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. Last Updated: 07/27/2016

Foreign Banks Eye Retail Market

With memories fading of the 1998 crash, foreign retail banks are tiptoeing into Russia hoping for rich pickings if they can persuade a wary public to trust them with their cash.

Tempted by a rising middle class particularly in Moscow and St. Petersburg, some of the world's largest banks are closely eyeing the market in Russia, where many still feel the only safe place for their savings is under the floorboards.

Citigroup, with two branches at present, is preparing a campaign to promote its retail services, while Britain-based HSBC, with operations from China to the Americas, believes that the time may be ripe to start taking deposits.

"We are just about to open consumer banking," said a source close to Citibank. "In September and October we will see a substantial marketing push."

A Citibank spokesman in Moscow said the bank was not planning any announcement before the end of the year.

Richard Tickner, CEO of HSBC's Russian office, said the bank was still making an appraisal of the market.

"We believe it is a matter of when rather than if," Tickner said, although he added that it was hard to imagine it possible to have a viable retail operation with fewer than 100,000 customers.

Underpinning the interest is the improving economy -- heading for a fourth year of growth after the 1998 meltdown -- coupled with the underdeveloped state of the market.

"I think there is a good business opportunity," said Ilka Salonen," president of International Moscow Bank, a retail banking business jointly owned by Germany's HypoVereinsbank and Finland's Nordea.

Compared with other emerging economies the banking industry in Russia is tiny.

Total deposits account for barely more than one-tenth of gross domestic product, a much lower proportion than in Hungary and the Czech Republic for example.

Despite a 20 percent increase in deposits to $48 billion at the end of 2001, "Russia's banking sector remains immature, undeveloped and undercapitalized," Standard & Poor's said in a recently published report on the industry.

Economists estimate that Russians hold up to $80 billion in dollar bills and rubles stashed away in their homes -- a phenomenon dryly described as "internal capital flight."

Yet Russia badly needs to develop a more sophisticated banking system to put its growing pool of savings to productive use by lending it on to cash-starved small businesses.

Foreigners also have to reckon with state savings bank Sberbank, which dominates its home market more than any other bank in Europe with an 80 percent share of all deposits backed by a vast branch network scattered throughout the country.

"We have to go for depositors who want a long term relationship," Salonen said, adding that with only 35,000 clients Moscow Bank's business was struggling to break even.

Salonen said International Moscow Bank -- which has seven branches in Moscow and one in St. Petersburg -- planned to offer mortgages to its customers by the end of the year.

Alexander Koloshenko, head of Raiffeisen Zentralbank Austria's retail division in Russia, said his bank was already offering car loans and mortgages.

"More customers are realizing the need for a bank in their life," Koloshenko said.

Analysts said the Austrian bank, which operates five branches in Moscow and one in St. Petersburg, was aiming for customers with monthly income of more than $700.

One banker said he believed there was room in Russia for at least two or three other foreign banks, adding that research showed Russians were better disposed to European than to American banks.

Foreign banks, though, have formidable obstacles to climb in building a business in Russia.

Some foreign bankers say they are put off by what they see as heavy-handed Central Bank regulations that determine everything from the thickness of the glass that has to be installed in a branch to the layout of the office.

"Opening a branch in Russia is phenomenally expensive," said Richard Hainsworth, managing director of RusRating, a bank rating agency.

Another foreign banker said: "We have a vault and a cashier's desk with a bulletproof window even though we do not handle cash."

Yet with plans by the Central Bank to introduce a compulsory deposit insurance scheme set to raise public confidence in retail banks, international banks are watching the market with growing interest.

"There is tremendous potential and it's concentrated in major urban areas," said Steve Thunem, Dutch ABN AMRO's branch manager in Moscow. "Salaries per capita are getting to a level where they can support a retail [banking] business."