The sale of Royal Bank of Scotland's business in Russia has thrown the spotlight on whether Britain's Barclays and HSBC will continue to retain a presence in a market wracked by sanctions and deepening recession.
RBS, the UK's largest-taxpayer owned bank, said on December 1 it has agreed to sell its Russian operations to Expobank, a mid-sized lender which had previously acquired Barclays' Russian retail business. The sale for an undisclosed amount will close in spring 2016 pending regulatory approval.
Barclays, along with is UK rival HSBC and Spanish giant Santander, are among international lenders that abandoned consumer banking in Russia over the past four years as state-controlled Sberbank and VTB Group increased their market share. Sanctions have paralysed capital markets in the past 18 months and foreign banks are having to ask themselves if they can afford to retain bricks and mortar in Moscow or whether to resort to the fly in-fly out model commonplace in the early part of the last decade.
"Brokerages are pretty much dead in the water," Tom Adshead, chief operating officer at Macro Advisory in Moscow, told bne IntelliNews by phone. "The question is whether there is anything to be gained by running a skeleton staff so you don't look like an idiot when markets come back."
Barclays keeps a swish Moscow office for its Barcap investment banking unit at the Four Winds Plaza hotel, just off Tverskaya, the main road leading to the Kremlin.
It is believed that the office is been run by a small handful of staff after roles were axed and some were relocated to London. Bob Foresman, Russia country head for Barclays, told bne IntelliNews a year ago that he was relocating to New York and would commute back and forth to Moscow.
Foresman, a former Renaissance Capital and Dresdner Kleinwort rainmaker, had great ambitions for Barclays to become the number one foreign investment bank in Russia. In 2010, Foresman told Bloomberg News that Barclays would hire 100 personnel for its brokerage alone.
Barclays Capital, the bank's securities unit, was one of the four arrangers of Russia's first sovereign Eurobond since the government defaulted in 1998, but the bank never make progress beyond arranging debt deals in Russia.
A small research team was hired and there was slow progress over the years in building up sales and trading capacity in Russia.
The retirement last year of Hans-Joerg Rudloff, the chairman of Barclays Capital and one of the foremost experts of Russia, also damped their ambitions. Rudloff, regarded as the father of the modern Eurobond market, had served on the board of oil giant Rosneft and had many connections throughout the public and private sector.
Barclays, along with UBS, was tapped in November by Alfa Bank to arrange investor calls ahead of a bond deal. It was also mandated for the $1bn Norilsk Nickel Eurobond in October in a deal which marked a revial in the Russian debt market. On both deals, it's highly likely their debt capital market bankers were working the phones out of London.
Jon Laycock, a London-based spokesman for Barclays Capital, declined "to comment on market speculation" regarding its plans for its Russia business.
Tom King, CEO of Barclays, recently said the bank is constantly monitoring its geographies and is makings adjustment. Speaking at a New York conference in September, King said it's important not to take the simplistic view that any geography or product "is all or nothing".
Diplomatic relations between London and Moscow are at their lowest point since the Cold War and British lenders and investors have undoubtedly suffered as a result over the past few years.
Notwithstanding the sanctions imposed over Russia's involvement in the Ukraine conflict, British firms have also been affected by a bitter dispute over TNK-BP, an Anglo-Russian joint oil venture which was eventually sold to Rosneft. The closure of the British Council's offices in Russia and the Kremlin's refusal to extradite Andrei Lugovoi, the chief suspect in the London killing of dissident Alexander Litvinenko, haven't helped relations either.
HSBC has more at stake in Russia with a staff of about 200 in Moscow and St Petersburg serving mainly Russian corporates and foreign multinationals.
A sign of it downgrading Russia came though came when the experienced CEO of the bank's country division Mark Stadler was transferred to another role in Dubai in September. He was replaced by Malachy McAllister, a much less experienced financier who was running capital financing in France.
The bank was active in arranging foreign debt sales and loans for Russian corporates prior to sanctions being imposed. The corporate business has been badly hit by sanctions and the recession, which has curbed the ability of companies to grow. Project and export finance for Russian corporates looking to grow and trade overseas has also been hit.
A senior source at the bank recently told bne IntelliNews that HSBC is still committed to remaining in Russia and is even still making money.
"HSBC is posturing itself as a global bank and Barclays isn't and that's the difference between the two," Adshead said. "HSBC wants that global footprint without going crazy on investment banking."
RBS, Russia’s 145th largest lender with RUB28.5bn worth of assets, was a likely candidate to cut and run. The bank, which acquired its Russian unit as part of its purchase of ABN Amro in 2007, was bailed out by the British government in 2008 to the tune of £45bn and has been scaling back its global ambitions to focus on core markets.
RBS had just three branches in Moscow on Bolshaya Nikitsaya, St Petersburg and in Yuzhno-Sakhalinsk, a wealthy oil and gas outpost in Russia’s Far East.
Making for the door
Herman Gref, the head of Russia's largest lender Sberbank, said the country is facing the biggest banking crisis in two decades. The economy is suffering from a combination of weak oil prices, sanctions and a ruble that’s 35% weaker than it was a year ago.
The remaining foreign lenders still in Russia, including BNP Pariba, Raiffeisen and UniCredit, have all been cutting headcount, shutting branches and tightening costs. The rumour mill has it that Austria's Raiffeisen may yet sell it's profitable Russian business.
American bulge-bracket investment banks such as Goldman Sachs, JP Morgan and Morgan Stanley have deep pockets and can afford to wait until the market turns.
A trading scandal led to the closure of Deutsche Bank's investment banking operation in Moscow in September and the loss of at least 200 jobs. Investigators from the US and European regulators are looking at the bank's use of so-called mirror-trading involving about $6bn of transactions over four years.
"Perhaps the investigation was a blessing in disguise for Deutsche," Adshead said. "This gave them a good reason to cut back on operations without saying they had lost faith in the market."