With interest rates at
their lowest level for 40 years in the West, Russian
banks are struggling to compete with their foreign
counterparts in the lending market. Victoria
Lavrentieva reports on the increasing presence of
foreign banks in Russia and the implications this has
for the banking sector.
With the Russian lending
market still one of the most risky yet most profitable
in the world, more foreign capital has poured into the
coffers of Russian companies than ever before. But
because of their sometimes shady behavior in the
aftermath of the August 1998 financial crisis, Russian
banks have hardly seen any of it.
The government and the
Central Bank have worked tirelessly to protect the
troubled banking sector from foreign competition by
limiting the scope of foreign presence in the market and
delaying the reform process. However, they have been
powerless to stop the increasing interest rate margins
between the United States, Europe and Russia, which has
meant that Russian banks have found it difficult to
compete with foreign banks in the lending
Despite an unenforced 12
percent limit imposed by the Central Bank on the
participation of foreign capital in Russia's banking
sector, the real scope of foreign activity -- if
measured by lending volumes -- is already twice as much.
As a result, Russian banks,
with their comparatively small asset base, are losing
the battle for the largest and the soundest local
borrowers to their foreign rivals.
According to the Interfax
Rating Agency, or IRA, the accumulated volume of
outstanding loans provided to Russian companies by banks
from 19 highly developed countries reached $14.5 billion
through July 1, 2001.
"This is roughly 27 percent
of all outstanding loans ever provided to Russian
companies," said Mikhail Matovnikov, deputy director
general of IRA. "This means that Russian banks already
account for less than three-quarters of all loans to
The explanation is simple.
After nine rate cuts by the
U.S. Federal Reserve, the base interest rate in the
United States is down to 2 percent from 6.5 percent at
the beginning of 2001. And the annual LIBOR -- the main
interbank lending rate in the United States and Europe
-- is currently just 2.5 percent in dollar terms, a
record low for the past 40 years.
At the same time, the average
annual lending rate in Russia for dollar loans is 16
percent to 18 percent, while interest on annual deposits
in dollars averages just 9 percent to 11
As a result, Russian banks
cannot compete with foreign banks on credit costs.
"The spread between the
lending and deposit rates in Russia is enormous," said
Christof Ruehl, the World Bank's chief economist for
Russia. "This means that the Russian financial
intermediation system is not functioning
Russian Banks With 100% Foreign Ownership, as
of October 1, 2001
|1. Deutsche Bank
|2. Dresdner Bank
|3. Commerzbank (Eurasia)
|4. WestLB Vostok
|5. Garanti-Bank Moskva
|6. Finansbank (Moskva)
|7. Iktisat-Bank (Moskva)
|8. Yapy-Credit (Moskva)
|9. Credit Lyonnais Rusbank
|10. Societe Generale Vostok
|11. ING Bank (Eurasia)
|12. ABN AMRO Bank
|13. Citibank T/O
|14. J. P. Morgan International
|15. Raiffeisenbank Austria
|16. Credit Suisse First Boston
|17. First Czech-Russian Bank
|18. Bank of China (Elos)
|20. Michinoku Bank
|21. Small Business Credit Bank
||mixed European |
|22. Investment Bank of Kuban
||mixed European |
||mixed American |
|Source: Central Bank |
Renaissance Capital recently
identified the continued increase of interest rate
margins between the United States, Europe and Russia as
a potential catalyst for a new crisis in or even a
collapse of the Russian banking sector.
"Russian banks will have
difficult times competing with foreign banks for
domestic companies, especially for those that foreigners
want to lend to," said Renaissance banking analyst Kim
Matovnikov said foreign banks
are lending mostly to the largest Russian companies,
such as Gazprom, LUKoil, Transneft and Rosneft.
"These companies are
interested in foreign loans, as they need to compete on
the world markets and can't afford to pay twice as much
for Russian loans," he said.
But as Ruehl pointed out,
"One good thing about foreign banks coming to Russia is
that they will bring rates down."
"Capital markets are
international, and you have only two choices: either to
close off the banking sector completely or to open it,"
Cutting Out the Middle Man
Syndicated loans have always
been the most popular and least risky way of lending to
Russian borrowers. There are no official statistics
showing the real volume of such loans, and it is also
hard to tell which foreign banks are lending most. But
the numbers that are available are impressive.
