* Domestic players Sberbank, VTB are hard to beat
* Foreign banks have made mistakes in Russia's retail market
* Russia remains under-banked compared to BRICs
* Investment banks are here to stay
By Megan Davies
MOSCOW, May 22 Foreign banks that once treated
Russia as virgin land where easy money could be made are now
finding it a cut-throat market tougher than some bargained for.
While players such as Citi and Austria's Raiffeisen
thrive, many have found post-Soviet Russia too hard to
crack: rife with credit, legal and corruption risks, and
dominated by state giants Sberbank and VTB.
The latest to hit trouble has been France's Societe Generale
. Vladimir Golubkov, the head of its Russian unit, was
charged with bribery last week after being caught on film in a
police sting operation with piles of cash on his office desk.
"Fifteen years ago all you had to do was turn up and open
your doors, and people would queue up, because you knew what
customer service was and you understood what products were,"
said Stuart Lawson, who opened Citi's Moscow operations in the
1990s and ran HSBC's Russian operations from 2008 to
"Now ... the state banks have hired graduates from the
foreign banks or from overseas and they're full of people who
understand it. The game is a lot tougher now."
Western banks with a bit of nerve flocked to Russia after
the 1991 collapse of the Soviet Union, but this no longer fits
President Vladimir Putin's vision for a country which was badly
exposed to the Wall Street crash almost two decades later.
Now, savvier homegrown banks have significant control.
Yet Russia remains "under-banked" compared with other
countries, offering tempting growth prospects. Russia's banking
system is worth around 50 trillion roubles ($1.6 trillion) by
assets - about the same as Ireland and dwarfed by the $14.5
trillion banking system in the United States.
That also bears out when compared to the BRIC group of
countries. Credit provided by banks to the domestic economy
accounts for just 40 percent of Russia's gross domestic product.
In China, that figure was 146 percent, in Brazil 98 percent and
India 74 percent, according to World Bank figures from 2011. The
lack of affordable credit has hit investment and weighed on the
growth of Russia's $2 trillion economy.
DO THE HOMEWORK
Those banks which have prospered in Russia got the timing
right, didn't overpay, had headquarters which were involved with
the running of the business and had staying power during
SocGen bought in haste, without proper due diligence and
failed to assert control quickly, says one former French bank
executive in Russia, criteria that are crucial in a market where
courts are little trusted and corruption widespread.
SocGen has spent around 4 billion euros ($5.2 billion) since
2006 building up an 82 percent stake in Rosbank - previously
owned by Russian tycoons Vladimir Potanin and Mikhail Prokhorov.
"The expatriates systematically find themselves holding the
No.2 position," said the executive, adding it was
"incomprehensible" why they did not install a more senior French
executive. "It shows the naivete of SocGen."
SocGen declined to comment.
Other banks have also struggled with valuing Russian assets.
Britain's Barclays paid four times book value for
Expobank in 2008, before the global financial crisis hit. It
later sold below cost to banker Igor Kim, who has been snapping
up distressed banking assets.
"Although they are my competitors I felt sorry that some
banks, including Barclays, withdrew from Russia," said VTB's CEO
Andrei Kostin, who said VTB has a stake of around 10 percent in
Rosbank. "But maybe they entered the wrong time, the wrong way."
HSBC was a latecomer and decided to pull out of retail
banking in Russia in 2011 as part of a global reorganisation.
"Foreign banks largely entered Russia to operate on the
retail market but many faced tough competition. They didn't
expect that," said Anatoly Aksakov, head of the Association of
Regional Banks of Russia, and a member of Russia's parliament.
Kim said he had seized on the opportunity presented by the
weakness of foreign players, which in selling out of Russia
cheaply surrendered banking operations that were well run and
not burdened with balance-sheet risks.
Kim said in an interview with Reuters that he only buys
assets once he is fully satisfied that all the "skeletons" have
been disposed of or properly provided for with provisions.
There are some notable Western survivors.
Citi entered in 1992 and expanded organically. It reported
over $300 million in profit from Russia last year and CEE
Cluster Head Zdenek Turek called it one of the "top priority
countries for Citi".
