by becoming the first Russian institution to offer a full suite of risk management products and services to the commodities markets. Essentially, we are creating a new precedent in the Russian commodities market and creating a new business within the globally recognised banking giant VTB Group.
From a timing point of view it does appear that we are defying the trend by developing a new business now, however, the volatility in the markets has actually been in our favour – increasing the demand for quality risk intermediation services, in a market we wanted to enter. Even in challenging times like these there are opportunities.
Energy Risk: It sounds like an ambitious task. At what point did your business become operational?
ST: We had less than six months to establish a new business in both Moscow and London. VTB had no previous experience in the commodities markets, so we had to start completely from scratch.
We were faced with a number of immediate challenges: hiring a team of experienced people; building an infrastructure to support the business; and developing a reputation and profile in what, for us, was a new market. Firstly, we built the team, hiring a group of like-minded and determined individuals, which is fundamental to the success of a business. At the same time, effort was concentrated into developing systems and the support organisation. We were dealing with a relatively new infrastructure that was extensible and could support our business needs, which was an advantage.
Furthermore, VTB Capital had many resources of its own to draw upon: as part of VTB Group, we had access to an extensive client base; we had a clear understanding of the Russian market and our clients; and, finally, as a new company we were agile enough to deliver this new business within a very limited time frame.
In December 2008, our business model was approved by the Financial Services Authority (FSA), a great testament to the team and probably an unprecedented feat within the time frame we had, particularly in today’s markets.
In a very short period we have established a fully operational commodity research function and started publishing extensive weekly and daily reports, covering base and precious metals, energy and agriculturals. In addition to providing regular market overviews and ideas for the team and clients, our commodities research is regularly featured on key business news wires, as well as business television commentaries.
Energy Risk: As a new business, what are the greatest challenges facing you and how do you intend to address them?
ST: Beyond the challenges of setting up an infrastructure and team in the bank within six months, we had some other obstacles to overcome – obtaining regulatory approval for the business, entering a newly formed market and building our reputation within the marketplace.
As we were building a business from scratch we had the advantage of investing a significant amount of effort into creating a robust risk management environment, which was instrumental in gaining FSA approval. As with any new business, we are aware of the importance of developing brand recognition and strengthening our profile within the industry, and establishing our presence in the marketplace will be a critical success factor for achieving our business growth objectives. Although we are new entrants to the market, we have a clear and calculated vision and strategy of how to maximise our profile and reach our target audience in both the domestic and international markets.
The other interesting challenge we have of course is the tough market environment. The market turmoil that we are experiencing now requires institutions, particularly those in the risk management space, to be more innovative and more responsive to clients’ individual requirements. We realise that we will have to work in an extremely difficult global economic environment, and that our potential clients are facing very hard times. However, the instability and unpredictability of today’s markets will increase the appeal of our products and we are positive that they will enjoy a steady demand.
Energy Risk: What products and services do you offer and what is your target client set?
ST: Our main focus is on providing quality commodity derivatives to domestic Russian clients and acting as an investment channel for international businesses that want access to the potential of the Russian market.
We provide customised risk management solutions across energy products, base and precious metals, coal, freight and some agricultural products.
Typically, our clients are classified into two groups: the first group includes corporate clients (for example, producers and consumers) involved in foreign trade, exporters and importers. It also incorporates companies, which, although not engaged in export or import operations, are still exposed to fluctuations of global market prices. These are borrowers wishing to obtain VTB financing on flexible terms at floating interest rates linked to commodity prices.
The second group of clients are institutional investors including banks, pension and hedge funds, insurance and asset management companies, who are looking at commodities as an asset class for investment purposes. For these clients, we are developing investment products, structured and hybrid products, which provide strong returns on products linked to Russia and commodities risk.
The profile of our customer base will further develop in 2009. We will leverage our existing offices in Asia to expand our operations. Towards the end of 2009 and early 2010 we aim to build our international client base as well as increasing our customer population in Russia.
Energy Risk: 2008 was a very productive year, what are your objectives for 2009?
ST: Beyond geographical expansion we will also roll out new products and services. This will be a continuous part of our business plan. In the current volatile times, market institutions must be able to adapt and respond quickly to changing market dynamics, as well as client requirements. We are a young and adaptive business with a team of experts so we are in a great position to come up with new and innovative ways to tackle the challenges that lie ahead.
About VTB Capital
VTB Capital – the investment business of VTB Group – was established in spring 2008 and focuses on arranging operations in the debt, equity, global commodities markets, developing private investments, asset management, advising clients on mergers and acquisitions and equity capital markets (ECM) deals in Russia and abroad. VTB Capital has its headquarters in Moscow and operates in London and Singapore. 2008 has been a busy and productive year. Within a short and very challenging time frame, the company has built up a team and set up all the business lines to deliver the whole range of investment banking services to its clients. The VTB Capital Fixed Income team has completed a number of outstanding and profitable client transactions. The research division beat all conceivable deadlines in launching analytical coverage. The equity team started the brokerage business and the investment banking division delivered the first ECM deal and is working on a range of advisory mandates. The equity trading division of VTB Capital brought the VTB Group to a leading position as the most significant REPO operator in Q4 2008, according to the Leading Operators survey by MICEX. 2009 promises another year of ambitious expansion, of which one of the key focuses will be the commodities business.
Sergei Timokhovitch, Global Head of Commodities at VTB Capital, joined the company from Deutsche Bank, where he occupied the position of Head of Commodities Russia and Commonwealth of Independent States (CIS). Prior to that, Sergei spent 11 years with Koch Industries, where from 2002 to 2007 he was the company’s country head for Russia and CIS. Sergei graduated from The Beijing Language Institute with proficiency in Mandarin Chinese. He has a degree in economics from the State Academy of Management in Moscow and an MBA from the American Graduate School of International Management, Phoenix, Arizona, USA.