Investment Banking from Russia: With Love?
When I was traveling in Europe a few years ago, everyone thought I was either French or Russian.
And, of course, I knew neither language so whenever someone attempted to speak to me I stared at them blankly and used hand gestures to explain my ignorance.
I have the same reaction when readers ask about investment banking in Russia: blank stares followed by “It’s on the list” and “I want to cover it soon.”
That ends today with a new interview from a reader who works at a top investment bank in Moscow – here’s what you’ll learn inside:
- The recruiting process in Russia and the types of candidates they’re looking for.
- What the finance industry in Russia is like – industries, deals, dominant banks, and more.
- Hours, work, and pay and how it compares to what you would earn in NY or London.
- Exit opportunities – the legal kind.
Let’s get started:
Q: Can you tell us about your background and how you broke into the industry?
A: Sure. I moved to Moscow about 5 years ago to study at a top Russian university, and before that I had lived in Siberia for my entire life.
Q: Wow. That’s intense. I guess you had no trouble proving that you could handle the rigors of banking if you lived in a place like that.
A: Yeah, the weather is a little exaggerated but it certainly helped.
Anyway, I completed a Bachelor’s in Finance degree in Moscow and during my study I did several internships:
- Year 1: Commercial banking (sale of credit cards)
- Year 2: Russian antitrust regulator (M&A deal approvals)
- Year 3: Investment banking internship
And then I started working full-time as I was completing my 4th year.
I worked for a “fund” that was owned by a Russian oligarch and did private equity-related work there, and after that started as an investment banking analyst at one of the leading banks here.
Q: That’s quite a lot of experience, especially in your first few years… how did you accomplish all that if you arrived in Moscow and didn’t know anyone at first?
A: Recruiting is a bit more random here, so I went through an extensive networking effort as soon as I arrived.
I went to events sponsored by business clubs, followed job posting sites, spoke with headhunters, and leveraged a lot of those connections to win internship and full-time offers.
It was definitely a gradual process, which is why I didn’t do anything directly related to IB in my first 2 years, but it got easier over time partially because the finance community here is very small – networking is more manageable when there aren’t thousands of bankers.
Q: Right, I think that happens with a lot of other markets as well (I’m looking at you, Canada).
What is the recruiting process like in Russia, especially compared to the UK and Europe? Do you still see assessment centers?
A: The bulge bracket banks still use similar recruiting tactics – assessment centers, numerical tests, online applications, interviews, and so on.
The process takes a long time and you usually interview with the entire banking team, or at least 60-70% of them.
One big difference is the length of the internships.
Instead of a standard 8-12 week summer internship, most banks tend to organize off-cycle internships which could last 6-12 months or even more without necessarily offering promotion to a full-time analyst position.
Imagine working investment banking hours with a miserable base salary and without a bonus for 1-2 years – but some people are willing to pay this price to get into the industry.
Large banks here might have 10-15 people dedicated to the region – that gives you an idea of how small the region is in terms of banking activity.
This is why it is crucial to know someone from the bank’s team – even if you pass all stages of the assessment center you cannot be absolutely sure that you will become a banker unless someone at the bank can say: “Yep, this guy/girl is good enough, he/she can do investment banking”.
At regional banks, they don’t use assessment centers – you just go through interviews and sometimes have to complete valuation or deal-based case studies, either on the spot or on your own time.
Obviously, networking is even more important there.
Q: So it sounds like the overall process isn’t much different from what you see at other banks, but what about the details?
Are there any differences on CVs, or with networking and interviews?
A: No huge differences with CVs. Typically they are written in English even though the official language here is obviously Russian; you still shouldn’t write more than 1 page and you should be as concise and clear as possible.
Really, the main difference here is that competition for investment banking positions is ridiculous.
Each bank may only hire 3-4 people per year, and sometimes only 1-2 people; and there are only around 10 – 15 investment banks where you could conceivably work.
Sure, competition is tough in the US and UK but at least in those regions there are plenty of tiny boutiques that might offer unpaid or trial internships, and big banks hire hundreds of people each year.
