Graham Stack in Minsk -

Austria's Raiffeisen International is the Indiana Jones of the banking world. Even after Eastern Europe became fashionable amongst international financiers in about 2004, the idea of buying into Belarus crossed few people's minds. Now that Belarus has thrown open its doors and is quickly becoming the hottest bank market in the region, banks arriving in the country will arrive to find Raiffeisen has already been there for five years.

Priorbank was founded as an innovation in 1989 during the first wave of private bank start-ups by a group of the county's largest manufacturing concerns, including truck makers MAZ. Oil paintings of the banks' industrial founders still adorn the walls of Priorbank's headquarters, but the bank was never reduced to a pocket bank: at the same time as serving large corporate clients, as early as 1995 Prior was a partner of the European Bank for Reconstruction and Development's Small and Medium Enterprise (SME) programme, and in 1997 the EBRD took a 27% stake.

Vladimir Dedioul, member of the Priorbank board responsible for investment banking, says Priorbank was then the country's third-largest bank, and its largest private bank. A greenfield development in Belarus would have been difficult, but Priorbank was looking for a buyer. "So Priorbank followed the typical East European pattern of taking on first a financial investor, then a strategic investor," explains Dedioul, who has worked in the bank since it's founding.

The strategic investor came in the shape of Raiffeisen in 2003, which too first took a 50% stake and subsequently increased it to 63.1%. "Our purpose was to find a source of long-term money for the clients we knew well. Raiffeisen gave us know-how, technologies, finance," says Dedioul.

Austrian Bernd Rosenberg, originally from Raiffeisen International, now a member of the Priorbank board responsible for risk management, jokes that "White Russia" was literally a blank on the map. But precisely this fact attracted Raiffeisen: "It's always better to be first in the market and here as well we saw considerable potential for the future. We wanted to cover the whole region."

All about timing

Raiffeisen chose the perfect moment to enter the market. From 2002-2007, Priorbank grew explosively along with the Belarusian banking sector. Priorbank's loans to customers grew more than eightfold, assets more than five times, equity trebled, and retail deposits rocketed four and half times.

It's testament to the strength of Priorbank's position that, unusually for Raiffeisen, the bank still uses the Prior brand, with the Raiffeisen emblem adjoined. "We were also lucky in that Priorbank has always used yellow for it logo, like Raiffeisen," jokes Dedioul.

The Priorbank deal was pioneering for Belarus - and is seen as having kick-started a process. "The Priorbank deal showed the government that foreign investors would act perfectly normally, on the one hand, pay taxes, pay their employees, and also introduce much needed technologies and improvement," a source at a competitor bank tells bne. "But Prior and Raiffeisen have had to adapt a bit to realities. There was an initial euphoria in terms of public relations and openness, but recently they have become more closed. They serve a number of state-owned companies."

Dedioul admits it has not been all plain sailing. However, he points out that the government has been so convinced of the benefits from foreign investors, that it has moved from tolerating them to actively seeking them - with a far-reaching privatization of the bank sector in the pipeline for 2008.

Dedioul claims the banking sector could go private "virtually overnight." The share of foreign capital is currently just under 10% and there is a 25% cap on foreign bank ownership, but it is widely believed that this will be changed. "People often imagine the Belarusian banking system totally belongs to the government. However, that's simply not the case: 23 of the 27 banks in Belarus are already private." Admittedly, of the six largest banks, with about 80% of the total assets, only Priorbank, the third largest, is currently private. "But the fourth, fifth and sixth largest are all about to be privatised in the immediate future, and the two largest, Belarusbank and Belagrobank, will hold IPOs."

Rosenberg says Priorbank is not worried about competition heating up. "We have first-comer's advantages," he says. "And we have done a lot of work over the past five years. Since we arrived, we have changed structures and approaches, switched from a three-tier to a one-tier structure, made large investments in IT and personnel. These are changes that the banks that are going to be privatised still have ahead of them. That will take time, and so we are far ahead of the field."

Rosenberg explains Priorbank strategy as being Raiffeisen's general approach tailored to suit local conditions. "The Raiffeisen strategy is to be a universal bank strong in corporative banking, where we are traditionally good, and to build up the retail area for private individuals and micro-crediting. We have a very clear focus on SMEs and retail."

As an example of Raiffeisen's approach, Rosenberg points to the introduction of standardized products for SMEs as being a general tendency - but "standardized products tailored to the Belarusian market, not imported from Vienna."

IPOs postponed?

Priorbank recently qualified as an IPO partner for the Warsaw stock exchange - again, the first bank in Belarus to do so. With the government announcing upwards of 75 IPOs of state-owned companies to take place in the immediate future, this looks like a wise move to get a slice of the action.

Dedioul says, however, it is unclear how fast this can be achieved, giving the current international market conditions.

Rosenberg agrees: "It is very difficult to jump from isolation to integration in one go, in one year," he argues. "There's a whole science of how to do it: building up a credit history, working with international institutions, with private placements, sovereign borrowings, country ratings. To do it in one year is basically impossible."

The private sector in Belarus, Dedioul and Rosenberg agree, appreciate the recent moves towards liberalisation, while emphasizing the importance of correct timing and consistency in implementation.

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