Bankers on the road to Russia
Despite the risks, Western banks are heading east
By Kari Räisänen in Moscow
Money comes to money. And that is exactly what is now happening in Russia.
Oil and natural gas are bringing barrow-loads of cash into Russia. The rich are getting richer, and alongside them the Russian middle-class are also growing and prospering.nicely.
The money piling up in Russia is also acting like a candle to the moths of the Western banks. Banks have begun by building bridgehead positions in Moscow and St. Peterburg, from which they hope to be able to expand their operations.
There is certainly no shortage of growth potential. For instance, in a country with a population of around 140 million, there have only been as many housing loans granted as in neighbouring Estonia - population 1.3 million.
As well as lucrative prospects, the Western banks face resistance and hurdles in the Russian market: political uncertainty, the near-Byzantine complexities of the country's legislation, and well-established organised crime.
But thus far at least, the rewards yielded from Russia have warranted the risks that are associated with any emerging market.
The Western bank that has spread itself most widely in Russia to date is the Austrian Raiffeisen Zentralbank. This established a subsidiary in Russia all of a decade ago, and today - through the acquisition of Impexbank - it has a network of branches from the Kamchatka Peninsula in the Russian Far East right the way across to the exclave of Kaliningrad, nestled between Lithuania and Poland on the Baltic.
Raiffeisen's progress has outrun that of such rivals as International Moscow Bank (IMB, now owned by the Italian UniCredit Group through their holding in Hypovereinsbank of Germany) and Citibank of the United States.
At the Raiffeisen head office in Moscow, visitors are received by a guard sitting behind thick sheets of security glass. The electric doors open only after the man has carefully examined the visitors' passports.
From the main lobby area we are accompanied to the elevators by another burly young man. Physical risk management appears to be a significant business consideration here.
On the top floor, the visitors are met by the Chairman of the Managing Board Johann Jonach, who is effectively the bank's Russian operations supremo. This 44-year-old Austrian has also worked for Raiffeisen in Poland, Ukraine, and Bulgaria. His first posting in Russia was in 1990.
"I suppose I dare say that I know these markets moderately well", smiles Jonach.
The background to Raiffeisen's operations in Russia is somewhat unusual in that the largest shareholder Raiffeisen International Bank-Holding AG (Raiffeisen International) is a fully-consolidated subsidiary of Raiffeisen Zentralbank Osterreich AG (RZB), a large Austrian cooperative bank.
RZB set off on a process of international conquest and expansion in 1987 by acquiring a holding in a Hungarian bank. Now RZB has banking subsidiaries in 15 countries in Eastern and Central Europe.
The success story has also woken up the investors: when RZB listed Raiffeisen International on the Vienna Stock Exchange, the issue was oversold 22 times over. The share issue was the largest ever carried out on the Vienna bourse.
"We have been successful right across Eastern Europe", says Jonach. "But now Russia is definitely our most important market area. There is an astonishing potential here."
Others have reached the same conclusion.
This year the arrivals include the French giant Sociéte Général, Germany's Commerzbank, and the Finnish financial services conglomerate Sampo, who have all bought Russian banks or slices of them.
The biggest deal was signed by Raiffeisen itself, who paid USD 550 million for Impexbank, which provided them with an extensive branch and ATM network.
Before all this, the Nordic banking competitors Handelsbanken and SEB (from Sweden) and Finland's OKOBank have made moves into the Russian market.
Nordea, for its part, owned a minority holding in IMB until June of this year, a legacy from Nordea's days before the merger of Merita and Kansallisbank (KOP).
Having now sold off that stake, Nordea is looking around for a suitable replacement, either via obtaining its own banking licence or by acquiring a small to medium-sized Russian bank, as the bank is eager to keep a toehold in the Russian market.
Johann Jonach believes that the Scandinavian banks, who have moved only rather sluggishly in their expansion into Russia, are not seriously late for the train - yet.
