Ben Aris in Berlin -

This crisis is bad news, right? Not true if you're a private equity fund sitting on about $1bn of cash. And this is just where the managing director of Icon Private Equity Partners finds himself.

"The turbulence has produced some very big opportunities," says Kirill Dmitriev, who, despite his relative youth, is amongst the most experienced fund managers in Russia. He cut his teeth at Delta Capital Management, the US government-backed private equity fund, and then worked closely with the Russian government as the head of the Russian Private Equity and Venture Capital Association, representing the interests of fund mangers while the Kremlin was setting up the Russian Venture Company last year, amongst other things.

One of the venerable men of the market, Dmitirev gave up all his other jobs to run Icon, which was set up one and half years ago. The fund has about $1bn of assets under management, but Dmitriev is coy about who the investors are, describing them only as "major Russian and Ukrainian industrialists."

Oligarchs have become steadily more interested in investing their profits in industries outside the cash cows - especially after the Yukos affair, which saw Russia's largest oil company bankrupted by the Kremlin - but until recently made most of their investment decisions themselves and usually on a whim.

Russia is unusual in that the organised private equity funds have about $5bn under management, whereas the private money is seven times as much, according to Michael Calvey who runs Barings Vostok Capital Partners, another such fund. In other emerging markets, the organised and private money are on about the same level - this discrepancy is more evidence (if it was needed) of just how rich Russian oligarchs are.

However, the fact that several super-rich men have banded together in Icon and hired someone like Dmitriev to run the fund represents a significant increase in the sophistication of the private equity business in Russia. And these investors are about to make a killing. Since its inception, Icon has not spent much of its money. "We were expecting an economic slowdown," says Dmitriev, "but nothing on this scale."

Perfect timing

Icon first made the papers after Dmitriev set up a $200m vehicle together with Igor Kim, the founder of the hugely successful regional Ursa Bank. As both men are well known pioneers in the banking sector, the article assumed Icon was to be a banking fund. And indeed it will invest into banks, as there are so many attractive opportunities about - but not only banks.

The fund has also made investments in financial services, telecommunications, media, retail and other sectors. Only, thanks to its shy investors, it hasn't made many of these deals public. Dmitriev says the fund has already done eight deals, but only made three public. Still, banks remains an important target and Kim, with over 16 bank mergers already under his belt, has more experience buying and melding banks than anyone else in Russia. "We started talking about a year ago, but we haven't spent any money yet. Now is the perfect time for [the bank] vehicle," say Dmitriev. "Prices are down dramatically. The state is looking for strong acquirers to support the bank sector. They are prepared to help with liquidity and support to make the deals happen."

Dmitriev underscores the consensus view that the state is going to play a much more important role in the economy after Russia (and the rest of the world) emerge from the current brouhaha. But he goes on to say those companies with good government connections are using them now and the most likely to emerge winners. "The state has to reassure investors, but the new equilibrium will be different than the old one. The government will play a much more important role than it used to in the economy and in business - and not just in Russia, but in the whole world," says Dmitriev. "Certain individuals and the biggest industrial groups that can tap state help will get the upper hand."

The point is nowhere clearer than in the banking sector. The Central Bank of Russia (CBR) believes it missed a trick when it failed to consolidate the banking sector during the 2004 mini-bank crisis, but commentators on all sides say it's not going to make the same mistake twice. Russia currently has a little over 1,200 banks, but Dmitriev says there will only be 300-400 banks standing in two or three years time. That is an enormous change.

The Gazprombank subsidiary Gazenergoprombank has already bought three biggish banks, but there is no way the top three state-owned banks that dominate the sector can buy 900 banks between them. Even getting the top 300 commercial banks in on the action would still mean each would have to buy three banks each.

The upshot is the CBR wants all the help it can get and with his strong ties to government, Dmitriev is in a perfect position to help. Dmitriev says the CBR has said that if the fund is willing to take over banks with problems, the central bank will stump up liquidity to solve those problems. The same deal is presumably being offered to any of the top 120 banks willing to pitch in. The trick for Icon at the moment is to find banks that are struggling, but not struggling too much. "Currently we are getting calls from 10 banks a day that want to be bought," says Dmitriev. "We are not going to acquire problems we can't mend. You have to look at the liabilities and check the quality of the assets. Can the bank repay its obligations? If the answer is yes, then we are interested."

The CBR has already rushed through changes to make bank mergers and acquisitions easier. Mikhail Sukhov, head of the CBR's licensing and financial recovery department, said at the end of October that before the end of the year, the central bank might reduce the number of documents that such investors must submit in order to get its permission to purchase stakes in banks. Several large Russian companies have already approached the CBR with proposals to invest in Russian banks, says Sukhov. And Dmitriev says the CBR will fast track any paperwork needed to make deals happen fast.

Sudden change

But cutting deals is still hard. Dmitriev is assuming that Russia is going to experience at least two years of slow growth and many companies and owners are still in denial, convinced the size of Russia's hard currency reserves are a panacea that will keep any economic downturn at bay. "The issue now is not the amount of money Russia has in reserve, but the speed of the change from fast growth to fast contraction: companies were geared for fast growth and borrowed accordingly. No one was anticipating the speed of the u-turn and now they are scrambling to restructure to accommodate the fast slowdown. The faster the turnabout, the worse the problems will be," says Dmitriev.

The speed of the about-face has been very sudden indeed. Equity prices have given up all their gains for the last six years and economic forecasts for growth in 2009 were changing on a weekly basis at the end of October - at the time of writing, predictions ran over a huge spread: 3.3% (Renaissance Capital), 5.5% (IMF), 6.3% (UniCredit) and, highest of all, 6.7% (government). "Company owners assume that the large currency reserves will protect Russia from the worst of the downturn and fail to see the havoc that the speed of the current changes is the real danger," says Dmitriev. "In practice, this means companies that turned over $60m in 2008 are expecting to turn over $60m in 2009 as well."

The banks are the biggest victim and have been caught out by a mismatch between the maturity of loans and the investment projects companies financed with them. "The banks were pretending they were offering one-year loans that they could roll over. This is all very well while the economy is growing, but now they need to call in the loan, they have discovered the loans were really five-year loans," says Dmitriev. "If a bank calls in a loan, what is the company going to do? Say here, come and take my tractor. Banks can't get their money back even if they wanted to."

It's this mismatch that's undermining the bank sector regardless of the state's cash pile, as asset quality in the bank sector has collapsed. However, the cash pile is enough to stave off a complete collapse and the state pumped over $100bn into the economy between September and the end of October, which will probably be enough to prevent a total meltdown. For funds like Icon the rescue of Russia's economy is a golden opportunity: asset prices are distressed, but the chances of a total meltdown are small. It's a shoppers' paradise - if you are cautious. "The crisis will be here for a long time. Russia will face difficult times for two-three years," says Dmitriev. "But it will fare better than many other countries and it will recover. We just have to wait."

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