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* Domestic players Sberbank, VTB are hard to beat
* Foreign banks have made mistakes in Russia's retail market
* Russia remains under-banked compared to BRICs
* Investment banks are here to stay
By Megan Davies
MOSCOW, May 22 (Reuters) - Foreign banks that once treatedRussia as virgin land where easy money could be made are nowfinding it a cut-throat market tougher than some bargained for.
While players such as Citi and Austria's Raiffeisen thrive, many have found post-Soviet Russia too hard tocrack: rife with credit, legal and corruption risks, anddominated by state giants Sberbank and VTB.
The latest to hit trouble has been France's Societe Generale. Vladimir Golubkov, the head of its Russian unit, wascharged with bribery last week after being caught on film in apolice sting operation with piles of cash on his office desk.
"Fifteen years ago all you had to do was turn up and openyour doors, and people would queue up, because you knew whatcustomer service was and you understood what products were,"said Stuart Lawson, who opened Citi's Moscow operations in the1990s and ran HSBC's Russian operations from 2008 to2010.
"Now ... the state banks have hired graduates from theforeign banks or from overseas and they're full of people whounderstand it. The game is a lot tougher now."
Western banks with a bit of nerve flocked to Russia afterthe 1991 collapse of the Soviet Union, but this no longer fitsPresident Vladimir Putin's vision for a country which was badlyexposed to the Wall Street crash almost two decades later.
Now, savvier homegrown banks have significant control.
Yet Russia remains "under-banked" compared with othercountries, offering tempting growth prospects. Russia's bankingsystem is worth around 50 trillion roubles ($1.6 trillion) byassets - about the same as Ireland and dwarfed by the $14.5trillion banking system in the United States.
That also bears out when compared to the BRIC group ofcountries. Credit provided by banks to the domestic economyaccounts for just 40 percent of Russia's gross domestic product.In China, that figure was 146 percent, in Brazil 98 percent andIndia 74 percent, according to World Bank figures from 2011. Thelack of affordable credit has hit investment and weighed on thegrowth of Russia's $2 trillion economy.
DO THE HOMEWORK
Those banks which have prospered in Russia got the timingright, didn't overpay, had headquarters which were involved withthe running of the business and had staying power duringdifficult times.
SocGen bought in haste, without proper due diligence andfailed to assert control quickly, says one former French bankexecutive in Russia, criteria that are crucial in a market wherecourts are little trusted and corruption widespread.
SocGen has spent around 4 billion euros ($5.2 billion) since2006 building up an 82 percent stake in Rosbank - previouslyowned by Russian tycoons Vladimir Potanin and Mikhail Prokhorov.
"The expatriates systematically find themselves holding theNo.2 position," said the executive, adding it was"incomprehensible" why they did not install a more senior Frenchexecutive. "It shows the naivete of SocGen."
SocGen declined to comment.
Other banks have also struggled with valuing Russian assets.
Britain's Barclays paid four times book value forExpobank in 2008, before the global financial crisis hit. Itlater sold below cost to banker Igor Kim, who has been snappingup distressed banking assets.
"Although they are my competitors I felt sorry that somebanks, including Barclays, withdrew from Russia," said VTB's CEOAndrei Kostin, who said VTB has a stake of around 10 percent inRosbank. "But maybe they entered the wrong time, the wrong way."
HSBC was a latecomer and decided to pull out of retailbanking in Russia in 2011 as part of a global reorganisation.
"Foreign banks largely entered Russia to operate on theretail market but many faced tough competition. They didn'texpect that," said Anatoly Aksakov, head of the Association ofRegional Banks of Russia, and a member of Russia's parliament.
Kim said he had seized on the opportunity presented by theweakness of foreign players, which in selling out of Russiacheaply surrendered banking operations that were well run andnot burdened with balance-sheet risks.
Kim said in an interview with Reuters that he only buysassets once he is fully satisfied that all the "skeletons" havebeen disposed of or properly provided for with provisions.
There are some notable Western survivors.
Citi entered in 1992 and expanded organically. It reportedover $300 million in profit from Russia last year and CEECluster Head Zdenek Turek called it one of the "top prioritycountries for Citi".
