​Russia’s state-owned banking behemoths are going to go head to head this year after VTB Bank announced it would hire 7,000 new employees during the expansion of the newly established Pochta Bank (post bank) that will encroach on its sister Sberbank’s traditional domination of retail banking.

The plan to create a post bank has been on the cards for a decade. When Andrei Kazmin stepped down as CEO of Sberbank in October 2007 he was tasked with setting up a post bank, but nothing happened.

Now the plan is back. VTB closed a deal last year to establish a bank on the premises of Russia’s Pochta Rossii, the post office, which is, apart from Sberbank, one of the very few government organs that has offices in all the cities and villages of Russia. Pochta has a total of 42,000, about half of which will be turned into banks, giving it about half as many outlets again as Sberbank operates.

VTB bullied Pochta into terms that give it pretty much full control of the banking operations in the post offices, according to bne IntelliNews sources, and in particular has its eye on the payment of pensions, which is a multi-trillion ruble business and largely distributed via the post offices across the country.

An indication of the weak position Pochta was put in is that since the deal with VTB was closed the general prosecutor has started a corruption investigation into Pochta’s CEO Dmitry Strashnov for awarding himself a $1mn bonus. These charges appear to be somewhat egregious, as on the one hand, the size of the bonus for running one of Russia’s very biggest companies does not seem unreasonable when set against Rosneft CEO Igor Sechin’s reported $50mn-plus annual salary or VTB Group CEO Andrei Kostin’s $37mn-plus salary.

Secondly, Strashnov has done a sterling job, having returned the post office to comfortable profitability and restarting the company’s long-overdue reform without tapping the government for billions of rubles in subsidies that his predecessor had asked for.

VTB acquires muscle

Up until now, VTB has largely been a corporate bank and in the depths of the crisis in 2008 set up an investment banking arm VTB Capital by poaching much of Deutsche Bank’s investment banking team, which marked the start of the German lender’s Russian woes.

However, the Pochta deal will give VTB a national retail distribution system that will allow it to compete directly with Sberbank, which holds about half of all Russian retail deposits. VTB has already got a retail offering in the form of VTB24, based on the assets of Guta Bank that went bust in 2014, which are in turn based on the assets of Inkombank that went bust in 2998.

However, VTB24 targets the middle class and compete with the likes of Alfa Bank and Raiffeisen in the lucrative but limited middle income tier. A post bank will clearly target the masses, including those outside the so-called millionki, or Russia’s dozen large cities with more than 1mn inhabitants, which are not served by the upmarket commercial banks or VTB24.

The wisdom of allowing VTB to go against Sberbank is questionable. The Kremlin sees the need for competition in a sector like banking, but has adopted a hybrid model that bne IntelliNews dubbed ZAO Kremlin in a cover story in August 2007 when this mechanism became clear. ZAO is the Russian legal form that limits the sale of shares as all the other shareholders have to give permission for any change, and President Vladimir Putin started to call in the captains of the private sector, who had to get informal permission for their corporate investment plans that are now required to dovetail with the government’s plans.

The practical upshot of the ZAO Kremlin system is a hybrid system where commercial banks and leading companies in many other really rich sectors like oil have been relegated to the second tier, while two state behemoths have been set up to capture most of the earnings for the state, but are forced to genuinely compete with each other to promote market efficiency. VTB has been bolstered with state business to compete with Sberbank, which set up its own investment banking arm Sberbank CIB to compete with VTB Capital (with the unfortunate side effect of almost killing off all the Russian private investment banks that flourished in the 1990s).

And it sort of works. While VTB itself has been badly managed to the point where it was forced to ask the state for a RUB300bn bail out two years ago, as a bne IntelliNews investigation showed in June 2015, Sberbank under CEO German Gref has been transformed to become one of the very best banks in Russia, with vastly improved customer service and profitability. Likewise, Mikhail Zadornov, who runs VTB24 is widely considered to be one of the most talented bankers on the Russian market and has turned the group’s retail subsidiary into a lean and profitable business. So the jury is out on how successful the new post bank will be.

Initially the two retail banks will going in the opposite direction. VTB has barely returned to profit in 2016, reporting profits in the millions of dollars, while Sberbank has reported in the billions. But Pochta Bank plans to double its staff to a total of 18,000, according to Bloomberg, while Sberbank is still chasing cost savings and closed 1,300 of its 16,400 branches in 2016, which is down on the 25,000 branches it used to have before Gref took over.

The details of management are not clear year, but as Pochta Bank was created on the basis of Leto Bank, VTB’s former consumer lender, it seems that the VTB24 business or Zadornov will not be included in the new bank.

Pensions and pickling jars

However, as the post office controls the distribution of some 40% of all pension payments – effectively free funding for the bank if it can capture these payments – it is hard to image Pochta Bank not being profitable. VTB’s plan is to tap into these payments as well as bring more of the banka savings into the system, VTB said in its three-year strategy presentation in January; banka is the glass pickling jars Russians use to store cash at home, amounting to an estimated RUB1.7 trillion-RUB2.9 trillion ($30bn-$50bn), Bloomberg reports.

Total individual deposits were RUB24 trillion at the end of January, of which Sberbank held RUB11.4 trillion. Pochta Bank hopes to increase deposits to RUB150bn this year and to RUB1.6 trillion by 2023, according to VTB.