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VTB Says Bank of England Targeting London Unit Over Ukraine

April 10 (Bloomberg) -- VTB Group, Russia’s second-biggest lender, faces pressure in London from U.K. regulators because of the standoff with Europe over Ukraine, according to the chairman of the state-run bank.

“There is clear political motivation here,” Andrey Kostin, chairman of the Moscow-based banking group, told reporters in Moscow, criticizing the Bank of England for making demands that exceed its oversight functions. He said the U.K. regulator had been putting “very strong pressure in recent weeks” on its VTB Capital Plc investment banking unit in London, according to comments published earlier in Izvestia newspaper and confirmed by his press office.

Kostin, a former Soviet diplomat in London, warned earlier this month that Russia is in a Cold War with the U.S. and Europe and all of its banks could face sanctions.

The U.S. and its economic allies have been weighing tougher sanctions on Russian companies and industries, while NATO has accused President Vladimir Putin’s government of accused stoking ethnic unrest in Ukraine’s eastern regions.

The Bank of England has made additional demands on VTB’s London unit relating to capital levels and liquidity controls, Chief Financial Officer Herbert Moos said at the briefing.

Cutting Costs

A spokeswoman for the Bank of England declined to comment when called by Bloomberg. The regulator has been tightening rules for non-European banks seeking a foothold in the U.K. by introducing a series of tests to ensure financial stability.

Pressure from British regulators to bolster capital was squeezing the profitability of overseas banks that operate out of London, the head of VTB’s overseas investment banking, Atanas Bostandjiev, said in an internal memo in November. Moscow-based VTB Capital has offices in London, New York, Hong Kong, Dubai and Singapore, according to its website.

VTB plans to reduce payroll expenses 15 percent in 2014 and 2015 in its corporate-investment banking group, according to a presentation on its website today. The group isn’t planning big job cuts and may rely on trimming bonuses and offering some part-time work, Deputy Chairman Yulia Chupina said today.

‘Financial Weapon’

Kostin also accused the U.S. of using a “financial weapon” to achieve political goals, referring to Visa and MasterCard cutting off Bank Rossiya from their systems after U.S. sanctions on the lender controlled by a billionaire associate of Putin, according to the interview.

He also said U.S. regulators were deliberately withholding cooperation with Russia over implementation of a law requiring financial institutions worldwide to report details of accounts and transactions of their American customers. “The U.S. authorities are forcing Russian banks to participate in this process singlehandedly, which is expensive and difficult to carry out,” Kostin said in the newspaper interview.

VTB’s shares have dropped 21 percent this year as tensions grew over Ukraine and the U.S. and European Union levied sanctions against Russian officials for the annexation of Crimea. The stock rose 1.8 percent to 3.91 kopeks at the close in Moscow.

Investment banks including Moscow-based VTB Capital say Russia’s economy will shrink for at least two quarters as penalties for Crimea rattle markets, curb investment and raise the cost of borrowing.

‘Difficult’ Year

This year may be more “difficult” in terms of financial results than 2015 and 2016 with a potential increase in provisions on Ukraine, Kostin said today.

Russian state companies such as gas exporter OAO Gazprom and OAO Rosneft, the world’s biggest publicly traded oil producer by output, should gradually switch to ruble payments for their customers to avoid having to process transactions via the U.S. banking system, Kostin said in Izvestia.

“This would allow them to resolve the problem of depending on payments that always go via New York,” he said in the newspaper. VTB doesn’t have a “very serious” business presence in the U.S., Kostin said at the briefing.

Foreign partners are under pressure from their governments on issues including attending the annual St. Petersburg International Economic Forum, the top Russian investment conference, according to Kostin. Nonetheless, several European and U.S. banks visited VTB in recent weeks to say they’ll keep working in Russia, he said in the newspaper.

To contact the reporters on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net; Artyom Danielyan in Moscow at adanielyan@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Torrey Clark, Michael Winfrey

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