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Why are western banks leaving Russia?

Wednesday, March 16, 2011 · Category Economy · comments 0

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Russian Finance Minister Alexei Kudrin said that a perception of political risk leading up to the 2012 presidential election was causing capital to flee the country, a factor which battered the ruble in the second half of last year. Russia saw over $30 billion in capital outflows last year, more than four times the amount forecast by the central bank. In January 2011 the capital outflow reached a stagering $ 13 billion.

The influx of Western Banks into Russia

Once like over a decade ago Western Banks looked at Russia as the next big thing; a huge undeveloped market. Nowadays most of them are backing out, scaling down or focussing merely on investment banking. Morgan Stanley, Banco Santander, Barclays, Swedbank and even Dutch Rabobank Group asked the Russian Central Bank to annul their license so they can concentrate on more promising markets like China and India. So what's going on really? Are they being pushed out by Russian Local banks?

There are some reports that some Western Banks have had trouble competing with large, state-owned institutions. In a Feb. 28 report, Moody's Investors Service (MCO) noted that state-owned banks control about half the banking system's total assets and "enjoy unparalleled access to low-cost funding and high-quality borrowers."

Local banks are growing rapidly

Russia remains a growth story, and there is huge potential for banks to tap the rapidly growing consumer lending market. Local Banks like Sberbank and VTB, both state-run and Russia's top two banks by assets, are gaining clout. Sberbank has almost 20,000 retail branches and is plotting a move into investment banking. VTB, once the Soviet foreign trade bank, has more than 530 branches nationwide, and its investment banking unit is the biggest underwriter of bond and equity sales. Let's not forget that the Russian Government bailed out the worst-hit state corporations and banks from financial crisis with its reserves in 2009.

Russian Households

Nowadays only 24 percent of households in Russia have bank accounts, according to Credit Suisse (CS). While older Russians who saw their savings wiped out in the 1998 crash remain wary of banks, a younger generation is eager for consumer credit to finance purchases of everything from cars to appliances. Russia's mortgage industry is in its infancy, and the government's new privatization push will give investment banking a lift. Russians, even the younger generation, don't like bank accounts. They are in need of consumer credit which they will pay back when they can. From my own experiences, Russians keep their money in different locations, both at home, at the parents house and any other place where they can access the cash rapidly when needed.

Other important factors

  • The macro-economic stability
    Russia doesn't have much diversity in it's economy. It's largely based on raw materials like gas and oil. Although Russian public debt is very low and it had more than $ 600 billion dollar in foreign reserves the 2009 economic drop of -8.5% shows the economies fulnerability. On the other hand Russian companies have borrowed large amounts of foreign loans. The increasing inflation led to an increase in real exchange rate, quickly undermining the competitive position of Russian businesses. Another big issue is the strong reflex to export capital when a crisis seems at hand.
  • The openness of a countries economy
    Openness in the Russian economy is large based on the wrong model. Capital influx was largely based on the import of bank loans. These loans tend to dry up in times of crisis adding to the fulnerability of the economy.  The massive misallocation of capital to state crony companies has depressed economic dynamism.
  • The presence of a highly educated population
    Largely due to heavy investment in Soviet times, Russia has a relatively high educated population. Since the fall of communism though a large "brain drain" has taken place. Russia's investment in education is around 1% of total investments and corruption at school has grown rapidly. If you want your child to get the necessary attention, you better bring some "presents" for the teachers on a regular basis.

So are domestic banks squeezing out the foreign competition?

So why are Western Banks really leaving Russia? Because of corruption? Because of bureaucracy? Because it's a tough market to work in? Because the conditions are getting tougher? Or is it simply because there is no need for their presence. Let's face it; With $ 30 billion dollars capital flight in 2010 from Russia, there is really no need for any foreign bank to be present in Russia. The Russians are bringing the money across the border themselves or just stuff it under the bed, because they understand that putting it into a Russian bankaccount probably one day means you will have lost your capital.

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