If measured only by figures
made public in the first half of 2001, syndicated loans
from foreign banks have already reached more than $1
billion. Austrian-owned Raiffeisenbank and the 80
percent foreign-owned International Moscow Bank, or IMB,
are the leading organizers. IMB was merged with Bank
Austria in 2000 after German Hypo-und Vereinsbank bought
Bank Austria and took over its activities in Russia. The
German bank is the major shareholder of IMB.
"I can say that foreign banks
are competing to lend to large-scale Russian companies
now," said a banker with one foreign bank who asked not
to be named.
"Almost any Russian company
could get any money it wants if it comes out with a
concrete project and sound financial statements under
International Accounting Standards," he said.
Life would be easier for
Russian banks if they could attract syndicated loans
from abroad as easily as they did before the 1998
As analysts say, it makes
more sense for foreign banks to lend money to Russian
banks than directly to companies because this way their
risk is more diversified.
However, analysts say foreign
banks have no intention of doing this because they
remember the way they were repaid by Russian banks after
"Russian banks should have
thought twice before ripping off their creditors,"
Not much has changed since
the crisis to make lenders feel more comfortable in
Russia, Iskyan said.
"The Russian banking system
is still considered a minefield by most foreign banks,"
Michel Perhirin, chairman of
the board at Raiffeisenbank's Russian subsidiary, said
that his bank, with a total lending volume of $450
million, has not written off any loan provided to
Russian companies since 1996.
However, Perhirin said he
still cannot forget the way some Russian banks behaved
in forward-contracts disputes that were a question of
"life or death" for many foreign banks in Russia in
According to foreign bankers'
estimates, Swiss-owned Credit Suisse First Boston, or
CSFB, lost $2 billion after the crisis, French bank
Societe Generale $600 million and Raiffeisenbank $150
million in GKOs, nondelivery forwards and syndicated
loans to Russian banks. And these are just a few
"It goes without saying that
banks have not forgotten the losses they suffered in
Russia. We lost several credits given to Russian banks,"
Kurt Firmetz, chairman of the supervisory council of
Hypo-und Vereinsbank, said in an interview with
Vedomosti in November.
As a result, he said,
"Western banks prefer to participate in syndicated
credits to companies. The situation with the
organization of credits to banks is more complicated
because after the 1998 crisis Western banks are very
Top 10 Foreign Banks in Russia*
||Assets, $ mln
||Deposits,$ mln of Individuals
||Loans to Nonbanks, $ mln|
|International Moscow Bank** (6)***
|Citibank T/O (11)
|Raiffeisenbank Austria (15)
|Credit Suisse First Boston (18)
|Deutsche Bank (21)
|ING Bank (Eurasia) (28)
|ABN AMRO Bank (29)
|Dresdner Bank (43)
|Credit Lyonnais Rusbank (48)
|Commerzbank (Eurasia) (50)
|* as of October 1, 2001 Source: Interfax
** International Moscow
Bank (IMB) is not 100% foreign-owned, as 22% of
its share capital is represented by Central Bank
money. But as its major shareholder is German
Hypo-und Vereinsbank (43%), most analysts consider
IMB de facto a foreign bank.
*** the number in the
brackets shows the bank's place in the list of
Interfax "Top-100 Russian banks" in terms of
assets, as of October 1, 2001.
|Source: Interfax Rating Agency|
Although foreign banks are
well represented in Russia's corporate sector, only a
few of them are working with retail customers, citing
large costs, high risks and the low profitability of the
Most of them prefer to work
within so-called "salary schemes" with large, mainly
foreign-owned companies working in Russia whereby
employees of the foreign companies have access to all
retail banking services while they work for the
Raiffeisenbank and Bank
Austria have been the only foreign banks to actively
work with Russian retail customers. Raiffeisenbank leads
with $153 million in deposits and five branches in
Moscow and one in St. Petersburg.
Before the merger with Bank
Austria, IMB did not consider retail business a
priority, but has since changed its concept to follow
Bank Austria's experience. IMB has roughly $150 million
IMB spokesman Sergei Levskoi
said IMB had 8,000 retail customers before merging and
got an additional 12,000 from Bank Austria.
"Now we are left with six
Bank Austria branches in Moscow and one in St.
Petersburg, and we intend to seriously develop our
retail activities," he said.
Another bank that has tried
to get into retail is Turkish-owned Garanti-Bank Moskva,
which this year launched a large-scale advertising
campaign targeting retail customers. But a financial
crisis in Turkey together with a lack of interest shown
by Russians forced it to sell its retail business to the
Russian-owned Bank of Moscow.
