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RUSSIAFINANCIAL TIMES SPECIAL REPORT | Wednesday April 27 2011
www.ft.com/russia2011 | twitter.com/ftreports
InsideSiberia waits for thawTheregionneedshelp togrowfrom itsneighbour on the otherside of the Amur riverPage 2
Horticulture A formersugar trader hasplanted success in anunfriendly climate forbusiness Page 2
Financial reformEfforts to raise thecredibility of thefinancial system arebeing stepped up, aspart of a plan to bringmoney back into thecountry Page 2
Politics Formersoldiers and spies, thesiloviki or “strongguys”, are no longer infavour at the heart ofthe government Page 3
Banking Lending is upacrosstheboard,thoughfrom alow base,but
foreign and privatebanks are finding ithard to compete withthe statebackedinstitutions Page 3
Economy Policymakersare starting to grapplewith a distinct lack ofoptions, as voters lookbeyond the current highoil prices Page 4
Wealth managementThe prospect of greaterpolitical stability isstarting to change oldhabits that have seenRussia’s wealthy tendto keeplargeamountsof theirmoneyabroadPage 4
Rivalry at the top causes unease
Mikhail Osokin,anchor of ano p p o s i t i o n -oriented news
programme on Russian tele-vision channel REN TV,says he can reliably tell anelection is coming by thetone of the government’scalls to him and his editorsfollowing his shows.
“It’s an atmosphere, likea feeling on your skin,” hesays. “In an election year,there is a chill. Everyone isa little more nervous. Andthis year, everyone is alittle more nervous than inmost election years.”
Russian journalists arelike canaries in a coal mine– the first to feel a changein the political atmosphere.And what is making peoplejumpy this time is that,with less than a year beforethe 2012 presidential elec-tion, the outcome is not yetwidely known – which isunsettling in a country thatprizes predictability.
The main question is nolonger whether DmitryMedvedev will stay for asecond term, or whetherVladimir Putin will returnto the presidency from hiscurrent role as prime minis-ter – this has always beentempered by the widelyheld view that, whateverhappens, it will be part of awell-rehearsed plan decidedin the smoky back rooms ofthe Kremlin, a stitch-upbetween the two men.
Now, however, the uncer-tainty is over whether thereactually is a plan, orwhether the outcome willbe left to the personalambitions and relativepower of each man and hisentourage.
“I really don’t think they[Mr Putin and MrMedvedev] know who isgoing to be president,” saysMr Osokin. “And no oneelse knows either.”
Over the past month, MrMedvedev has begun layingmarkers for his own presi-dential ambitions, to theobvious displeasure of hispredecessor, sparking talkof a rift between the two.
In March, Mr Medvedevchastised Mr Putin, callinghis remarks on the Libyanwar – which the latter hadcompared to a crusade –“unacceptable”.
Then, in April, he forcedone of Mr Putin’s mosttrusted lieutenants, IgorSechin, a deputy prime min-ister, to step down from hispost as chairman of Ros-neft, the state oil company,with a decree prohibiting
ministers from holdingseats on the boards of statecompanies.
On April 12, he issued hisboldest statement yet, indi-cating that he could stayon. “I do not rule out that Iwill run for a new term aspresident. A decision willbe made, moreover, in thefairly near future, becausethere is less than a yearremaining,” Mr Medvedevtold Chinese state TV onthe eve of a visit to Beijing.
Mr Putin, meanwhile,seems to be pushing backagainst Mr Medvedev’spugilistic tone. The dayafter Mr Medvedev’s chal-lenge, Mr Putin told jour-nalists that either of themcould still run in 2012, andit was too early to makeany announcements aboutthe election.
Infighting in the Kremlinis nothing new – WinstonChurchill famously com-pared Soviet politics towatching “bulldogs fightunder a carpet”. And read-ing the tea leaves today isreminiscent of Cold Warstyle Kremlinology, whenarmies of CIA analysts,with little else to go on,pored over the seatingarrangements of the MayDay parade bandstand.
One official close to MrPutin cautions journalistsabout making too much ofthe recent squabbling –both the prime minister andthe president have an inter-est in keeping everyoneguessing, he says.
The moment one of thembecomes the candidate, thepower of the other would bereduced. “Neither wants theother one to be a lameduck,” he points out.
But there are signs thatthe uncertainty is having areal effect. Despite near-record prices for oil and aseemingly healthy econ-omy, nervous Russianshave taken a net $21bn outof the country in the firstquarter, according to thecentral bank
Meanwhile, when MrMedvedev and Mr Putinpublicly disagreed over thewar in Libya, parliamentarydeputies tried to avoid tak-ing sides, perfecting the artof “sitting on two stools”,as the Russian saying goes.
Most people still believethat the decision on thepresidency rests with MrPutin “but it’s not clearthat he wants it”, accordingto the editor of a Moscowdaily newspaper. “There isa view that he is just tiredof the whole game.”
There is more to Russianpolitical life, though, thanwhat happens inside theKremlin. There are increas-ing signs that the electorateis fed up with the twochoices on offer. A study bythe Center for StrategicResearch, a think-tank with
close links to the UnitedRussia political party, saysfocus groups haveexpressed increasing disap-proval of the ruling duo.
“The change in the politi-cal consciousness of Rus-sians that has occurred inrecent months is not onlydiminishing confidence inthe Putin-Medvedev tan-dem, but fuelling demandfor a new leader, a thirdleader,” the report says.
The rise in discontent is aconundrum. The price ofoil, the usual barometer ofRussian economic health, isabove $120 a barrel andclimbing. Inflation is nearits lowest in two decades,though rising. Bank creditis growing, and depositshave surged 30 per centsince the crisis two yearsago, a sign of renewed con-fidence.
Investment is also grow-ing. Officials say their goalis to raise investment as apercentage of GDP from 20per cent now to more than30 per cent over the nextdecade, chiefly by attract-ing foreign investment.
Recent deals have under-lined this, such as PepsiCo’sacquisition of Wimm-Bill-Dann, and the announce-ment of a $10bn govern-ment fund to invest along-side foreigners in privateequity-type deals.
“We need to makeprogress in improving theinvestment climate,” saysArkady Dvorkovich, aKremlin economic adviser,who calls a trend towardsliberal economic reforms ”avery positive signal”.
He recently met westernbankers and economists tohear their views on whatRussia can do to make itselfmore attractive to foreigninvestors, in an openness toforeign opinion not seen foryears.
However, one key indica-tor is doing badly – realwages, which doubled inless than a decade under MrPutin until 2008, but have
barely risen in the past twoyears.
