Russia’s Top Asset Managers Face a Long Bear Market

In the face of macro and geopolitical pressures, state-owned firms grab the meager spoils in investment management as foreigners, including BNP Paribas, head for the exits.


For Russian asset managers, even good news comes with a gray lining these days. Consider the 50 billion rubles ($758 million) the government abruptly transferred to nonstate pension funds in April. That should have provided a boost to a money management industry struggling with a recession, a moribund stock market, double-digit inflation, flight by foreign investors and the Russian public’s aversion to stocks.

The market’s joy was diluted by two factors. First, the Finance Ministry explained that the money was recompense for funds withheld in 2013, when a moratorium on private pension contributions went into effect. But officials gave no guidance on whether private contributions would be restored permanently. Behind closed doors, conflict still rages between liberal bureaucrats who favor reviving the private pension system and conservatives who support a state-only system, fund managers say.

Second, little of that 50 billion-ruble bounty was available to third-party managers through competitive mandates, even though Central Bank of Russia regulations ostensibly require that.

Russia’s largest state-owned banks and corporations also dominate asset management. The ubiquitous Sberbank’s asset management arm jumps from seventh place to first in this year’s Russia 20, Institutional Investor’s ranking of the country’s largest asset managers. It was the only firm to expand in dollar terms; in aggregate, the top 20 shrank by 22 percent. State rival VTB Capital Investment Management falls to No. 2. Next come Region Group, Kapital Asset Management Group and TransFinGroup Asset Management, firms closely linked to state oil giant Rosneft, private oil power Lukoil and state-owned Russian Railways, respectively.

Transparency and competition are making limited headway against this powerful oligopoly, outsiders complain. “Our real competition is different in-house projects and schemes in real estate and other nonmarket instruments,” says Vladimir Tsuprov, chief investment officer for TKB BNP Paribas Investment Partners, which drops from fifth to eighth place this year. Tsuprov’s employer’s name became a misnomer this summer when the outfit was acquired by a previously obscure Russian entity called Alor Group. BNP Paribas refused to provide details of the transaction. Its exit leaves London-based Prosperity Capital Management as the only member of Russia’s top ten that caters to foreign investors.

Another tarnished bright spot for Russian asset managers has been the local bond market, which has offered impressive nominal returns while avoiding the massive defaults many feared when the West imposed a lending boycott last year to protest Russia’s support for separatists in Ukraine. Corporate bonds rated triple-B or better offer yields in the 12 percent range, and managers straying into junk territory can earn 14 percent, says Aylin Suntay, a Turkish financier who heads No. 7 Gazprombank Asset Management, an arm of the house bank of Russia’s state-owned gas giant. But these gains struggle to keep up with inflation, which hit 15.8 percent in August.


Russia’s weak domestic capital market has been buttressed in the past by foreign investors, who historically have owned most of the free float in equities. The prospects of rescue from abroad look faint at this point, though. Russian stocks have rebounded a bit this year, rising 19 percent in ruble terms and 8 percent in dollars. But that is hardly enough to attract major inflows against a background of weak emerging markets, oil languishing near seven-year lows, a shrinking Russian economy and continued sanctions over Moscow’s perceived aggression in Ukraine. “Russia is very, very thinly owned by investors right now,” says Mattias Westman, a founding partner at Prosperity.

Earlier this year Moody’s Investors Service and Standard & Poor’s downgraded Russia’s sovereign credit rating by one notch to junk status because of a government spending spree that seeks to cushion the effects of recession and sanctions; the downgrade forced many international investors to divest the country’s bonds. Ordinary Russians, faced with a stock market that has gone sideways since 2011 while interest rates on deposits have remained high, are effectively boycotting the market. “The mutual fund business is basically dead,” says Vladimir Potapov, chief executive of VTB Capital.

One straw asset managers are grasping at is the so-called de-offshorization law signed by President Vladimir Putin last November, which makes it more difficult for Russian corporations and individuals to domicile their wealth in low-tax havens like Cyprus or Luxembourg. The statute has been backed up by informal persuasion targeted at Russia’s ultrarich, with results that are hard to quantify but real, money people say. Russia as a nation continues to suffer from capital flight that totaled $52 billion in the first half of this year, compared with a record $140 billion for all of 2014. But high-net-worth individuals who want to stay in business under Putin’s watchful eye are funneling more activity through domestic institutions, or so it seems. “There are people I know who have been investing Russians’ money for 20 years out of London,” Gazprombank’s Suntay says. “Now they are thinking of moving to Moscow. That’s chasing opportunities.”

A recent phone interview found VTB Capital’s Potapov chasing opportunity far from Moscow, in Beijing, where the state-owned firm is trying to copy Putin’s policy of enhancing relations with China to offset deteriorating ties in the West. “The Chinese are more interested than Europeans in our market, both fixed income and equity,” he says. The proof remains to be seen.