Other European banks such as
Dutch-owned ABN AMRO and ING Bank with individual
deposits of $20 million and $29 million, respectively,
feel more comfortable sticking with salary schemes in
the present climate.
"For the time being, ING Bank
provides retail banking services ... to employees of
corporate clients only," said Hendrik ten Bosch, the
general director of ING Bank (Eurasia). "The bank
considers this business direction as a perspective one
and plans to develop its retail capacity further during
the next few years."
Foreign banks that have plans
to launch retail business in Russia some time in the
future include U.S.-owned Citibank and Germany's
"We will be launching some
level of retail activity in Russia within the course of
next year, as we are positive about Russian market,"
said Allan Hirst, Citibank regional head for Russia and
As for Deutsche Bank, its
Russian subsidiary is still trying to convince its
headquarters to move into retail banking and is
reluctant to give any concrete dates.
"We don't usually decide on a
specific country but rather on a region as a whole,
which takes time," said Hubert Pandza, CEO of Deutsche
Bank's Russian subsidiary.
"The reason for such a delay
is not because the Russian market is not ready yet but
more because our headquarters are not ready to make this
decision," he said.
According to the Central
Bank, there are currently 23 licensed foreign banks in
When banks decide to start
operations in another country, they take into account
many factors but, first of all, they consider the
external trade volumes between the two countries and the
number of their clients already working with that
In the case of the four
German banks represented in Russia, for example, the
benefits of moving into Russia are clear as Germany
accounts for almost 40 percent of Russia's foreign
Trade volume is not an
overriding factor, however. There are also four Turkish
banks in Russia, even though Turkey is not Russia's main
"In this case, you should not
judge only by total [trade volume]," said Andrei Ivanov,
banking analyst with Troika Dialog. "The number of small
Turkish companies working with Russia exceeds that of
In addition, he said, "They
are represented in a variety of sectors, starting with
trade and finishing with the cement industry and
Although the number of other
European banks and U.S. banks in Russia is low --
Citibank and J.P. Morgan International are the only two
major U.S. banks that have subsidiaries in Russia --
their importance to Russia's banking sector is evident
if one looks at financial statistics.
Citibank has the largest
assets of all foreign banks, with $1.3 billion through
Oct. 1, 2001. It is the 11th largest bank in Russia in
terms of assets, according to the Interfax Rating
Agency. Citibank also leads among foreign banks in
lending volumes, with $581 million in outstanding loans
to Russian companies.
"In contrast to most U.S.
investment banks, we like to be very involved in the
domestic financial system," Hirst said. "Our strategy
here is to serve both multinational and Russian
companies, which currently account for an equal share of
the bank's activities in Russia."
"We know the companies we
would like to work with, which makes it easier, but we
want to expand our Russian business in the future," he
Matovnikov said, "Citibank
traditionally was a wholesale bank in Russia, working
with a limited number of large companies, avoiding
advertising campaigns and retail business. Nevertheless,
it is one of the most profitable of the foreign banks in
The banking activity in
Russia of J.P. Morgan International, which recently
merged with Chase Manhattan, is far behind that of
Citibank, while Morgan Stanley and Goldman Sachs still
prefer to work through representative offices. Bank of
America, which was given a license by the Central Bank
in 1998, closed its Russian subsidiary soon after the
"I believe that all the [U.S.
banks] that you would expect to see in Russia are
represented in the market," Hirst said. "There aren't
that many global U.S. banks left due to so much
consolidation in the U.S. banking business -- and most
of them prefer cross-border investments to general
banking outside the U.S."
As for the expansion of
European banks, Renaissance's Iskyan said, "It is quite
logical, because Austrian and German banks have a
limited scope of expansion in Europe, so they have to
look at Russia as their closest neighbor."
Austria's Raiffeisenbank is
in 15th place among the top 100 banks in Russia, with
$835.2 million in assets, half that of Citibank.
Matovnikov said that the high
activity of Austrian banks in Russia can be explained by
the fact that "the only way for Austrian banks to
survive is either to merge with other European banks,
which we see in the case of Bank Austria, or to develop
their business outside the country."
"External growth is the most
important, if not the only factor of growth for them and
Raiffeisenbank chose the second way," he said.
"Austria always served as a
link between Western Europe and the Eastern European
bloc, so we know this region better than others," he
said. "We also proved that a medium-sized bank on the
global scale can be as big as Citibank in Russia."
Other European banks, such as
Deutsche Bank, ABN AMRO, CSFB, Dresdner Bank and
Commerzbank, are servicing both their international and
Russian clients in Russia and are very active in
organizing syndicated loans.