Yitzhak Brudny, a Russiaspecialist at the HebrewUniversity of Jerusalem,says the rising discontentindicates that Mr Putin is avictim of his own success.In the Putin years, Russiansbecame used to steadilyimproving living standards.
“[Former President Boris]Yeltsin put expectationsdown, so it was easy for MrPutin to meet them in hisfirst years,” he says. “Now,expectations are muchhigher.”
Much of Russia’s mood ofprotest is being funnelledinto ethnic nationalism: in
December, Moscow wit-nessed the largest violentdisturbances since 1993, asskinheads rioted outside theKremlin walls on ManezhSquare. A poll in Januaryby the Levada Center, asociological researchagency, showed that 58 percent of Russians supportthe slogan “Russia for theRussians”, the highestnumber since data began tobe collected in 1998.
It is difficult to predicthow the new protest moodwill affect calculations inthe Kremlin. Mr Medvedevhas been positioning him-self as the candidate for thedisaffected, but his appeal
is limited to a narrow lib-eral audience. Further dis-order and a descent intonationalism would favourthe return of Mr Putin.
The Kremlin, long used tothrowing money at prob-lems – Mr Osokin calls thepractice “stuffing people’sopen mouths with cash” –has found that thisapproach may for the firsttime spawn more inflationand ultimately be counter-productive.
“They can’t step into thesame river twice,” says MrBrudny. “There is a realsense that they havealready tried everything,and are out of ideas.”
Charles Clovernotes the changein atmosphere inthe runup to anelection whoseoutcome is unclear
Eyes on the presidential prize: Dmitry Medvedev (left) has recently been laying the ground for his candidacy, while Vladimir Putin insists it is too early for an announcement about next year’s election Reuters
Putin seemsto be pushingback againstMedvedev’spugilistic tone
Success in ‘near abroad’is main achievement
Foreign policy is an areawhere Russia’s presidentDmitry Medvedev andprime minister VladimirPutin have clashed inrecent weeks.
But analysts suggest that,while the clash, after MrPutin likened western airstrikes in Libya to medieval“crusades”, may havereflected genuine differ-ences of opinion, it did notsignal any change in Mos-cow’s more pragmatic for-eign policy line.
Russia’s decision toabstain at the UnitedNations over the resolution
allowing western action inLibya, rather than wield itsveto, is the latest evidencethat foreign policy, like theeconomy, has entered anew, third phase in thecountry’s post-Soviet his-tory.
The 1990s saw Russiaattempting to put relationswith the west on a newfooting, but experiencing alarge decline in influence.
The next decade, underMr Putin’s presidency, sawa more aggressive Russiaattempting to claw back itslost clout. The culminationof that second phase wasRussia’s 2008 war in Geor-gia.
While the interventiondrew condemnation in thewest, it achieved theunstated aim. Russia’s inva-sion persuaded members ofthe North Atlantic TreatyOrganisation to think hardabout the consequences ofadmitting Georgia, or
Ukraine, to membership ofthe military alliance. Itpushed any such plans offthe west’s agenda for thetime being.
“Since 2007-08, Russia hasreached a level where it issatisfied with its greatpower status. It wants tokeep on enhancing it, toplay the games, but it isn’trevisionist any more,” saysSergei Karaganov, head ofRussia’s Council for For-eign and Defence Policy.
The global financial crisisalso forced Russia torethink foreign relations.
As made clear by a leakedforeign ministry documentlast May, confirmed in aspeech by Mr Medvedev inJuly, its new approach is touse foreign policy to furtherRussia’s goal of modernis-ing its economy.
Moscow should have “nofriends, or enemies, onlyinterests”. It should form“modernising partnerships”
with countries such asGermany, France, Italy andthe US.
“If you think that over-coming your backwardnessis your most importantchallenge, then your foreignpolicy is a facilitator,” saysDmitri Trenin, director ofthe Carnegie Moscow Cen-tre.
There had been signals ofa new approach well beforelast summer, aided byWashington’s “reset” ofrelations. “It very muchhelped that Barack Obamawas elected president,” saysMr Trenin. “It removed allthe main irritants.”
Russia’s own “reset” ofits external relations had
Foreign policyModernising theeconomy isthe new focus,says Neil Buckley
Trenin: help from US ‘reset’
Oil and gasBold foreigninvestors arefunding riskierexplorationPage 4
2 ★ FINANCIAL TIMES WEDNESDAY APRIL 27 2011
Russia
Success in the ‘near abroad’
seen it resolve a 40-yearmaritime border disputewith Norway and embarkon a historic rapproche-ment with Poland.
This strengthened afterApril’s Smolensk air crashin which Poland’s presidentLech Kaczynski died alongwith many senior figures.
Yet some question howmuch Russia can gain fromits new policy. Local com-mentators point out thatprevious phases of post-Soviet policy began withattempts to build partner-ships with the west.
President Boris Yeltsin inthe early 1990s sought anew start, but Nato pushedahead, against Russia’swishes, with expansion intothe former Soviet bloc.
Similarly, President Putinwas the first foreign leaderto phone US presidentGeorge W Bush after the9/11 terrorist attacks in2001. He quickly allowedthe US to use bases informer Soviet republics tosupport its invasion ofAfghanistan.
Yet according to the Rus-
sian narrative, the USsnubbed Mr Putin’s initia-tive, withdrawing monthslater from the 1972 Anti-Ballistic Missile treatyagainst Russia’s objectionsand later backing “col-oured” revolutions in Geor-gia and Ukraine.
Alexei Pushkov, a foreignrelations professor andpresenter of a political TVshow, says that othercountries’ decisions onwhether to co-operate com-mercially or invest in Rus-sia depend little on politicalrelations.
Foreign investment, headds, peaked in 2007-2008,when talk of a “new ColdWar” was at its height.
“Following the end of theCold War, you can have acomplex political relation-ship, and business ties don’tdepend on this,” he says.
Mr Pushkov suggests theUS “reset” is a tacticalmeasure aimed at securingRussian support for futureaction against Iran, andcould easily be reversed.
There is also the questionof how much the west isprepared to allow Russiaa “sphere of privileged
interest” in the formerSoviet republics.
While the US and allieshave been embroiled in Iraqand Afghanistan, Russiahas made big progress inefforts to reassert influencein its “near abroad”.
President Mikheil Saa-kashvili, leader of Georgia’s2003 Rose Revolution,remains in power. ButUkraine’s 2004 Orange Rev-olution has in effect beenreversed, with the electionof Russia-leaning ViktorYanukovich – defeated can-didate in 2004 – as presidentin February last year.
