Russia’s Rich a Target for VTB as Foreign Banks Juggle ProbesBy
State-owned bank may profit after scandals at foreign firms
‘It only takes two days’ to open an account, lender says
Russia’s state-owned VTB Group has found a silver lining in the country’s economic isolation.
Since financial sanctions and a fall in oil prices pushed Russia into recession 2 1/2 years ago, VTB’s retail arm managed to double the number of high-net worth clients, who avoided the worst of the crisis. Now, the country’s second-largest bank plans to take market share by luring Russia’s rich back home and away from international wealth managers, which are hampered by increasingly complex anti-money laundering regulations.
“Our goal is to attract clients currently being serviced by foreign banks,” Pavel Kudryavtsev, the head of VTB 24 private banking, said in an interview. “It can take up to six months for Russian citizen to open an account with a European bank. At VTB, it only takes two days.”
VTB estimates that only 25 percent of high-net worth individuals’ wealth is held domestically, a number that may increase as wealth managers abroad are forced to step up compliance and vet clients more thoroughly, limiting their ability to compete for client funds. International firms including Deutsche Bank AG and Royal Bank of Scotland Plc have been ensnared in scandals ranging from helping Russians move billions out of the country to alleged money-laundering scheme.
VTB currently oversees more than 1 trillion rubles ($16.7 billion) for wealthy Russians, though competition for their money is fierce. Cyprus, a favorite financial center for Russians, is offering foreigners the opportunity to obtain EU citizenship in less than six months in exchange for an investment of at least 2 million euro ($2.2 million). Traditional private banking powerhouses like Switzerland’s Credit Suisse Group AG and UBS Group AG are also competing for money.
Russia has the largest disparity between the haves and have nots of any major economic power, with 89 percent of the country’s household wealth in the hands of the top 10 percent, according to Credit Suisse. About two-thirds of Russian workers earn less than the average monthly income of $655, with President Vladimir Putin saying last week the growing number of people living below the poverty line is “particularly alarming.”
“During the periods of market volatility, the discrepancy in wealth increases and clients move towards higher quality services,” Kudryavtsev said.
Wealth managers in the country benefited last year as high-net worth Russians increased the amount of money in private banking accounts by 15 percent to 6.25 trillion rubles, without adjusting for changes in the ruble exchange rate, according to Moscow-based Frank Research Group.
VTB and other state-owned banks like Sberbank PJSC also profited after the central bank purged Russia’s financial industry, pulling one in three banking licenses since 2014 in an attempt to eliminate mismanaged and under-capitalized banks from the system.
“The most noticeable trend is the concentration of clients’ funds in large players on the private banking market and, in particular, at banks with either state ownership or foreign capital,” Frank Research Group analyst Lyubov Prokopova wrote in a June 20 report.
Private banking in Russia caters to clients with at least $1 million in assets. VTB requires Moscow residents to keep 50 million rubles in their accounts to qualify, while regional clients can achieve the status with 30 million rubles, or about $500,000.
Kudryavtsev says he aims to increase the number of high net worth clients to 18,000 by the end of 2018, from 11,000 currently.
“The market isn’t a level playing field as high-net worth clients have more options,” Kudryavtsev said. But he believes new know-your-client rules abroad are making storing wealth in Russia more attractive, as “some European banks are asking their clients to provide documentation on transactions they conducted 10 years ago.”