You don’t see that as much in Russia, so it’s significantly harder to stand out.
Q: So how do you stand out?
A: I know you’re going to laugh, but despite standard things like high GPA and relevant internships, the CFA is actually helpful here because recruiters need to screen people somehow.
So completing at least the first level of the CFA can be good way to get past that screen and set yourself apart, simply because other people may not take the time to do it.
Q: You mentioned the CFA, time to ban you from the site! (Kidding)
Yeah, I think you actually see that in other emerging markets as well – when the industry isn’t so developed, they sometimes place more emphasis on certifications.
Circling back to my original question, any differences with networking and interviews?
A: Networking – no, not really. As I’ve been saying, the industry is tiny here so by the time recruiting started I had already known pretty much all the key bankers at the major banks because there are so few of them.
And I attended plenty of information sessions and other events where banks booked hotels, invited people, and held talks.
Interview questions are not much different. The big banks will still ask you to walk through a DCF, how to link the 3 financial statements, calculate Beta, and so on. It’s not as if valuation methodologies or financial modeling techniques are different just because we’re in Russia.
And don’t forget about the brainteasers!
At boutiques here, the questions are similar but a few friends reported that they can be more difficult on the technical side, and they may care more about industry-specific questions.
Admittedly, I didn’t have much experience interviewing at smaller firms so that’s all based on what I’ve heard from others.
Q: Ok, that makes sense. So what types of candidates are they looking for? Is it even possible for foreigners to break in?
A: It’s pretty difficult for foreigners – most foreign bankers here are at the Managing Director level in their investment banking careers and got in because of their connections and reputations elsewhere. Everyone else is mostly Russian.
When the free market first emerged in the 1990s and early 2000s and when the investment banking industry hadn’t developed as much, you saw more foreigners here because the local people didn’t have the skills that banks were looking for.
Banks used to prefer Russians who had been educated in other countries, but that has changed over time and now they just want people who can win clients for the firm.
I don’t know if it’s quite as bleak as the situation for foreigners who want to work in the finance industry in China, but it’s definitely gotten harder over time to break in as a foreigner.
Q: Going along with that last point, I’m also assuming that language skills are critical?
A: Yes. You need to be a native speaker, or very close – many clients do not speak English at all, and Russian is the working language for most teams here.
It’s not necessarily impossible to come in and learn the language well enough as a foreigner; I know people who came from other countries and could speak well after a year of studying it.
It’s definitely not easy, but again I don’t think it’s as bleak as the situation for foreigners in China.
The Banking Oligarchy?
Q: Awesome, thanks for sharing all that.
You’ve mentioned a couple times now that the Russian IB industry is very small. Why is that, given that they’re in the top 15 economies in the world?
A: The main reason is that the free market economy hasn’t existed here as long as it has in Western countries; it only began in the 1990s (Gazprom first went public in 1996). Prior to that, there had not been an investment banking industry at all.
Another reason is the mentality of Russian companies – many of them have the attitude: “We don’t need investment bankers, we can just go to a commercial bank and get a loan. And we don’t need M&A advice because we can just grow organically.”
Q: So it sounds like you don’t do many M&A or debt deals, either?
A: Exactly. Most of the deal activity here is not with M&A or debt financing deals, but with equity capital markets deals such as IPOs instead.
At most banks in “good” years around 70-80% of their fees are from capital markets deals, and only 20-30% of the fees come from M&A advisory.
There’s a lot of political pressure with M&A deals as well – many companies are controlled by the state or oligarchs rather than institutional investors and individual shareholders, and negotiating with them and finding solutions can be very, very difficult.
More often than in other regions, politics frequently ruins otherwise good deals here.
On the other hand, there are a huge number of promising private companies here that might go public in the future – so M&A is still difficult, but capital markets activity will only get better as the economy grows.
It does vary by year, of course; as we’re speaking, the capital markets have been closed for much of the year. But anything could happen in the future.
Q: You mentioned how foreigners are quite rare in the Russian finance industry – what about foreign investment banks? Is the industry dominated by local firms or do the global banks have a significant presence there?
