German Savers Love Russian Banks
Near-zero interest rates in Europe have made individual deposits an unnecessary headache for local banks: Wholesale funding is cheaper and easier to arrange. There are two banks that exist in a different reality, however: the Austrian subsidiaries of Russia's state-controlled Sberbank and VTB. They very much want Europeans' savings because they know how to play the Russian carry trade.
Sberbank and VTB, Russia's first and second biggest banks by assets (Sberbank accounts for 29 percent of the Russian banking system's assets), are under U.S. and European sanctions imposed for Russian meddling in Ukraine. They're barred from borrowing for more than 30 days. But their European subsidiaries, headquartered in Austria, are exempt from the sanctions because they have sizable retail units, and regulators didn't want to hurt their own banking systems by punishing the Russian-owned banks.
At the same time, the Austrian subsidiaries cannot really serve as the Russian banks' window on the Western financial markets: Their credit ratings are in line with Russia's, which makes borrowing a relatively unattractive proposition. For example, last November, India-based Axis Bank, which has the same BBB- credit rating from Fitch as Sberbank Europe has, issued 10-year debt at a 3.25 percent annual rate. Deposits are a cheaper funding source. The online bank Sberbank Direct offers Germans a maximum of 2.2 percent a year for 36-month or longer-term deposits, and VTB's German online bank is only slightly behind with a 2.1 percent rate.
The highest interest rate at Germany's biggest bank, Deutsche Bank, is 0.6 percent for an eight-year deposit. Where Deutsche will pay only 0.05 percent -- next to nothing -- on a one-year deposit, Sberbank Direct offers 1.4 percent.
No wonder the deposit base of Sberbank Europe, which operates in a number of Central European countries, is growing fast. While in 2014 the bank increased its deposits 1 percent to 6.8 billion euros ($7.4 billion), this year the German online division alone has seen a net influx of almost 1.3 billion euros.
For Sberbank, this in an unexpected benefit from a suboptimal deal it made in 2012, when it acquired the troubled Austrian Volksbank International for 500 million euros. Once the bank's managers realized they had overpaid, they demanded compensation from the sellers, the Österreichische Volksbanken-Aktiengesellschaft. In 2013, the compensation was apparently paid, but by then Sberbank had to cover a 263.5 million loss.
When the deal took place, Sberbank was in the process of building an empire. Its management had no idea that President Vladimir Putin would engage in some empire-building of his own in 2014 and put Russian business on the defensive. Yet it's those events that made the Austrian branch, the former Volksbank, especially useful to the Moscow parent company. In the past two years, the Austrian bank barely broke even, but now it can be used to provide cheap funding to Sberbank in Russia.
The parent bank doesn't offer euro deposits, but it does have a product that pays up to 4.5 percent a year in U.K. pounds sterling. On ruble deposits, Sberbank's rates are upward of 8 percent. That's actually low by Russian standards: Smaller banks pay more than 6 percent a year in euros and 14 percent in rubles. Russians, whose living standards have dropped considerably following last year's oil price decline and ruble devaluation, are taking advantage of the banks' generosity, and this year, the Russian central bank predicts 8 percent deposit growth. In a recent interview, Herman Gref, Sberbank's chief executive, said deposits were rebounding after an "unprecedented" outflow late last year, when people rushed to convert rubles to dollars and euros as insurance against what looked like the ruble's death spiral.
Sberbank and VTB are much quieter about this new German deposit opportunity than they are about Western sanctions. They have filed suit with the European Court of Justice to have the restrictions lifted. Yet the loopholes in the punitive measures allow them to get by and obtain cheap funding. In 2013, the last full year that Sberbank had full access to financial markets, its long-term borrowings increased by $3.4 billion. If Sberbank Direct's deposit growth in Germany continues at the current rate, the parent company can soon satisfy its euro funding needs from this source alone. Only Slovakia's J&T Banka and Bulgaria's Fibank offer better rates on a two-year deposit in Germany than Sberbank Direct does, and they are much smaller lenders.
It's a complicated world in which simple solutions work in unpredictable ways. Sanctions have forced state-owned Russian companies to search for new funding opportunities and business models. Their flexibility and resilience have resulted in unexpected benefits for Westerners and Russians alike -- even as the sanctions have done nothing to deter Putin from destabilizing Ukraine.
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