Russia has recently beenpushing Ukraine to join acustoms union it launchedlast year with Belarus andKazakhstan.
Kyrgyzstan, which has amore pro-Russian adminis-tration after KurmanbekBakiyev, president since a2005 revolution, was oustedlast year, formally appliedto join the customs unionthis month.
Little by little, Russia isrebuilding relations, notjust with the west but withmany of its former Sovietneighbours.
ContributorsCharles CloverMoscow Bureau Chief
Neil BuckleyEastern Europe Editor
Isabel GorstCentral AsiaCorrespondent
Catherine BeltonMoscow Correspondent
Rachel MorarjeeFT Contributor
Rohit JaggiCommissioning Editor
Steven BirdDesigner
Andy MearsPicture Editor
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Continued from Page 1
Sugar trader comes up roses in an unfriendly climate
Deep in the Russian country-side, the white hothouse mergesinto the snow, concealing theforest of exotic roses inside.
“In a way it’s crazy to growhothouse flowers in the cold,”says Florence Gervase d’Aldin,the French founder of FeyaRoza (Rose Fairy), the horticul-tural company that has intro-duced rare garden roses to Rus-sia. “If I had understood what itwould mean, I would have beenafraid.”
Russia is the world’s sixth big-gest market for cut flowers,
importing about $2bn worth ofblooms a year, mainly fromindustrial growers in Kenya andSouth America.
But frail garden roses cannotbe carried across long distances,because they wilt within threedays of being cut. Voluptuousand highly perfumed, these rareflowers caught on quickly inMoscow when Feya Roza begantrading in 2008. Clients includea string of luxury florists,Chanel, Cartier and the resi-dence of Dmitry Medvedev, theRussian president.
A love of flowers is embeddedin the Russian culture, reflect-ing a yearning to escape fromthe long colourless months ofsnow. So, when Ms Gervased’Aldin grew tired of her careertrading sugar in Russia, theflower business seemed like abright idea.
“I was bored,” she says.“Someone suggested rose-
growing and I just switched on.”With financial backing from a
group of Russian and foreigninvestors, she began searchingfor land, eventually choosing aplace in the Kaluga region,250km south-west of Moscow.
There is no tradition of agri-culture in Kaluga, let alone thescientific horticulture that isrequired to grow hothouse flow-ers. But the local authoritieshad a reputation for opennesseven to experimental investors –Volkswagen and Peugeot havevehicle assembly plants in theregion and a local oligarch istrying to grow Aberdeen Angusbeef.
Rural land is cheap in Russia,but Ms Gervase d’Aldin agreedto pay above the market pricefor a 15-hectare plot outside thetumbledown village of Babulinoto ensure her hothouse wasguaranteed water and electricitysupplies. While many foreign
investors give top jobs to expa-triates, she hired aRussian manag-ing directorwith close tiesto the Kalugaauthorities.
“It is impor-tant to have alocal network. Idon’t have any prob-lems with bribes. Idon’t have prob-lems with sud-den inspec-tions,” shesays.
So far,F e y aRoza hasi n v e s t e dabout €6mmainly onimportedt e chno l -ogy, in-
cluding a hothouse equippedwith irrigation and heating sys-tems. Meilland, the French hor-ticultural company, supplies anever-changing selection of rosesthat are bedded down inside,filling the air with their headyscent.
Most educated Russianshave fled the countryside to
find a better life in the cit-ies and Feya Roza
faces a continualstruggle to findand train horti-cultural staff.Garden roseslook natu-rally beau-tiful in a
vase, butthey areg r o w na r t i f i -
HorticultureIsabel Gorst describeshow an unlikelycommercial ideahas flourished
A love of flowers is inthe culture, reflectinga yearning to escapethe long colourlessmonths of snow
Siberia waitsfor a thaw inborder policies
Across the Amur river thatdivides Russia from China,dark streaks of water run inpatterns across the ice as
spring comes to the Siberian city ofKhabarovsk.
The thaw is bad news for Russia’seconomy but good news for VovaLosev, who works for a trading com-pany that shuts down during thespring and autumn when the ice istoo unstable to bear the weight oftrucks but still thick enough toobstruct the passage of boats.
“We have two months a year wherewe can’t get much done, but it’s niceto have a break from the phone ring-ing day and night,” says Mr Losev, ayoung Russian who works in neigh-bouring China.
Along a 3,279km stretch of borderfrom Grodekovo near Vladivostok toZabaikalsk near Lake Baikal, thereis not a single crossing that ispassable all year, hampering thegrowth of trade between resource-richRussia and the booming Chinese econ-omy.
That should change this year, withconstruction of a railway bridgeacross the Amur river to connectthe steel mills of Heilongjiang innorth-eastern China with the iron oredeposits in Russia that they need torun.
The bridge will be paid for by boththe Chinese and Russian governmentsand by IRC, a Hong-Kong-listed min-ing company that operates the Kim-kanskoye and Sutarskoye (K&S) ironore field at the Russian end of therailway line.
“We know that Russia needs to co-operate with another country to openup its far east. The natural partner isChina, which has far more financialresources than either Japan or SouthKorea,” said Boris Krasnojenov, met-als and mining analyst at RenaissanceCapital.
The region’s key challenge – andone it shares with developing coun-tries with natural resources from
Africa to Mongolia – is infrastructure,says Mr Krasnojenov. And China hasthe funds to solve the problem.
China is keen to solve that problemto ensure it gets vital resources topower its economy. The projectfinancing for IRC’s K&S project wasarranged by China’s ICBC bank andthe China National Electrical Engi-neering Company (CNEEC), whichwill build the iron ore processingplant.
At the K&S field, a drill is boringholes to fill with dynamite, and thewhite powdery explosive dusts theground around the machine ready toblow a hole in the earth that willexpose the iron ore beneath.
“We use Chinese workers to developthe mine. It’s a win-win for every-body,” says Svetlana Kostromitinova,a mining analyst with Petropavlovsk,which owns a controlling stake inIRC.
Ms Kostromitinova has identifiedthe other key challenge confrontingofficials trying to develop the remotebut resource-rich Siberian forestwhich borders China – a lack of peo-ple.
With thousands of miles of unex-plored forest and snowy tundra,Russia’s far east is sparsely popu-lated. It has only 6.7m people spreadacross its vast area, or roughly oneperson a square kilometre, comparedwith 84 per sq km in the Chineseprovince of Heilongjiang across theAmur river.