A: VTB Capital (Russian investment bank that’s part of VTB Group – the second-largest Russian commercial bank) dominates deal activity here; they started fairly recently and hired lots of people from bulge bracket banks to build a strong franchise.
Since firms here have worked with commercial banks so much in the past, VTBC leveraged their strong commercial banking presence to win clients and roles on IPOs, M&A deals and so on.
Another example of a major state bank entering the investment banking industry happened when Sberbank acquired one of the leading domestic investment banks – Troika Dialog.
In Russia, the model has been more like, “Commercial bank becomes even bigger and offers wide range of services, including investment banking.”
Outside of that, in the top 5 banks here you see lots of global banks: Morgan Stanley, JP Morgan, Goldman Sachs, Deutsche Bank, and Credit Suisse are all very strong.
The top 15 banks are mostly global, and you see more names like UBS, BoA ML, and BarCap joining the list.
Local firms have more of a presence on smaller deals ($50 – $100 million USD) that the bulge brackets don’t focus on.
Such banks as Renaissance Capital, Alfa Bank, Gazprombank and Xenon Capital Partners (fast growing boutique established by former JP Morgan’s team) have been performing on par with bulge bracket banks on smaller deals in certain sectors.
Q: Ok, great… so #1 is a Russian bank, but most of the others are actually global firms from the US or Europe.
What about the dominant industries? I’m guessing it’s all about natural resources?
A: No! You might think that since oil & gas are a huge part of our economy, but that’s not the case because it’s already a consolidated industry.
There aren’t many smaller, private companies there waiting to go public or be acquired by other parties, so there isn’t as much deal activity as you’d expect.
You actually see more activity in the consumer sectors because those industries aren’t quite as consolidated.
In terms of trends by industry:
- Retail and Consumer Goods: You see more M&A activity here because few companies are big enough to go public, and the largest companies are in the process of consolidating the market.
- Financial Institutions: Pretty much the same situation – there is a high number of small banks and insurance companies, so the market is relatively hot in terms of mergers and acquisitions.
It is also important to mention that many industries (e.g. power & utilities) are over-regulated by the state and investment banking activity there is entirely driven by political decisions.
A Day in the Life at a Russian Investment Bank
Q: Great, thanks for the detailed information on the banking industry there.
What’s an average day in your life like? I’m guessing the hours are still pretty intense even though it’s an “emerging market”?
A: It’s pretty standard – in the morning I typically try to find some time to read major newspapers and news sources online to understand what’s going on in Russia and worldwide.
Then, we have lots of internal and external conference calls for projects discussing deliverables, what the client wants, and so on.
You have to make sure you schedule and complete all the calls before 6 PM because employees of Russian corporations usually don’t sit in the office past the end of the standard work day.
One difference here is that analysts start working on models and “real work” very early on, so we get more responsibility compared to 1st year analysts in developed markets.
It’s not just about creating WGLs or editing presentations.
In fact, you almost need to have some modeling experience and some exposure to Bloomberg coming into the job here because you’ll be expected to know those from the very early stages.
For the overall split of work, I’d say it’s about 20% administrative, 50% PowerPoint, and 30% Excel and modeling.
As a junior analyst at large banks elsewhere, you may only spend 10% or less of your time on technical work and analysis. So comparatively, it’s a much more technical role.
On the hours, “busy season” generally starts in February or March and runs through the spring. 80-100 hour workweeks are common.
The flow slows down over the summer, especially in August when people go on vacation, and we might only be working 60 hours per week then.
Overall, it’s still banking and you won’t have much of a life – but there are more relaxed periods as well.
Q: Great. I don’t think anyone reading seriously expected a 40-hour workweek, but hey, only 60 hours per week for one month of the year is not bad.
What differences do you see with deals, the work itself, and financial modeling?
A: Capital markets transactions are pretty standard. Sometimes we need to get more regulatory approvals, but the overall process is similar to debt and equity deals in other regions.
The M&A process can be very different because of how Russian clients act, the legal system here, and so on – a single deal might last for 1-2 years or more.
