Foreign Banks Are Fleeing Russia

Western banks once saw Russia as a huge undeveloped market. Now some foreign lenders are changing their minds. In the past year, at least six European and U.S. banks have announced plans to cut back or close operations in the country. Morgan Stanley (MS) sold its local mortgage unit last year, and Spain's Banco Santander (STD) exited from consumer banking in December. The U.K.'s Barclays (BCS) announced in mid-February that it will divest the Russian retail unit it acquired for $745 million in 2008. "Subscale businesses don't belong in our portfolio," says Hans-Jörg Rudloff, chairman of Barclays's investment banking arm.

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.

Still, some foreign banks, including Barclays and Santander, 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."

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. On Feb. 22, VTB agreed to buy the Moscow government's shares in Bank of Moscow for $3.5 billion—the biggest acquisition by a lender in the country.

As domestic banks bulk up they are squeezing out foreign rivals. Swedbank is cutting back its Russian retail operation because it has not achieved enough scale to be profitable, says Thomas Backteman, a spokesman for the Stockholm-based lender. Rabobank Group of the Netherlands asked Russia's central bank to annul its license last month so it can concentrate on more promising markets such as India and China.

Although it is giving up on retail, Barclays wants to continue to build on its investment banking business in Russia. The U.K. bank is one of 22 institutions hired by the Russian government to help sell as much as $34 billion of state assets over the next three years.

A handful of European banks are also staying put. Société Générale, which bought Moscow-based Rosbank in 2008, has more than 16,000 employees in Russia—more than in any other country outside of France. Italy's UniCredit acquired full ownership of International Moscow Bank in 2007 and has more than 100 Russian branches. Says Leonid Slipchenko, a banking analyst at Uralsib Financial in Moscow: "Russia remains a growth story, and there is huge potential for banks to tap the rapidly growing consumer lending market."

The bottom line: Russia's state-owned banks are bulking up, causing bantamweight foreign players to flee the market.

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