“There is enormous potential here,but the key challenge is to find thepersonnel you need to open up theregion,” says Ken Tocker, productsupport manager at Amur Machineryand Services, a subsidiary of Caterpil-lar of the US, which supplies thetrucks, drills and diggers that powerthe mining, timber and constructionindustry in Russia’s far east.
In two decades of working for Cater-pillar in 20 countries, Mr Tocker saysthis is the toughest posting he hashad. He has tried to recruit peoplefrom central and western Russia towork there and failed. “It’s practicallyimpossible,” he says.
Despite the lack of manpower ineastern Siberia, however, Russia hasnot made it easy for Chinese citizensto emigrate and work in the region.
Russians can cross the Amur riverfrom the border city of Blagovechensk
to the Heihe free-trade zone, on theopposite side, without a visa. But Chi-nese are not able to make the samejourney travelling in the oppositedirection.
Meanwhile, in the Russian city ofKhabarovsk, a 18-hour train ride awaythrough the dense birch and cedarforest known as the taiga, the authori-ties reduce the populations of Chinesemigrant workers by carrying out spotchecks and deporting those caughtwithout papers.
But without Chinese labour theregion will languish.
Dr Pavel A Minarkir, director of theRussian Academy of Sciences FarEast branch, says that the region’s
best hope is to align more closely withits Asian neighbour.
“We are not Europe and we are notAsia, but the political obstacles to acloser economic relationship withnorth-east Asia are far lower thanthose standing in the way of integra-tion with the European Union,” DrMinarkir says.
China’s projected growth of 7 to 9per cent a year is correlated with steeldemand, so iron ore is a vital elementsupporting the Chinese economy.
The countries remain locked in atight but uneasy embrace. But forSiberia, Chinese money and workerswill be vital to push the economy for-ward.
ChinaRussia relationsA sparsely populatedregion needs its neighbour,says Rachel Morarjee
Difficult crossing: the Amur is impassable two months of the year Alamy Images
Financial reform Rise in credibility is overdue
To many foreign investors, PresidentDmitry Medvedev’s plans to transformMoscow into an international financialcentre able to compete with otherregional hubs look like little more thana pipe dream, writes CatherineBelton.
With a corrupt judicial system andmany other investment risks, mostRussian companies seek to raise longterm capital on internationalexchanges. Most of Russia’sbillionaires also keep their fortunesoffshore, while Moscow’s financialinfrastructure lags far behind the restof the world.
But this year, at the Russianpresident’s bidding, the governmenthas begun taking concrete steps tocreate a financial system that is notso easily buffeted by global financialshocks, as Russia seeks to diversify itseconomy away from commodities.
“There is a growing realisation in thegovernment that some kind ofenduring reform of the financial andjudicial system is needed, becausecurrently the rate of capital outflow isunsustainable,” says Chris Barter, cochief executive of Goldman Sachs inRussia.
Outflows hit $21bn in the firstquarter of the year. That continued atrend begun in September, which sawabout $3bn in net outflows per week,as jitters grew over political stabilityand possible tax rises.
However, in recent months MrMedvedev has begun stepping upefforts to boost the credibility of thefinancial system. In March, he calledfor all companies and regulators toadopt international financial reportingstandards. He also signed off on adecree to merge two financial marketwatchdogs.
Moscow’s two exchanges, the RTSand the Micex, are also to merge aftermonths of negotiations in a move thatshould simplify market infrastructure,while the Kremlin has studded anadvisory council for financial centrereform with leading lights of theinvestment banking world, includingLloyd Blankfein, chief executive ofGoldman Sachs, Jamie Dimon ofJPMorgan Chase and SteveSchwarzman, cofounder ofBlackstone.
But the government needs to do agreat deal more if Russia is ever goingto have a thriving financial centre ofits own and bring back any of thehundreds of billions of dollars held byRussian tycoons in Swiss bankaccounts, bankers say.
“A lot of oligarchs say they arehappy to make money in Russia,because the return on capital is muchhigher. But once they’ve made it, theywant to bank it offshore,” saysanother senior western banker.“Whether this situation changes willdepend on whether a lot of institutions
improve, including whether there is acredible judicial system.”
One big step towards boosting thestability of the financial infrastructurewould be to bring a large part of thecredit market onshore, bankers say.
Currently, many Russian tycoonsborrow money by pledging shares inRussian bluechip companies againstloans – a practice known as “marginlending”. However, it brought thecountry’s bourses to a halt in autumn2008, when margin calls on loansexacerbated already falling marketsand caused the regulator to shut downthe markets or face a total meltdown.
“It is an offshore market because noone believes in enforceability onshore,”says Mr Barter. “It is challenging toregulate offshore leverage and hencemonitor its future impact on themarket.” That means Russianexchanges could easily face a repeatof the credibilitydamaging “deathspiral” of 2008.
But to bring margin lending onshore,contracts need to be enforceable,which means “you need to have anarbitration system that works”, MrBarter says.
Russia would also need to deepen
its own pool of domestic capital byfinally embarking on pension reform, apolicy likely to be delayed beyondpresidential elections next year,analysts say.
Another helpful step would be forthe Russian government to use aRussian exchange rather than Londonto sell some of the state assets underits $30bn privatisation programme.
In the background, leading Russianlawyers are working on ways to boostthe credibility of the legal system.Dimitry Afanasiev, chairman of Egorov,Puginsky, Afanasiev and Partners, sayshis firm is heading a group working onrewriting the civil code to improve theenforceability of contracts and bringRussian legislation in line withinternational standards.
“Unless we start using Russian lawon major deals, the legal system willnever improve and it is a viciouscircle,” Mr Afanasiev says. “Otherwise,there will be no pressure on thecourts to improve and the legalsystem will remain inefficient.”
But whether progress is made ornot could depend on whether soaringoil prices sap the government’s sensethat it needs to act. “This is a realconcern,” a banker warns.
‘Unless we startusing Russianlaw on majordeals, the legalsystem will neverimprove’
Dimitry Afanasiev
cially on a diet of mineral nutri-ents drip fed into “hydroponic”gravel beds. “We made a lot ofmistakes at first,” says MsGervase d’Aldin. ”If you getthings wrong with roses, theydie. It’s much more difficultthan sugar trading where prob-lems are solved by phone.”
Another challenge is thatenergy prices have been deregu-lated this year causing the hot-house electricity bill to soar andworkers to demand higherwages.
“Nothing is done to help smallbusinesses in Russia,” she says.
Feya Roza sells about 2,000roses a week in Moscow and 10times that amount aroundnational holidays.
