US banking giant Citigroup is retrenching in Russia by closing branches in Moscow and St Petersburg, retreating from regional cities, and by slashing its retail client base, bne IntelliNews can exclusively report.
Though Citigroup insists to bne IntelliNews it remains committed to its Russian clients and to global clients doing business in Russia, the decision by the US bank means it is joining a growing list of foreign banks in Russia that are either exiting the country altogether or scaling back operations in the face of deteriorating ties between the Kremlin and the West.
The New York-based lender is understood to be shutting 10 branches this year after some closures in 2015, and has already shrunk its retail client base to 700,000 from 1mn less than a year ago, sources close to the bank tell bne IntelliNews.
The bank has already exited Krasnodar and is likely to wind down operations in Novosobirsk, Ufa and Kazan, which it served through credit cards. Three branches will likely be closed in Yekaterinberg, where a new ’smart branch’ – a smaller digitally-centric café-style branch – will be unveiled instead. More branches have been shut in Moscow and St Petersburg, although fewer branches have opened utilising smart technology.
The bank’s chief in Russia, Marc Luet, is likely to quit his position by autumn this year following a three-year stint, the sources say.
“US banks in Russia are square in the cross-hairs right now,” a senior European banker in Moscow tells bne IntelliNews. “A decision to cut back will have been made from the top down, because they know some depositors are worried and don’t want to put their money in a US bank. This is also Citigroup acknowledging that they have to trim their sails, as we are in for a long recession rather than them packing up to leave.”
Keeping a lower profile in Russia suits many big American brands with boots on the ground due to a cooling in relations with the West. Alexei Pushkov, head of the Russian parliament’s foreign affairs committee, suggested in March that McDonald’s and Coca-Cola should leave Russia because of Washington’s confrontation with Moscow over Ukraine.
A recent opinion poll published by the independent Moscow-based Levada Center indicated that just over 80% of Russians have negative views of the US, a figure that has almost doubled in just over a year. The Russian government’s recent move to shut down the US embassy’s American Culture Center in Moscow after 22 years in operation has also led to a further deterioration of relations on the ground.
Post-Soviet, pre-sanctions winner
Citigroup, which returned to Russia in 1992 after a 72-year hiatus, is one of a handful of foreign banks that have done well in consumer banking following the collapse of the Soviet Union. But the bank, which ranks fourth among foreign lenders, is now aggressively cutting back its exposure to Russia this year as a collapse in oil prices and imposition of US and EU sanctions over Moscow’s actions in Ukraine pushed the economy into stagnation.
In a detailed statement e-mailed to bne IntelliNews, the bank says: “Citibank was one of the first international banks to enter the Russian market in 1992 and it was the only global international bank not to depart from Russia following the 1998 crisis. Citi remains just as committed to its Russian clients and to its global clients doing business in Russia today.”
Foreign rivals are also scaling back. Raiffeisen Bank International plans to cut its risk-weighted assets in Russia by 20% in euro terms by the end of 2017; and Societe Generale’s Russian unit cut about 1,500 jobs last year. Others are quiting altogether: US investment bank Jefferies Group shuttered its Moscow business in February; and Barclays became the latest international lender to completely cut and run when it shut its investment bank in January.
After the coming branch closures, Citigroup could be left with about 35 branches compared to about 50 a year ago and 45 branches now.
One of the problems for the bank, which is self-funded, is that it has many costs in dollars as its retail unit operates within the global consumer banking franchise. “The business is struggling because it’s much more difficult for the guys to make money following the ruble devaluation,” a source said. “Branches, which are no longer profitable, have to be closed.”
Citigroup, which has cut its workforce in Russia by 500 to 3,500 since 2013, is Russia’s 20th largest with assets of RUB420bn. The bank said it has 3,000 institutional clients and 330,000 active credit cardholders across the 10 cities it serves in person.
Its French CEO, Luet, hasn’t settled in Moscow and raised some eyebrows because it took him well over a year to be authorised by the central bank due to complications over his diplomas and spending a lot of time outside of Russia. His predecessor Zdenek Turek, who has since been promoted to Citigroup CEO in Europe, was regarded as a revelation in his five years as Moscow chief.