Italy's Unicredit has been in the Russian market for more
than 20 years, growing by acquisition, and is profitable, as is
Raiffeisen, which opened up shop back in 1989 and gained scale
through its $550 million acquisition of Impexbank in 2006.
BULLDOZER WITH HANDBRAKE OFF
Hard to beat are the state players Sberbank and VTB, which
dominate the retail market and are strong in investment banking.
"The bulldozer with the handbrake off, heading down the hill
- that's the state banks," said one senior banker.
"They've got momentum. They've got product, low capital cost
and vastly improved management, and they're heading in the
direction of the private sector banks."
The country's largest bank, Sberbank, has undergone a
transformation under former Economy Minister German Gref,
defending its market share in lending and still controlling
nearly 46 percent of Russian retail deposits.
Once synonymous with queues and hour-long waits, the bank
has improved its service and is a popular stock among foreign
Russia's second largest bank VTB, once the Soviet foreign
trade bank, has a retail franchise with 8.7 percent of deposits.
It is serious investment banking player, and has been swiping
bankers from foreign rivals.
So far this year, VTB is top in M&A based on fee income,
fifth in equity and third in bonds, according to data from
Thomson Reuters/Freeman Consulting.
Russia's laws prohibit foreign banks from opening branches
but allow them to operate subsidiaries subject to regulation by
the central bank. One banker says there is equal opportunity.
"Foreign banks have been treated on a level playing field
(in Russia)," said Lawson, now an executive director at Ernst &
Young in Moscow. "Once you've locally capitalised, except for
the reality that the state banks dominate the market, all else
is on a pretty equal footing."
Foreign bankers with an appetite for risk sought out Russia
in the turbulent years that followed the Soviet collapse, as the
industrial legacy of the command economy came up for grabs.
New Zealander Stephen Jennings came to Moscow in 1992, aged
32, with Credit Suisse First Boston to advise on privatisations
that created a new class of billionaire business oligarch.
He founded Renaissance Capital in 1995, making his name and
fortune as a risk taker and dealmaker. But, after surviving the
1998 and 2008 crashes, his dream finally unravelled last year
after three consecutive years of losses.
Jennings abruptly left Moscow after RenCap suffered a
ratings downgrade. He has declined to comment since.
Prokhorov, who had already saved RenCap in 2008, bought the
rest of the bank and pumped in extra liquidity. Renaissance
announced a loss of $378 million for 2012 but says its
investment bank is now operationally profitable.
Unlike the United States, which is lucrative for business
such as capital- and debt-raisings, and M&A, commissions are
lower in Russia, one banker said.
"Here, fee scale means nothing, every single thing is highly
negotiated and the state sector will always be tougher and more
competitive," the banker said.
Still, there is money to be made and Wall Street banks JP
Morgan, Morgan Stanley and Goldman Sachs
are present in Moscow with gleaming offices and aggressive
bankers. Bank of America Merrill Lynch recently hired
RenCap alumnus Alexander Pertsovsky to head its Moscow team.
For the government, Western banks are sought as promoters of
Russia's investment story - one of Putin's ambitious aims is to
build a global financial centre and Goldman Sachs has a mandate
to help the country attract foreign capital.
Western banks are also advising on the state's privatisation
programme in which the government has reduced its share in both
Sberbank and VTB in recent years but kept majority stakes.
Whether Putin will go further and cede control is open to
doubt. The 2008 crash revealed just how exposed Russia was to
the Wall Street crash - $130 billion fled Russia in the fourth
quarter of that year alone.
Russia's banks were only saved from collapse by the central
bank, which spent $200 billion of its reserves to defend the
exchange rate - thus allowing them to refinance their foreign
debts - before finally devaluing the rouble by 25 percent.
Finding a niche has paid off for some mavericks in the
consumer banking sector.
Oleg Tinkov supplies credit cards to regions neglected by
the big banks. Using direct mail and online advertising, Tinkoff
Credit Systems is profiting from increasing demand for consumer
loans in a country where credit card penetration is tiny.
He sees no threat to his marketing-led approach from Western
banks, whose business model he sees as broken.
"When I see a French banker, I laugh. They don't succeed in
Russia because they are so amateur. They are bureaucrats," said