Long-term Russia investors and strategists are sceptical of claims by the Kremlin-controlled VTB Bank that Brexit complications alone are forcing the lender to move its European headquarters out of the UK.
A Financial Times report on October 11 quoted the bank’s deputy head and CFO Herbert Moos as saying the Russian lender is upping sticks due to anticipated disruption from the British decision by referendum in June to leave the EU.
“We did have bigger plans for the London office, but after Brexit we are scaling them down and building them up elsewhere,” Moos told the paper, adding that the new location will be decided by end-2016, with Frankfurt, Paris and Vienna all under consideration. “You cannot postpone this decision, as I do not think this [Brexit negotiation] will be a quick process,” said Moos, who argues that the European Central Bank is unlikely to accept “having critical functions being performed outside the EU”. Building two central functions to comply with two regulators is also too expensive, according to the CFO.
However, long-term Russia watchers expressed doubt that Brexit alone was driving Russia’s second-largest state bank to quit London’s square mile. The UK unit is loss-making amid the Western sanctions imposed on Russia since 2014 for its actions in Ukraine, while tight regulatory inspection and the cost of real estate are also cited as major issues for the lender.
A veteran Russia investor even joked that Russia engineered the UK’s vote to leave the European Union so VTB would have a reason to leave London.
“You don’t think the Russians hacked the voting system to ensure a Brexit so as to give VTB the excuse to leave?” the investor quipped to bne IntelliNews. “As distinct from the fact it makes no money in the UK because nobody likes or trusts it.”
A Moscow-based analyst at a rival lender suggested that VTB bankers could no longer stand the regulatory heat in the UK capital.
“Being a Russian banker at a sanctioned lender in Londongrad doesn’t open many doors these days,” he said. “The regulators are watching them like a hawk and it just doesn’t make commercial sense for them to have hundreds of bankers still there.”
Shrinking fees, diminishing staff
VTB at its peak employed more than 500 people in London, mainly in its investment banking unit and global anti-money laundering and compliance units. bne IntelliNews reported in August that the London unit had slashed its headcount by 22% under efforts to shrink its growing losses.
According to a filing submitted to UK Companies House on June 28, VTB last year cut its UK personnel to 330 from 425 and its operating expenses by 15%. That helped the lender to significantly narrow its post-tax loss to $9.5mn from $92.2mn a year earlier.
VTB Capital earned just $9mn in fees from arranging Russian bonds, mergers, IPOs and loans in the first six months of 2016 compared with $27mn for the same period of 2015, according to data supplied by New York-based consultancy Freeman & Co. The business, which has been Russian President Vladimir Putin’s investment banking champion since its inception in 2008, lost ground to its state-controlled rivals Sberbank CIB and Gazprombank. These earned $33mn and $28mn in the first half of this year, respectively.
VTB, which is run by former Soviet diplomat Andrey Kostin, has therefore been aggressively reducing costs and trying to diversify into new geographies to offset the blows in Europe and back home in Russia. The parent of VTB Capital was sanctioned by the US and the EU over Russia’s involvement in the Ukraine conflict and the unit has suffered from severe contagion as well as a collapse in commodity prices.
Two years ago, Kostin accused UK regulators of making excessive demands of the UK operation due to Russia’s conflict with Ukraine. bne IntelliNews reported exclusively in February this year that Russian lender Gazprombank was also winding up its London operation after the UK regulator indicated it wouldn’t grant authorisation without more information about its shareholder. The secretive lender, which is also now sanctioned, opened its office in London in 2006 with plans to pave the way for the group’s initial public offering.
Meanwhile, VTB, which retains offices in London, New York, Hong Kong, Singapore, Dubai and Sofia, has also shrunk its real estate in the UK capital. The bank entered into a commercial lease agreement for office space for five floors at 14 Cornhill, a prestigious building next to the Bank of England.
In the June filing, VTB said it had an option to break the lease from August 2024 and it may well have to further reduce costs. The bank has already entered into a sub-lease deal for two floors of the office space it no longer needs, according to the filing.
Business search widens
Kostin, who mulled removing the bank’s listing from the London Stock Exchange in favour of China, previously warned that he doesn’t expect US sanctions to be lifted until 2018. The EU prolonged its measures against Russia in July by six months despite growing opposition from officials from Greece, Italy and France.
Leading Western investors have reined in all trading activities with VTB Capital and other Russian brokerages for fear of drawing regulatory scrutiny and fines. As business has dried up in the US and the UK, both VTB Capital and its parent have made an aggressive push to secure more business in Africa and Asia.
The bank is spearheading Putin’s proclaimed pivot to Asia, which aims to replace funding for Russian corporates from Western capital markets. The campaign has had limited success so far, with the only notable deal being China’s agreement to provide $12bn in loans for Russia’s Yamal liquefied natural gas (LNG) project.