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Published: November 11, 2008

 
 

Don’t Be Afraid of the Bear

The risks of entering this market are real. Russia, like almost every other country in the world, has spent the last few months struggling to contain the effects of a worldwide financial contagion. The country is a political enigma, and has been widely criticized by the West for the conflict that broke out in Georgia this summer. Russian workers now have greater access to jobs, which can hinder a foreign bank’s ability to get and keep good employees. And Russian regulators have a reputation for a sort of activism that can be painful for foreign companies. An example is Russia’s denial of a new work visa to Robert Dudley, the foreign-born CEO of TNK-BP — a joint venture formed by the merger of BP’s Russian oil and gas assets and the oil and gas assets of Alfa Group and Access/Renova Group. Some observers speculated that Dudley’s visa troubles were the result of his Russian partners’ desire to oust him from the alliance, leaving them in control of the operation.

Fortunately, most of these risks represent separate issues; they are not interconnected in a way that could bring down the country’s whole business environment. Russia is confronting its financial problems head-on, and recent news reports that two state-owned banks, Sberbank and VTB Bank, have been considering an investment in London-based Barclays PLC suggest that Russia has the capital to stabilize its own banking system. Furthermore, at least some of the risks of operating in Russia can be mitigated — foreign banks can address the challenges of hiring and retaining workers, for example, by offering above-market pay. Other risks will likely fade over time. For instance, the Russian regulators who have been so heavy-handed may now become active in a more positive way — encouraging foreign buyouts of, or capital investments in, weak banks. To the extent they do so, it may give non-Russian banks a gateway to the market.

For those still not convinced the opportunity exists, there is a precedent for foreign banks entering Russia during difficult times. A decade ago, as Russia was struggling with a crisis that drove inflation to 80 percent and led to 200 bank closings, Austria’s Raiffeisen International Bank Holding AG decided to enter the country. Expanding from an initial base of two banks in Moscow, Raiffeisen has maintained its investment program and, after two acquisitions, has almost 250 bank branches and some $20 billion in assets, putting it on a par with any non-state-owned bank in the country. Raiffeisen wouldn’t be in such a promising position if it hadn’t invested at a time when others were getting out. That’s a history lesson that shouldn’t be ignored.

Author Profiles:


Steffen Leistner is a partner with Booz & Company based in Berlin. He focuses on strategy development, technology-based business transformation, and operations and service excellence programs.

Tanvir Hanif is a principal with Booz & Company in London. He specializes in business and operational strategy for financial-services companies.

Thorsten Liebert is a principal with Booz & Company in Frankfurt. He specializes in strategy definition, restructuring, and risk management for leading banks in Germany, the U.K., and Russia.

 
 
 
 
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Resources

  1. Economist Intelligence Unit, “Country Forecast Russia” (subscription or fee required), October 2008: The EIU’s five-year macroeconomic projections for Russia, as well as a discussion of the country’s political, policy, and business environment.
  2. Steffen Leistner, Tanvir Hanif, Thorsten Liebert, and Roman Regelman, “Dipping into the Bear’s Honey Pot: Opportunities and Risks in the Russian Banking Market,” Booz & Company white paper, October 2008: The paper on which this article is based goes into further detail on the risks and opportunities of the Russian banking market.
  3. Klaus Rohland, “Russian Banking Sector: Recent Progress and Challenges for the Future” (PPT), The World Bank, Banking Forum of the CIS Countries and Eastern Europe, Vienna, April 24-27, 2008: The World Bank’s country director for Russia lays out his organization’s perspective on the market.
  4. The Central Bank of the Russian Federation Web site: Offers news and information about the Russian banking sector.
 
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