Demand for flowers in thecapital is recovering from a fallduring the crisis, but it is stilldifficult to find reliable retailpartners to care for the rosesand charge reasonable prices.
Business hothouse:Florence Gervase d’Aldin
FINANCIAL TIMES WEDNESDAY APRIL 27 2011 ★ 3
Russia
Statebacked groups distorta slowly recovering sector
From his corner office onthe 57th floor of the Federa-tion Tower in the ultra-modern Moscow City busi-ness complex, the view forAndrei Kostin, chief execu-tive of state-controlled VTBbank, seems limitless.
After the financial crisissent its accounts into thered, Russia’s second-biggestbank expects to reportrecord profits of $1.7bn for2010.
On the promise of a con-tinued surge in profits, VTBsold a 10 per cent stake toinvestors for $3.3bn in Feb-ruary. Now it has justnailed a big new acquisi-tion, a controlling stake inBank of Moscow, which willgive it access to 9.5m addi-tional depositors in Mos-cow’s lucrative market.“Now I’m thinking: what’snext?” Mr Kostin says.
For many Russian banks,the recovery from the 2008and 2009 financial crisis,which wiped out profits andall but paralysed lending, iswell under way. Russia’scentral bank forecasts 20per cent lending growththis year after total lendingrose 12.6 per cent last year.
Profits are up across theboard, with net profit forthe entire sector nearly tri-pling last year to $19.5bn aslending recovered, accord-ing to the central bank.
But the huge surge inprofits comes from anextremely low base. Mean-while, lending growth –even if it hits 20 per centthis year – is not sufficientto fuel a much-neededdeeper economic recoveryin sectors outside commodi-ties, say bankers and ana-lysts.
“Lending is picking up,but it is still lower thanbefore the crisis. There isstill a lot of uncertainty,”says Ekaterina Trofimova,bank rating director atStandard & Poor’s. “GDP is
picking up in Russia, but itis mainly driven by high oilprices and commodities,while many other sectorsfeel pretty bad.”
Oleg Vyugin, chief execu-tive of MDM Bank, one ofRussia’s biggest privatelenders, says he expectslending growth this year tobe 10 to 15 per cent – lowerthan the central bank fore-cast.
“In reality, only very fewbanks are stepping up lend-ing, especially the stateones,” Mr Vyugin says.“For now, the economy isgrowing at extremely meas-ured rates and investmentis also growing slowly.
“On the one hand, thereis no big demand for bankloans, and on the otherbanks don’t want to givecredit to companies thathave low demand for theirproducts.”
Even though S&P esti-mates that problem loans –including restructuredloans and foreclosed assets– across the sector havefallen from 40 per cent atthe height of the crisis to 25per cent, this figure is stillhigh enough to make manybanks think twice beforeextending new funds tosmall and medium-sized
enterprises, Ms Trofimovasays.
Despite high oil prices,the Russian economyappears to be struck by acrisis of confidence, withmany jittery about the glo-bal economy and the politi-cal situation at home.
Andrei Klepach, the dep-uty economy minister, thismonth decried a “big break-down” in investment in thefirst two months of theyear, causing the ministry
to cut its forecast for invest-ment growth this year from9 to 6 per cent.
Oleg Danilin, head ofbanking services in Moscowfor Ernst & Young, the con-sultancy firm, says manyRussian banks beingpressed by investors toincrease profits are concen-trating on giving short-termfunds to well-known bor-rowers rather than provid-ing much-needed project
finance for new equipmentand production capacity.“The biggest unsatisfieddemand is for projectfinancing,” he says.
Mr Vyugin agrees: “Atthe moment, all the banksare chasing the same well-known borrowers.” Forthose low-risk borrowers,state banks are able to pricemany privately owned com-petitors out of the market,after receiving huge capitalinjections from the state.
Many foreign banks arealso feeling the squeezefrom the increasing domi-nance of the three mainstate banks – Sberbank,VTB and Gazprombank –which now account forabout 60 per cent of thecountry’s banking assets.
“It used to be hard forRussian banks to competewith foreign bank lending.Now it’s the reverse,” saysBob Foresman, head of Bar-clays Capital in Moscow.
Moves by regulators inthe west to enforce morestringent regulations oncapital ratios haveincreased the cost of of cap-ital for western banks, hesays.
“For the biggest transac-tions, Russian corporatesstill require foreign bankparticipation.”
Indeed, the growing reachof the likes of VTB isprompting fresh fears thattheir domination may even-tually lower the quality ofrisk management.
“The growth of the statein the sector is a movementbackwards,” Mr Vyuginsays. “Only fair competitioncan guarantee the growingquality of services.” Privatelenders could be squeezedout of the market, he adds.
Ms Trofimova of S&Psays: “There is still roomfor private banks, becausethe level of intermediationin the economy is still nothigh. It’s still not critical.But as the state banksgrow, the problem willbecome sharper.”
Mr Kostin, however, isunrepentant. Referring toVTB’s recent acquisition ofBank of Moscow, he says:“It is not the case that we,the grey wolf, VTB, gobbledup the white lamb.”
BankingPrivate and foreigngroups find it hardto compete, saysCatherine Belton
‘Only very fewbanks arestepping uplending, especiallythe state ones’
Acquisitive: VTB has bought into Bank of Moscow Bloomberg
Shift in focus puts former spies out in the cold
Flipping through a sheafof papers with a breezyair, Arkady Dvorkovich,a bookish-looking Krem-
lin economic adviser, beganreading a list of names at apress conference on March 31.
Suddenly, muttering in theaudience stopped. Then jawsstarted to drop, eyes widened,and Mr Dvorkovich had every-one’s full attention.
Some of the most powerfulnames in Russia were on thatlist: ministers, deputy primeministers, all were being told bypresidential decree that theymust step down from the boardsof state-owned companies theyhad in effect run as fiefdoms foryears, to be replaced by inde-pendent state representatives.
Then Mr Dvorkovich came toone name in particular. “Ros-neft – Sechin,” he said and,without pausing, hurried on.
Igor Sechin, deputy primeminister, and until recentlyreckoned to be the third – oreven the second – most powerfulman in Russia after Prime Min-ister Vladimir Putin, was beingtold he must step down as chair-man of the board of state oilcompany Rosneft.
After the economic adviserwas finished, the assembledjournalists erupted in franticchatter. What was going on?
