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. Last Updated: 07/27/2016

Western Banks Dip Feet in Retail Waters

A handful of Western banks are moving to fill a niche in Russia for the stable retail services demanded by big corporate clients and what is left of the Russian middle class, trailblazing a path that, if successful, will be followed by other foreign banks.

Raiffeisenbank Austria AG, the Russian subsidiary of Raiffeisenbank Zentralbank, is set to open three retail branches by the end of this year, and Bank of Austria Creditanstalt Russia opened three retail offices in Moscow just this week. BNP Dresdner Bank and Garanti Bank of Turkey also offer household account services.

The first two branches of Raiffeisenbank are expected to be up and running in the center of Moscow by the beginning of October and will offer a full range of retail and Visa credit card services, Raiffeisenbank finance director Yevgeny Toutkevitch said in an interview this week.

Russia's banking sector collapsed under the liquidity crunch wrought by the August debt default and ruble devaluation last year, leaving private depositors and Russian and multinational corporations operating in a country with limited banking services.

"We would never have started this project had it not been for the August banking crisis last year," Toutkevitch said.

"Many Russian banks failed to pay back their customers. Our corporate clients turned to us to ask for both payroll and retail solutions for their employees," he said.

Even though Raiffeisenbank and Bank of Austria were badly burned from heavy investments in the now defunct state treasury bill market, both banks are seen by bank analysts as trailblazers in setting up retail services.

"Other foreign banks are still watching to see how the two Austrian banks will operate. It's a very important commitment to the market," Toutkevitch said.

The chairman of the managing board at Bank of Austria, Michael Franz, said that on seeing customer demand, the bank has prioritized retail services.

"We're now at the point of no return," he said. "We've taken steps to deal with retail customers. Now we have to grow with the market and follow the demands of our customers."

Raiffeisenbank will first offer its retail services to the employees of its corporate clients. It later expects to extend those options to private depositors. The minimum deposit for noncorporate clients, however, is $5,000, and each depositor is vetted to check employment details and income flows. Bank of Austria has a similar policy for private depositors.

Bank of Austria will charge cash withdrawal fees of 2 percent, while Raiffeisenbank's fees are 1.5 percent.

Banking analysts have pointed to the hefty fees as a sign that foreign banks are hedging their bets as they enter the retail business.

"They seem to be making up for the lack of investment returns by charging high rates," said Kim Iskyan, banking analyst with investment bank Renaissance Capital.

"The market is still relatively small and opportunities for banks to invest the funds from retail accounts in Russia are minimal," he said. "It still seems uncertain whether kicking off these types of services is going to be profitable at all."

But officials at both Raiffeisenbank and Bank of Austria said they are bullish about the opportunity.

Franz insisted that there will be ways to make money on the Russian market even though the collapse of the treasury bill market had left a huge dent in investment opportunities.

"Pressure is building up for the authorities to create ways to mop up the excess liquidity in both domestic and foreign banks here. And when the perfect Russian bond is created, we want to have all our client relationships firmly in place," he said.

Raiffeisenbank said it only goes for projects that have an acceptable credit risk profile.

Franz defended Bank of Austria's high withdrawal rates as being in accordance with the "better quality, systems, personnel, security and stability" the foreign bank offers.

Both banks say they have set up their own Visa processing centers, bypassing the confidentiality and security risks they saw as inherent in the third-party system that other banks in Russia use.

Both plan to offer Visa Electron and Classic services that can be used all over the world.

Raiffeisenbank sees a big market for a bank offering credit card services and offshore bank accounts.

"There's a big market of Russians who require Visa cards ... for trips abroad, for hiring cars, for booking hotel rooms. ... A bank account with us will make all this possible," Toutkevitch said.

"In the present situation of tight currency controls, there's also a large group of Russian customers who want to be able to justify having a foreign bank account," he said.

To open an account at a bank in another country, Russian citizens need the approval of the Central Bank. Therefore, having access to a foreign bank located in Russia, where no permission is required, is much simpler, Toutkevitch said.

The bank currently has 1,000 corporate clients and aims to win 20,000 household accounts by the end of next year. Bank of Austria plans to have 100,000 private depositors.

Officials at Russian retail giant Alfa Bank said they do not see any reason to fear the Austrian banks' attempts to muscle into the market.

Nevertheless, if both foreign banks expand as planned, they could soon rival the number of private accounts Alfa currently services. The bank boasts 270,000 household accounts.

-The first two Raiffeisenbank branches are due to open at the beginning of October on Nikoloyamskaya Ulitsa and Manezh Square. The third site is still under discussion. Bank Austria opened three branches last week at 10/2 Bolshaya Dmitrovka Ulitsa, the Riverside Business Center at 52/2 Kosmodaimanskaya Naberezhnaya, and Business Center Park Place at 113/1 Leninsky Prospekt.