They received more Russian
clients after the 1998 crisis and the 1999 Bank of New
York scandal -- in which top bank employees were accused
of helping launder money through Russian accounts --
after which many U.S. banks closed correspondent
accounts to Russian banks.
However, foreign bankers say
that overall it is more complicated to do banking
business now than it was several years ago.
"We all live in a different
environment now, and we have very strict requirements
with regards to money laundering and financial
transactions in general," Hirst said.
Most analysts agree that in
the current environment of increased foreign competition
Russian banks will have to diversify their business in
favor of small- and medium-sized companies to
"There is nothing left for
the Russian banks other than to look at medium- and
small-sized enterprises," Matovnikov said.
Some Syndications, Organized by Foreign Banks
to Russian Borrowers in 2001
||Loan description, participants |
|no data available
||Primorye Shipping Company
||$209.8 mln |
Cristiana Bank and Fortis
|ING Barings and Societe Banque Generale
||$175 mln. 2-year loan, rate 9,5%
Commerzbank, Erste Bank, Cantonate Vadoise,
IMB, KBC Bank
16 European banks, incl. Societe
Generale, Standard Bank London, Credit Suisse,
IMB, Dresdner Bank
|IMB, Bayerische Hypo-und Vereinsbank
BNP Paribas, Bayerische
Landesbank, WestLB, Bankdenessellschaft Berlin,
|BCEN-Eurobank Paris, Bayerische Hypo-und
Bayerische Landesbank, Credit
Agricole Indosuez, Mosnarbank, IMB
||$90 mln, with $40 mln syndicated with
ABN-AMRO, Raiffeisen Zentralbank and WestLB|
|CIB Bank (Hungary) City of Moscow
Eximbank (Hungary), Credit
Lyonnais, Hypo Vereinsbank
||$30 mln |
Hypo-und Vereinsbank, DG
|Standard Bank London
||$25 mln |
Glencore International AG
||$138 mln |
Corporation, Nordeabank, other European
|Source: Interfax Rating Agency, The Moscow
According to Troika's Ivanov,
"Russian banks will inevitably diversify their business
and start lending to medium-size companies."
"This will bring down the
risk of the high concentration of loans, that we see now
and also act as an engine of future economic growth," he
Currently, small companies
suffer most from a lack of bank loans. As analysts point
out, this negative impact will become increasingly
apparent over the next two years, as real ruble
appreciation continues to run its course, and as
commodities prices -- and oil prices in particular --
eventually return to their long-term averages.
There are at least two
foreign-owned banks ready to fill this gap.
Small Business Credit Bank,
or KMB Bank, an arm of the European Bank for
Reconstruction and Development, has been lending money
to micro-, small- and medium-sized Russian enterprises
since 1999. KMB specializes in micro and small loans,
ranging from $100 to $500,000.
"We started 2 1/2 years ago,
but we are still unable to satisfy the permanently
growing demand in the market," said Reiner
Mueller-Hanke, head of KMB Bank.
Since 1999, when the bank was
founded, KMB has made more than 15,600 small and
medium-sized loans worth $201 million.
DeltaBank, the small-business
arm of the U.S.-Russia Investment Fund, is running a
similar type of business. The bank, which started
operations in June this year, mainly works with
companies whose annual turnover ranges from $1 million
to $50 million and loans range from $100,000 to $1
DeltaBank plans to approve
$10 million in loans by end of this year and a further
$20 million in the first half of 2002.
"This business is not for
people looking for hot money," said Sergei Boyev,
president and CEO of DeltaBank. "You should build it on
a long-term basis."
Both KMB Bank and DeltaBank
are ready to share their experience with Russian
colleagues and have seen a lot of interest in their work
Analysts say that one of the
main reasons Russian banks prefer to stay away from this
sector is that they don't have enough experience or a
good methodology in the field.
In addition, Ivanov said,
"Russian banks need to change their overall approach and
diversify their business, which is currently focused on
servicing chase flows of a dozen export-oriented
"There is an attitude problem
in Russia that big is good and small is bad," Ruehl
However, he was optimistic
that there was room for both Russian and foreign banks
"Russia's financial needs are
so enormous that there is a niche for everyone, both
Russian and foreign banks," he said.
This view was endorsed by
Renaissance Capital research, which suggested that
encouraging and facilitating greater participation in
the Russian banking sector by foreign banks would, in
the long term, significantly improve the stability of
the sector and potentially ease it out of its present