Mr Dvorkovich, a DukeUniversity-educated intellectual,known principally for his ency-clopedic statistical memory andformidable chess skills, wasfiring Mr Sechin, who has beendubbed in the Russian press the“Darth Vader” of the Kremlin,and whose biography reads likethat of a John le Carré villainexcept a lot more vague?
Mr Sechin, a former “militaryinterpreter” in Angola in the1980s, had formerly epitomisedthe rise of Russia’s officer casteinto politics, the now ubiquitoussiloviki, literally, the “strongguys”. The word refers to agroup of former spies, securitymen and soldiers who flooded
into power with Vladimir Putinwhen he assumed the presi-dency in 2000.
But now, after a decade inpower, they may be on theirway out, and their influentialrole is increasingly being takenby their counterparts, gleefullydubbed the slaboviki (weakguys) in the Russian press –former economists, lawyers, andbankers whose liberal viewsincreasingly seem to triumphover the statist conservatism ofthe Kremlin’s former hierarchs.
“The numbers tell the story,”says Olga Kryshtanovskaya, asociologist and member of theruling United Russia politicalparty, whose academic special-ity is studying trends within theRussian elite.
Her latest research shows thatthe ranks of the siloviki in gov-ernment and state structureshave been thinned by nearlyhalf since the high-water markof 2007, when 67 per cent of the
positions in the executivebranch were filled by formerspies and security men – includ-ing Mr Sechin. Overall, thenumber is now just over halfthat – 36 per cent in the Krem-lin, while in government thesiloviki have fallen from 37 to 27per cent.
“They are uncomfortable inthe role as leaders. It was notsomething they were familiarwith,” she says. “They are usedto the number two or three posi-tion, controlling things frombehind the scenes, serving thestate rather than being thestate.”
The siloviki arrived on thescene in the late Yeltsin years,when the break-up of Russia fol-lowing the first Chechen warwas taken seriously as a threat– some provinces were repudiat-ing foreign treaties, one gover-nor even threatened to takecontrol of nuclear weaponsstationed in his province if fed-
eral budget subsidies were notgranted on time.
But after a decade of rule byMr Putin, first as president, nowas prime minister, the chal-lenges facing Russia are notpolitical stability but economicgrowth, following the collapse of2008-2009. GDP growth is stillsluggish, and real wages havebarely grown since 2008.
“[The siloviki] have fulfilledtheir mission, which was to pre-vent the collapse of the state,”says Ms Kryshtanovskaya,“Now, a new group of people isneeded with new skills.”
It was Mr Putin’s own deci-sion to all but appoint DmitryMedvedev, a lawyer, as his suc-cessor in 2008 that led to theexodus of many siloviki. Thetrend accelerated because of thesputtering economy – which hasbrought about a new wave ofliberal reforms, such as a priva-tisation programme designed toraise $30bn over five years, and
the reform that cost Mr Sechinhis position at Rosneft – alongwith the jobs of 17 other minis-ters.
Mr Medvedev champions adeparture from the cosy statecapitalism that characterisedmuch of the past decade andwas associated with the statistsiloviki. On April 12, he toldjournalists that state representa-tives should no longer be “wear-ing out their pants” on the
boards of state companies, andthat the end of Putin-era statecapitalism is nigh. “Whatworked 10 years ago may notwork today. We need to get usedto a changing world,” he said.
Mr Dvorkovich himself, askedabout the departure of theformer officers from the stateand state structures, said it was“an oversimplification” todescribe this as the fall of thesiloviki. Nonetheless, he said the
PoliticsThe days of the‘strong guys’ holdingthe reins of power maybe numbered, writesCharles Clover
Looking to new skills:Arkady Dvorkovich andDmitry Medvedev AFP/Getty Images
reform of boards of state compa-nies “sends a very serious sig-nal” that Russia is embracing amore liberal governing model.
Another place where liberalsmay be seen making a come-back is in parliamentary elec-tions this year.
Liberals were shut out of par-liament in the 2003 elections,with no liberal party winningenough votes to pass the 5 percent barrier to representation inparliament. But now, the statemay need liberals in parliamentto back economic reforms –“and take the blame for themlater”, jokes Yitzhak Brudny, aspecialist on contemporary Rus-sian politics at the Hebrew Uni-versity in Jerusalem.
One Kremlin official backedthis view when talking to jour-nalists in early April, describingthe possible formation of acentre-right liberal party beforethe elections later this year. “Itis felt that there is a certainvacuum which could be filled bysuch a party,” he said.
Alexander Oslon, a presidentof the Moscow-based PublicOpinion Foundation, a sociologi-cal research agency which hasworked for the Kremlin, like-wise says: “There is a hugenumber of Russians who are notrepresented on the politicalscene. They are the ones whoreact positively to the word‘innovation’; they like theiriPads, they spend a large part oftheir lives on the internet, andspeak some English. These peo-ple exist, and no one expressestheir interests.” However, hedoubts whether such a partycould be formed before theDecember elections.
The balance of the liberalsand siloviki in the governmentcrucially depends on Mr Putin,especially the decision, whichwill be largely up to him, onwhether he returns to the presi-dency in 2012 or allows MrMedvedev another term.
“I don’t think Putin has madeup his mind,” says the editor ofa Moscow newspaper.
But the main argument infavour of a third term is simple:“What else is there for him todo? He cannot simply leave, likeGeorge Bush, and write hismemoirs.”
The ‘siloviki’ in powerPercentage with experience in law enforcement or special services
Source: Olga Kryshtanovskaya * FSB and SVR
YearBranch of power Overall Just special services*
President’s administration
Government
Governors
200720102007201020072010
66.636.437.227.116.67.2
37.325.522.114.17.11.2
4 ★ FINANCIAL TIMES WEDNESDAY APRIL 27 2011
Russia
Policymakers start to grapple with a lack of options
The direction of Russia’s eco-nomic policy has become per-haps the central debate in thecountry today – and one inti-mately linked with the questionof who will be president afternext March’s elections.
The short-term economic out-look is reasonable. A recentsurge in oil prices to above $120a barrel caused by Middle Eastunrest could boost growth thisyear by about 1 percentagepoint from previous forecasts, to5 per cent.
If current prices are main-tained until the end of the year,moreover, Russia’s budget couldbalance, despite big increases inspending in recent years. Thegovernment had planned a defi-
cit of 3.6 per cent of grossdomestic product, assuming anoil price of $75 per barrel.
Inflation, running at 9.5 percent in February, is perhaps thebiggest near-term problem –especially in the run-up to elec-tions, a time when sensitivityamong ordinary Russians to ris-ing prices is particularly high.