Italy's Unicredit has been in the Russian market for morethan 20 years, growing by acquisition, and is profitable, as isRaiffeisen, which opened up shop back in 1989 and gained scalethrough its $550 million acquisition of Impexbank in 2006.
BULLDOZER WITH HANDBRAKE OFF
Hard to beat are the state players Sberbank and VTB, whichdominate the retail market and are strong in investment banking.
"The bulldozer with the handbrake off, heading down the hill- that's the state banks," said one senior banker.
"They've got momentum. They've got product, low capital costand vastly improved management, and they're heading in thedirection of the private sector banks."
The country's largest bank, Sberbank, has undergone atransformation under former Economy Minister German Gref,defending its market share in lending and still controllingnearly 46 percent of Russian retail deposits.
Once synonymous with queues and hour-long waits, the bankhas improved its service and is a popular stock among foreigninvestors.
Russia's second largest bank VTB, once the Soviet foreigntrade bank, has a retail franchise with 8.7 percent of deposits.It is serious investment banking player, and has been swipingbankers from foreign rivals.
So far this year, VTB is top in M&A based on fee income,fifth in equity and third in bonds, according to data fromThomson Reuters/Freeman Consulting.
Russia's laws prohibit foreign banks from opening branchesbut allow them to operate subsidiaries subject to regulation bythe central bank. One banker says there is equal opportunity.
"Foreign banks have been treated on a level playing field(in Russia)," said Lawson, now an executive director at Ernst &Young in Moscow. "Once you've locally capitalised, except forthe reality that the state banks dominate the market, all elseis on a pretty equal footing."
WILD EAST
Foreign bankers with an appetite for risk sought out Russiain the turbulent years that followed the Soviet collapse, as theindustrial legacy of the command economy came up for grabs.
New Zealander Stephen Jennings came to Moscow in 1992, aged32, with Credit Suisse First Boston to advise on privatisationsthat created a new class of billionaire business oligarch.
He founded Renaissance Capital in 1995, making his name andfortune as a risk taker and dealmaker. But, after surviving the1998 and 2008 crashes, his dream finally unravelled last yearafter three consecutive years of losses.
Jennings abruptly left Moscow after RenCap suffered aratings downgrade. He has declined to comment since.
Prokhorov, who had already saved RenCap in 2008, bought therest of the bank and pumped in extra liquidity. Renaissanceannounced a loss of $378 million for 2012 but says itsinvestment bank is now operationally profitable.
Unlike the United States, which is lucrative for businesssuch as capital- and debt-raisings, and M&A, commissions arelower in Russia, one banker said.
"Here, fee scale means nothing, every single thing is highlynegotiated and the state sector will always be tougher and morecompetitive," the banker said.
Still, there is money to be made and Wall Street banks JPMorgan, Morgan Stanley and Goldman Sachs are present in Moscow with gleaming offices and aggressivebankers. Bank of America Merrill Lynch recently hiredRenCap alumnus Alexander Pertsovsky to head its Moscow team.
KREMLIN GAMBIT
For the government, Western banks are sought as promoters ofRussia's investment story - one of Putin's ambitious aims is tobuild a global financial centre and Goldman Sachs has a mandateto help the country attract foreign capital.
Western banks are also advising on the state's privatisationprogramme in which the government has reduced its share in bothSberbank and VTB in recent years but kept majority stakes.
Whether Putin will go further and cede control is open todoubt. The 2008 crash revealed just how exposed Russia was tothe Wall Street crash - $130 billion fled Russia in the fourthquarter of that year alone.
Russia's banks were only saved from collapse by the centralbank, which spent $200 billion of its reserves to defend theexchange rate - thus allowing them to refinance their foreigndebts - before finally devaluing the rouble by 25 percent.
Finding a niche has paid off for some mavericks in theconsumer banking sector.
Oleg Tinkov supplies credit cards to regions neglected bythe big banks. Using direct mail and online advertising, TinkoffCredit Systems is profiting from increasing demand for consumerloans in a country where credit card penetration is tiny.
He sees no threat to his marketing-led approach from Westernbanks, whose business model he sees as broken.
"When I see a French banker, I laugh. They don't succeed inRussia because they are so amateur. They are bureaucrats," saidTinkov.