Citigroup says its clients in future will no longer require a large number of physical branches. “Banks around the world are investing in mobile technology and fintech at an unprecedented level – and we feel this will be the primary path forward,” Citigroup says. “Our coverage will remain the same. While reducing our presence to reflect current market environment in some locations, we are not planning to withdraw from any cities where we currently operate.”
Citigroup works with many multinationals in Russia by providing payroll services and also debit cards to employees. These cards are now being cancelled and on-site ATMs are being ripped out, especially in regions where salaries have plunged.
The bank has a whopping 50% share of the multinational market and its clients are understood to include Toyota, Samsung, Danone, Nestle, Apple, McDonald’s, Exxon, Shell and Pepsicola.
Citigroup provides a high level of service to multinationals, employing a “Chinese Desk” and a “Korean Desk”, which are manned 24-7 by fluent speakers.
The bank’s credit card business is struggling and may no longer be profitable, according to clients. Citigroup’s middle-class client base, who used to travel frequently for pleasure and business, have been grounded due to the ruble’s crash and no longer spend as much on international transactions.
Unlike some of its peers, the bank has managed to keep a lid on spiralling levels of non-performing loans through tight risk management. Problem loans in the retail book are believed to be in the region of 4-6%. Non-performing loans on the corporate side are believed to be even lower, although the bank declines to comment.
The bank’s main business when it first set up in Russia was correspondent banking and much of that has fallen away due to sanctions and the closure of international capital markets.
Prior to the US Treasury imposing sanctions on Russia, Citigroup’s biggest clients numbered VTB, Sberbank, Russian Agricultural Bank and Vnesheconombank, also known as VEB. These state banks are believed to have shipped billions of dollars out of Citigroup in New York months before the annexation of Crimea, a banking source tells bne IntelliNews.
“The Russian state moved the money out of Citi because they were afraid the funds would be frozen,” a source close to the bank says.
Citigroup says it preferrs not to comment on “rumours”.
Citigroup’s investment banking unit is still profitable by doing work in liability management, buying back bonds, restructuring and a small amount of M&A. The bank has also arranged a couple of Russian Eurobonds, such as Norilsk Nickel’s late in in 2015, but the primary and secondary equity market has been largely closed since sanctions were imposed.
The bank’s fees from investment banking contracted by 97% last year to $1mn from $28mn in 2014, according to data from consultancy Freeman & Co.
Citigroup is estimated to have an 80% share of the Russian market for custody and clearing services, or about $20bn in assets under management. That proportion could increase as Deutsche Bank looks vulnerable to client attrition following the closure of its investment bank last year in the wake of a trading scandal.
Despite Russia entering its second year of recession, the bank continues its philanthropic activities. A new grant has recently been approved for RUB100mn to invest in various projects, which suggests Citigroup’s long-term commitment to the country.
Flagship launches, another dry-docked
Plans are also well advanced to open a new flagship branch utilising smart technology on St Petersburg's main Nevsky Prospekt around September.
Citigroup said a senior delegation from Moscow, London and New York would attend this year’s St Petersburg Economic Forum, but declined to say whether Citigroup global CEO Michael Corbat, who was slated to attend the 2014 Forum but pulled out at the last minute, would travel to St Petersburg for the flagship branch opening.
A plan to open a Moscow flagship branch on the capital’s main Tverskaya Street was shelved in late 2014 and it's uncertain if and when there will be one. The bank said it has already opened four smart branches in Moscow recently and will transition most of their traditional branches to this new format.
Citi will also strengthen its footprint with fewer but better designed Smart branches in the best and most high-traffic locations,” the bank said in the statement. “The savings generated are reinvested in the development of technologies, services and next-generation branches.”
A veteran US financier believes Citigroup will stay in Russia even if Bank of America and Goldman Sachs pull out. Jefferies became the first US investment bank to depart in February following the exit of RBS, Barclays and Deutsche Bank.
“Citigroup is big in retail, which has given them Russian DNA,” the financier tells bne IntelliNews. “They are just battening down the hatches until the dawn of a brave new world.”