Both President DmitryMedvedev and Prime MinisterVladimir Putin have taken stepsin recent months to rein in ris-ing fuel and food prices.
In the longer term, however,Russia’s economic direction isdeeply uncertain. The country’snear 8 per cent contraction in2009 as a result of the financialcrisis – the deepest recessionamong the Group of 20 leadingeconomies – highlighted itsexcessive reliance on oil, gasand metals.
Assuming that oil prices dropback to about $75 a barrel, Rus-sia is unlikely to muster annualgrowth of more than about 4 percent in coming years. That isnot disastrous, but it is well
below many other emergingmarkets, and below the levelsneeded to catch up rapidly withadvanced economies.
It might also not keep pacewith the increases in socialspending and pensions requiredto support its aging population.
In essence, it could representa return to the stagnation thatmany Russians remember fromthe Brezhnev era in the 1970s.
Over the past 18 months, MrMedvedev has associated him-self heavily with the idea thatradical steps are needed to mod-ernise the economy and breakthe reliance on oil. He has calledrepeatedly for Russia to develophigh-technology sectors and amore innovative economy.
He has also founded Skolkovo,a business park outside Moscow,intended to be a kind of test bedfor his economic vision andintended to become Russia’sanswer to Silicon Valley in theUS.
A thinktank linked to thepresident, the Institute of Con-temporary Development, last
month published a 96-page pro-gramme aimed at Russia’s presi-dential election, presenting thedebate in apocalyptic terms.
Russia, it said, did not face achoice merely “between direc-tions in which the country canmove, but rather between thecountry’s future and theabsence of such a future”.
Implicitly backing MrMedevedev, it suggested thatRussian voters next year mustchoose between “the beginningof change and the end of hope,between the future and a newstagnation”.
But Mr Putin, seen as havingmore conservative economicinstincts, on December 30 con-vened his own taskforce toadvise him on policy options. Itis headed by respected liberaleconomists: Vladimir Mau, longan associate of post-Sovietreformer Yegor Gaidar, andYaroslav Kuzminov, rector ofMoscow’s Higher School of Eco-nomics.
Some involved in the task-force and its 21 working groups
suspect that Mr Putin wanted aproper understanding of thechallenges before decidingwhether to run for presidentagain. The taskforce will reportin full this year, and its conclu-sions are expected to be similarto those of the Medvedev-linkedinstitute.
Mr Mau says Russia needs to“understand that the economicpolicy of the previous period isexhausted. We can’t compensatefor the failings of institutionsthrough [spending] money anymore.” There is little room forRussia to improve further theefficiency of its legislation with-out improving the institutionsthat enforce and adjudicate onthe laws, he adds.
Mr Kuzminov says Russia hasno chance of becoming a low-cost manufacturer like China,because wages are too high.
Levels of higher education inRussia – which have increasedsince the Soviet collapse – alsomake Russians unwilling towork in factories. They do, how-ever, provide an opportunity to
develop a more knowledge-basedeconomy.
“Russians, with their high lev-els of education, are not pre-pared to work like robots. Theydon’t want to sit and drive trol-leybuses,” Mr Kuzminov says.
Ultimately, however, simplymaking it easier for existingbusinesses to operate may be asimportant as developing newtechnologies.
Yevgeny Gavrilenkov, chiefeconomist at Troika Dialog, theinvestment bank, says Russiastill has plenty of scope tosecure growth through encour-aging small businesses, andthrough productivity improve-ments in its biggest existingcompanies.
Despite the many obstaclessuch as red tape and corruption,he says, Russia’s economy hasbeen doing a pretty good job at“spontaneous modernisation”,as Mr Gavrilenkov puts it.
He says: “A better institu-tional framework is what isneeded to secure more sustaina-ble, faster growth.”
EconomyVoters are being askedto look beyond thecurrent high oil prices,says Neil Buckley
‘We can’t compensatefor the failings ofinstitutions through[spending] moneyany more’
Vladimir Mau,Economist
Foreign investorsfund venturesinto risky terrain
Total, the French oil group, lastmonth bought a minority stake inNovatek, the Russian gas independ-ent, in a deal greeted as further evi-dence of the Kremlin’s new opennessto foreign energy investors.
It was nonetheless a bold step forthe French company, which has hadits share of setbacks in the quest forRussian oil and gas reserves.
Total agreed to pay $4bn for 12 percent of Novatek and pledged toincrease its stake to 19.4 per centwithin three years, cementing a rela-tionship with the Russian companywhich, although dwarfed by Gazprom,is one of the world’s biggest gas pro-ducers.
In a separate transaction, Totalplans to take a one-fifth share inNovatek’s Yamal liquefied natural gasproject, one of Russia’s most ambi-tious energy schemes.
Political turmoil in the Middle Eastand north Africa has intensified inter-national oil companies’ resolve tomake headway in Russia, whereupstream deals have so far been diffi-cult to win and retain.
For once, there is a confluence ofinterests. Russia wants to remain theworld’s biggest energy producer, butunderstands that it needs help fromforeign oil companies to extend intothe more difficult areas that will sus-tain future growth.
Chris Weafer, chief strategist atUralSib, the Moscow-based invest-ment bank, says: “Realistically, Rus-sian producers do not have the tech-nology or experience to go it alone innew environments such as the Arctic,and therefore need the partnership ofinternational majors.”
Total’s agreement with Novatekwas the third big foreign investmentpact this year for Russia, following aclutch of exploration deals signed bystate-run Rosneft with BP and Exxon-Mobil.
Like the others, Total won the per-sonal blessing of Vladimir Putin, Rus-sia’s prime minister, who oversaw thesigning of the agreement withNovatek at his mansion outside Mos-cow.
On the surface, the oil industryappears to be flourishing in Russia,where production rose last year to apost-Soviet record of 10.1m barrels aday. But the gains mask an accelerat-ing decline in west Siberia, the most
prolific oil province, that is forcinginvestors to venture into even moreremote and difficult terrain. Russiahas vast gas reserves but needs tomove ahead with difficult Arctic LNGprojects that will help globalise its gastrade.
Rosneft has been the biggest benefi-ciary of a seven-year bout of resourcenationalism in Russia that nowappears to have run its course. Thestate oil company snapped up assetsas the Kremlin dismantled the Yukosoil corporation in 2004-05 and wonrights to strategic oilfields legallybarred to foreign investors.
Gazprom also took advantage of thetimes, muscling Shell out of the leadrole in the Sakhalin II project in 2007,thereby securing a stake in the flag-ship LNG project that has allowedRussia to diversify into Asian gasmarkets.
