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Analysis & Opinion
27.04.11 Foreign Banker Exodus
By Tai Adelaja

Europe's largest bank, HSBC, said on Monday that it would close down its retail banking operations in Russia after two years of trying unsuccessfully to lure Russian customers with its sophisticated Personal Financial Services (PFS). The bank said it would close five retail branches in Moscow and St. Petersburg, and refocus its Russian business on providing global lending services to industrial and corporate clients.

"Following a strategic review it is clear that the strongest opportunity for HSBC in Russia lies in servicing corporate and institutional clients," said Huseyin Ozkaya, chief executive at HSBC Russia." That is why we have taken the decision to exit from our retail business and reduce our private banking presence to a representative office."

HSBC followed in the footsteps of Barclays Bank, its British rival, which decided in February to sell its Russian retail unit in order to focus on investment banking. "In Russia, we decided to focus our business on government organizations, large corporations and international companies and withdraw from the retail business, where we have been unable to compete," Bob Diamond, Barclays’s chief executive, said in a statement. The British giant kicked off its retail activities in Russia in 2008 by acquiring Expobank for £373 million ($617 million), as it sought to become “one of the leading retail and commercial banks in Russia.” In a statement announcing the deal, Barclays said the acquisition would generate a profit and achieve a return on investment “significantly above the cost of equity” by 2011. But Barclays Russia was never able to recover from the 2008 global financial crisis and, last year, the bank announced a £244 million ($403.6 million) write-down in its annual report in connection with its Russia operations.

Other foreign banks have been fleeing Russia in recent months, with many claiming they could neither realize their investment dreams nor effectively compete with local champions. “No fewer than a dozen foreign-owned banks have seriously cut back on their operations in Russia over the past six months,” said Maxim Osadchy, the head of research at the Moscow-based Bank of Corporate Financing. One of the most curious cases, Osadchy said, is the Dutch Rabobank Groep. In February, Russia’s Central Bank annulled the operating license of Rabobank Groep NV’s local unit, at the Dutch lender’s request. “We have changed our priorities and won’t be using our subsidiary banking license in Russia,” Manel Vrijenhoek, a spokeswoman for Rabobank, told Bloomberg. “You have to make choices of how to deploy resources and we see better opportunities in other markets.” Vrijenhoek said the Dutch lender had requested for the license to be cancelled as it wanted to concentrate on opportunities elsewhere in China, India and the United States. Last year, the bank recorded a net loss of 54.6 million rubles ($1.95 million).

Along with Rabobank, other Western banks that have decided to cut back their Russian operations in the past year include the Belgian banking group KBC, which said it would be selling its Russian retail subsidiary, Absolut Bank. The Belgian group paid $1 billion in April 2007 to acquire 92.5 percent of Absolut Bank, which was then the country's 25th biggest bank that specializes in mortgages. In December, another foreign bank – Spain’s Santander – sold its Russian business to local player Orient Express, while Swedbank AB, the biggest Baltic lender, has also cut back its Russian operations in the past year, citing stiff competition as the cause.

Industry executives and analysts have given a mixed bag of reasons why foreign players are fleeing Russia despite a significant recovery in the banking sector. “The biggest hurdle for these foreign banks is that they cannot compete with state-owned Russian banks that have access to huge state resources,” Osadchy said. “For instance, while Dutch Rabobank is one of the world's largest agricultural banks, it could not make headway in Russia because state-owned Rosselkhozbank agricultural bank is a virtual monopoly.” Lately, banks like Rosselkhozbank have started issuing micro credits (usually no more than one million rubles ($35,000) for about a year) that allow borrowers to use a year's worth of unemployment benefits to start up a business in the farming sector, Osadchy said. This used to be the preserve of foreign banks, he added.

Former Central Bank Deputy Chairman Sergei Aleksashenko said a major increase in the role of state banks in the Russian banking sector has created an uneven playing field for foreign competitors. "The state-owned banks received enormous help from the federal budget in the days of the crisis, thereby strengthening their dominant position on the Russian financial market,” Aleksashenko said. “Today, one must not harbor any illusion of a fair competition with them: all the main cash flows in Russia are controlled by state-owned banks." But other experts like Yevgeny Trusov, a project manager at NEO Centre Consulting Group, said many foreign banks simply bring their businesses to Russia in an effort to streamline their costs without doing proper spade work. "Perhaps the British groups [HSBC and Barclays Bank] have been overoptimistic in their assessment of the future prospects in the Russian banking sector,” Trusov said. “Despite the fact that the Russian banking sector is already out of the crisis, hope for high profits that attracted many foreign players, including Barclays bank, did not materialize."

While Russian banking continues to be dominated by state-owned giants like Sberbank or VEB, a number of European banks, including France's Societe Generale, Italy's UniCredit SpA and Austria's Raiffeisen International Bank (RBI), have been able to make inroads in the market through a string of acquisitions. Some, like Raiffeisen Bank, which operates a successful banking business in Russia, believe that long-term investment in Russia is the key to success. In a statement on Wednesday, the bank said it has no plans to wind down some of its operations in the country despite the exodus of other Western players. “In Russia you separate the wheat from the chaff,” RBI CEO Herbert Stepic said in comments in Austrian daily Die Presse. It was mainly companies which entered the market in the hope of quick profits which would withdraw, he said. “In contrast, we are a long-term investor,” Stepic said. Raiffeisen Bank has been in Russia for two decades and has around 200 branches there, and the bank raked in a fifth of its profit from Russian operations last year.

Before the global financial crisis, foreign banks were rushing to Russia, drawn by the credit boom and high profits. Between 2003 and 2008, the market share of foreign banks in the sector rose from 5.2 percent to 28.5 percent. However, at the beginning of 2011, their market share has been reduced to 24.6 percent. “Now that we are witnessing the exodus of foreign banks, the leaders of our banking sector are probably comforting themselves that the weakest players are being pushed out,” Aleksashenko said. “But it is worth remembering that along with the foreign players, the country is losing opportunities for the introduction of advanced banking technology, while the hope for improving quality and reducing the cost of financial services to the people is also melting.”
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