On one deal last year, I was the third analyst to work on over the course of several years because it takes so long to negotiate, win approvals, and close transactions here.
There are almost no public-to-public M&A deals here, which makes life difficult because public companies all have clear financial statements and defined regulation.
Most M&A deals consist of a public company acquiring a private company, or a private company acquiring another private company – which makes analysis more difficult because private companies often have poorly organized financial statements or poor record-keeping (see: more on private company valuation and analysis).
And then there’s the questionable corporate governance and Russian style of business.
Most managers in Russian companies have come from the USSR era, and it can be really difficult to deal with them – they are used to relying on their seniors and the same applies up the ladder.
This makes the decision-making process as well as negotiations in Russian companies really difficult.
Also in Russia, private companies do not keep consolidated financial statements: Russian accounting standards require accounting for each subsidiary separately, so we find ourselves doing lots of manual accounting work to combine all the financial statements properly.
This is interesting at first, but can get really boring after you’ve done it 15 times.
Valuation and financial modeling are both similar; you still use the same methodologies and model types, but you may need to adjust items like WACC to take into account country-specific risk.
Q: Awesome, thanks for the detailed overview.
Now let’s get to the question everyone really wants to know about: how does the compensation differ from what you’d earn in London?
A: The base salary is pretty much the same, but the income tax rate is only 13% here – so the after-tax payment is significantly higher.
Bonuses tend to follow bonus numbers in the UK, so they might be anywhere from 50% to 100% of your base salary for first year analysts (for the top tier) and increase at relatively the same rate as you move up.
1st year associates might earn up to 1.5x their base salary as a bonus.
Those numbers are for global banks – at most of local boutiques, base salaries would be a bit lower and bonuses would be around 50% of what you’d earn at a large bank.
Q: I’m surprised that pay is so similar. Any idea what senior bankers in Russia would earn?
A: I can’t speak to that directly, but it’s always very performance-dependent.
One point that makes it particularly difficult for Managing Directors here is that clients can be… “complicated” when it comes to paying fees.
It’s not as straightforward as sending over an invoice and waiting for the fees to be wired over – sometimes you need to chase down the client and wait a long time to get paid.
So I wouldn’t be surprised if average MD pay is lower than in London, but again I can’t speak to it directly – that’s just speculation. And don’t forget about that 13% tax rate…
Got Exit Opps?
Q: Thanks for pointing out that issue about clients paying on time…
After pay, I think exit opportunities are important for many people – what are your options in Russia?
A: Private equity is still in its very early stage of development here – there might be around 10 PE firms countrywide that actually hire people.
And some places won’t hire anyone for 2-3 years at a time, so it’s still a very limited field and not too many bankers go into PE.
I’ve seen a few bankers move into private equity after 2-3 years, but it’s definitely not as common as in Western countries.
There are some companies which also could be classified as PE firms, but which are actually owned by oligarchs and do non-market PE deals.
Lately, bankers have been getting hired by these companies because the pay is similar and the hours are much better.
And at the senior level your compensation may even be higher than at global banks.
Despite that, lots of people actually just stay in banking and move up the ladder.
If you don’t want to do that, corporate development is always a possibility since companies value the investment banker skill set and are always looking to do more deals internally – remember what I said earlier about the attitudes of most Russian companies.
Q: So nothing much in terms of hedge funds or asset management?
A: Very little. A few asset management firms here do invest in public stocks, but it’s not a typical exit opportunity for investment bankers.
There may be a few hedge funds here, but it’s not yet a sizable industry and the biggest global hedge funds don’t do much here.
Q: Yeah, I think that’s a common trend in emerging markets: not as many exit opportunities since the industries haven’t developed quite as much yet.
What’s your plan for the future?
A: There are several options – moving to private equity or corporate development if there is a good opportunity, or even starting my own business or applying to MBA programs.
But at the moment, I am going to stick around for more time and get investment banking experience which will definitely help my future career no matter what industry it’s in.
Q: Yup, that makes sense.
Thanks for your time – I learned a ton about banking in Russia!
A: My pleasure.
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