Russia is opening its doors to for-eign companies to help sustain pro-duction in the longer term, but willoffer only “a specific opportunity set”,including LNG and Arctic and fron-tier exploration, says Hilary Cameron,principal upstream analyst at WoodMackenzie, the Edinburgh-based oilconsultancy.
“Russia is offering things that havenot been tackled on a large scale sofar. Foreign majors can bring newtechnology and skills which Russiancompanies want to acquire.”
Outside investors will ease thefinancial burden of inherently riskyexploration ventures that take a longtime to yield cash flow.
Total’s relationship with Novateklooked doomed in 2005, after the Rus-sian gas producer abruptly withdrewfrom a 25 per cent equity deal, choos-ing instead to list on the LondonStock Exchange and sell stock toGazprom.
But the French company is back infavour, as Novatek plans to diversifyinto LNG. After agreeing to sell Totala one-fifth share in Yamal LNG lastmonth, Novatek said it would divideup a further 29 per cent of the projectamong other international oil compa-nies.
However, analysts have warned thatcompetition for oil and gas deals willallow Russia to demand conditionsthat could deter some investors.
Gazprom finally buried the hatchetwith Shell last year, entering a strate-gic alliance with the Anglo-Dutchcompany to explore for oil and gas inRussia and elsewhere.
But it is also being careful to lookafter its foreign prospects. It warnedthat Russian upstream opportunitieswould be available only to companieswilling to share oil and gas assets inother countries.
Oil and gasWestern companies stillwant stakes, despite earliersetbacks, says Isabel Gorst
Stepping stone: Gazprom’s Sakhalin II move allowed access to Asian markets
Offshore havens losing allurefor a rising tide of billionaires
Two years after Russia’s econ-omy hit rock bottom amid theglobal economic crisis, thingsare back to normal by at least
one indicator – the country’s numberof billionaires.
Russia boasted 114 dollar billion-aires at the end of last year, moreeven than in its previous boom yearof 2007, when it had 101, according toFinans magazine, which publishes anannual list of Russia’s richest people.
The boom in the extremely wealthyhas spawned a rise in the privatebanking and wealth managementindustry. This is becoming tailoredmore to Russians who want to keeptheir wealth at home.
Russia’s elite have tended to keeptheir money offshore in safe havenssuch as Switzerland and the UK, butlong-term trends show they are start-ing to keep more and more at home.
“People are still scared to keepall their money onshore, because theyare worried about the politicalenvironment. That will change asthere is more stability,” says AlexeyIschenko, head of wealth managementat Aton Capital, the Russian invest-ment bank.
Russian banks saw deposits grow by30 per cent in 2010, according to thecentral bank, sending a strong signal
of public confidence in the bankingsystem in the aftermath of the finan-cial crisis.
“Cash is flowing back into Russiaand it’s our job to catch it,” says aprivate banker with a leading westernhigh-street institution.
PwC, the professional services firm,estimated in 2009 that rich individualskept no more than 10-15 per cent oftheir wealth with private banks andasset managers in Russia. However,the size of that onshore wealth man-agement market was $20bn-$25bn,more than double its size in 2006,despite the financial crisis, PwC esti-mated.
Furthermore, PwC estimated mar-ket growth at 15 per cent in 2010, andlocal asset managers expect double-digit growth to continue this year andnext.
“This is a potential bonanza,” saysCatherine Thibaut, Swiss-born buthired by local investment bank TroikaDialog as its head of private bankingin late 2010.
She estimates that there is $90bn inliquid assets in Russia and that only10-15 per cent is invested at themoment. By 2013, Troika Dialogexpects the pool of liquid assets togrow to $245bn.
Aton Capital concurs, saying thatbefore the Russian stock market crashof 2008 there were about 140,000 dollarmillionaires in the country. Marketlosses cut that number to 90,000 butthe number is rising rapidly again.
“Our business is growing very fast.People want to play the Russian stockmarket and they want their adviceonshore,” says Mr Ischenko.
Most of the wealth management
business is currently centred on Mos-cow, with private bankers jetting tovisit clients in St Petersburg.
But Troika Dialog and Credit Suisseboth say that there is a lot of moneyto be unlocked in the regions, andthey plan to expand across Russia.
“People really want local knowledgeand expertise and don’t want to haveto travel hours to get it,” saysTroika’s Ms Thibaut.
However, one Swiss banker says pri-vately that building networks in smallRussian towns in a nightmare. “Thereis usually only one decent hotel andrestaurant, where you are seen meet-ing your clients and then they want todrive you to your next meeting to be
hospitable, which makes discretionimpossible. Most people feel muchsafer talking about money in Moscowwhere they are not under scrutiny.”
Local Russian banks with VIP cli-ents, international retail banks suchas Citi, international investmentbanks such as UBS and Russian assetmanagement companies such asTroika all occupy slightly differentniches in the market. However, atevery level, relationships between thebankers and their clients are vital.
“What we are offering is a bespokeservice. I think that our financial
advisers are almost like a private doc-tor. We are privy to many sensitivethings, from the client’s psychology totheir vacation plans,” says MrIschenko at Aton.
Russians increasingly want to havefinancial advice on their own door-step. Even Swiss banks that managetheir clients’ money entirely offshoreare appointing advisers in Moscowwho can offer an international stand-ard of service to clients on their homeground.
“You cannot simply rely on clientsflying to Switzerland once a year,”says Michael Kunzi, of LombardOdier, a Swiss bank. He has worked inprivate banking in Russia for the pastdecade.
The market has great potential, butis still handling the small portion ofassets that wealthy Russians are will-ing to book onshore.
“Many of the billionaires who ownlocal banks do not put their cash intotheir private banks, but hold it sepa-rately in private companies,” says MrKunzi.
Retail banks in Russia will be in avery good position to develop privatebanking business by identifying thebig accounts, and segregating theminto a department with better man-agement, he predicts.
“The bottom-up approach couldallow retail banks to skim off thecream. As they already have a retailoperation, they can allow clients topay bills and do their ordinary bank-ing in Russia,” says Mr Kunzi,“Because they already have an ATMnetwork and the licence to offer physi-cal cash, they have a huge advan-tage.”
Wealth managementThe prospect of greaterstability is changing longingrained habits, reportsRachel Morarjee
‘Our business is growingvery fast. People want toplay the Russian stockmarket and they wanttheir advice onshore’
A reflection of increased affluence: Russia’s wealthy among the yachts on show at last year’s Millionaire Fair in Moscow AFP/Getty Images
