managers moving into Russia’s formerly uncharted territory turns
into a flood, finance industry experts believe further
strengthening of the country’s legal environment is needed before
private bankers can really flourish. Dan Jones
reports.
Russia, for so long uncharted territory for private banks, is
beginning to gain attention as the increasingly extensive reach of
wealth management begins to carve a niche for itself in the
country. But before the wealth industry can fully flourish in
Russia, private bankers believe a further strengthening of the
Russian legal environment providing certainty for personal assets
must be implemented.
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While the trickle of wealth managers moving into Russia may now be
turning into a flood, the current size of the onshore private
banking industry remains miniscule, with estimates putting the
figure at just $15 billion to $20 billion. Analysts believe this
could eventually rise to as much as $400 billion, surpassing the
$300 billion thought to be held in offshore accounts by wealthy
Russians.
Alexis Rodzianko, head of private banking at Credit Suisse in
Russia, told PBI he expects the onshore industry to “complement”
the traditionally stronger offshore market rather than surpass it
altogether.
Dmitry Paramonov, executive director and head of the Multiple
Family Office at UralSib notes that during the last few years the
proportion between offshore and onshore wealth has been changing,
with the tendency towards moving onshore.
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By GlobalData“This is largely due to significant risk appetite and an investment
portfolio structure of wealthy Russians which is dominated by
private equity projects,” Paramonov says. “Handsome returns and
understandable risks have made the home country more attractive in
terms of investments.”
In the current environment it is no surprise to hear private
bankers suggest risk is the current watchword – but in Russia it is
not risk return but “legal risk and property risk” that could come
to define the success of wealth management operations there.
New Russian President Dimitri Medvedev has made sizeable promises
regarding the independence of the judiciary and the intention to
transform Moscow into a global financial centre, but for private
bankers in Moscow the issue is how long the gap will be between the
statement of intent and actual execution.
Still, the Russian wealth industry remains positive, confident the
record number of millionaires in Russia – estimated to stand at
some 130,000– will continue to fuel a private client boom. Indeed,
wealth creation is not just flourishing among those who have made
their money in commodities; service industries, telecoms and the
retail sector all now contributing. Expectations that numerous
large retailers will go public in the near future may provide a
boost to a Russian IPO market that has shown signs of weakening in
recent months.
Rodzianko also expects “growing participation by our clients in the
services offered by our investment bank” following Credit Suisse’s
establishment of a “much stronger” local brokerage presence in
Russia.
“Clients tend to focus on Russia for their direct investment. This
is where they live, where they know the rules of the game and see
the highest gains for themselves,” he says.
As with their customers, most Russian institutions similarly have
little presence outside their native land; this internal focus
means it is unsurprising that Credit Suisse sees domestic players
as a major competition.
Ruben Vardanian, chairman of Troika Dialog, the oldest investment
bank in Russia, has said that Troika has 1,000 private banking
clients. UralSib, formed from the merger of five banks in 2005 and
operating in the wealth sphere under the name UralSib Bank 121,
says it has 2,000 clients and $1.2 billion in assets under
management, making it the largest private wealth management firm in
the country.
Other banks in Russia include HSBC, which has a representative
office, Deutsche Bank and Société Générale, which has a presence
via Rosbank, the Russian institution in which SocGen now has a 50
percent plus one share stake.
There are also a large number of ‘suitcase’ private bankers, who
jet in regularly to make client calls and rustle up new business.
UralSib’s Paramonov says one of the central Moscow hotels often
looks like “a private banking lobby” due to its popularity among
private bankers for arranging their meetings there.
He sees European banks striving to become “full-scope” players in
the onshore sector as the major competitive threat and, to a lesser
extent, US institutions which focus predominantly on onshore
wealth. But he confesses both camps “are very well positioned to
become the industry leaders due to superior technology which I
regard as an important competitive advantage”.
Among domestic competitors, Paramonov says that players like Troika
Dialog and Rennaisance Capital, which still focus on selling
in-house asset management products have a “pretty big market
share.” But he doubts their growth of the last few years will
remain as “beneficial” in the long run.
He adds: “I expect Sberbank and VTB might increase their market
shares significantly during the next two years, based on the huge
resources of the banking sector leaders and the new teams which
have joined the banks recently to develop the wealth management
business.”
At Credit Suisse, Rodzianko believes his bank’s strength is that
private banking remains its key offering, saying: “There aren’t
many banks in the world where private banking is the core
business,” he asserts.
The next phase of Credit Suisse’s operation will be an extension of
its range of service offering, including lending services which are
expected to be an attractive business in the future and “for which
we are very well positioned. Credit is definitely required; we have
done some transactions mostly out of Switzerland, and expect to
start lending from the Russian platform in the near future”.
While the outlook is positive, client numbers in Russia as a whole
remain very low. A PricewaterhouseCoopers study of the Russian
private banking market (see table above) show that private banks
have yet to make significant inroads into capturing the wealth of
those 130,000 dollar millionaires estimated to reside in the
country.