"But it is clear that it is no longer possible to find a host of good and cheap banks on offer in Russia. The choice of serious alternatives is getting rather thin."
This is not to say, however, that Russia is actually suffering from a dearth of banks. It is not - there are still more than 1,200 of them.
Around 200 of these carry on what we understand to be traditional banking operations, while many of the remainder are more accurately the financing arms of large companies that have been converted into banks for tax reasons.
Another point is that Russia's largest banks are on a tight state leash. The market leader Sberbank, for instance, is 60% state-owned, and the government has shown no great enthusiasm for divesting its interest.
Raimo Valo, the head of the Swedish Handelsbanken's Russian operations, is like Jonach in that he is no stranger to Moscow. He first worked in the city in the 1980s as a KOP employee.
Valo moved to Handelsbanken in 1997, a year before the banking crisis hit Russia, part of the knock-on effect of the Asian financial crisis and the fall in world commodity prices.
At that time the rouble slipped into freefall, young Russian banks with heavy dollar-denominated borrowings went under in large numbers, capital flew out of the country, and a lot of people lost their savings.
At the same time, not surprisingly, many lost what faith they had in the Russian banking institutions.
"Banking crises like that always strengthen the position of Western banks, as the consumers feel they can trust them with their money", says Valo.
Many Western banking outfits have moved into the Russian market by buying a bank "off the shelf".
In the best of all worlds, this means they get an operating licence, a network of branches, and trained competent employees, who are beginning to be at a premium these days.
Handelsbanken took a different route: they applied for a licence and founded their own local organisation from the ground up. Valo nevertheless admits that Handelsbanken would still be ready to make a deal if a suitable Russian bank became available at the right price.
"Unfortunately, buying a bank is not the simplest trick in the book. Sometimes it is impossible to inspect properly all the backgrounds and the financial data", he sighs.
Even so, there has been a good deal of progress in Russia's administration of the banking sector, Valo reflects.
The current government is trying seriously to develop the branch. The central bank has rescinded licences from banks that have been found guilty of money laundering, and legislation has been beefed up to provide customers with insurance on their deposits up to EUR 5,600.
"The central bank has a lot of power, and it also uses it", reports Valo.
There have been setbacks, too: confidence was badly shaken in September with the murder - apparently yet another contract killing - of the Deputy Chairman of the Central Bank of the Russian Federation Andrei Kozlov. Then two weeks ago there was another killing, this time a director of the state-owned Vneshtorgbank, the largest bank in the country by authorised capital.
Valo comments that the reformist Kozlov was a competent and upright servant to the bank. "Kozlov made many enemies when the central bank took away the licences from banks that did not meet the deposit insurance requirements", notes Valo.
It should come as no real surprise to hear that many Western bankers in Moscow have their own personal bodyguard - Raimo Valo included.
Until the last couple of years, Western banks have headed into the Russian market mainly in pursuit of their own corporate customers. Now the banks are taking a greater interest in Russian companies, and above all in Russian consumers.
Raiffeisen offers Russians a broad package of services, including housing and consumer loans, leasing arrangements, and credit cards, all the way to asset management services.
"In the future it is undoubtedly the private customers' accounts that will be the core area of interest", says Johann Jonach emphatically. The bank currently has around 300,000 customers.
"In terms of housing loans we are now Russia's third largest bank. But for all that, we have thus far only lent out something of the order of 200 million dollars to home-owners. Russia could become a real goldmine."
Yes, but what about the Russian risks?
Jonach shakes his head and issues the assurance that the political risks are fairly small. He also does not believe that the 2008 presidential elections will usher in any great changes.
And the other dangers?
"We have one rule in Russia above all others: you have to know exactly whom you are dealing with. If there are any doubts about the background of the other party, the only sensible alternative is to walk away."
Helsingin Sanomat / First published in print 22.10.2006
More on this subject:
 Keeping the risks under control
KARI RÄISÄNEN / Helsingin Sanomat
kari.raisanen@hs.fi
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Bankers on the road to Russia
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