EXCLUSIVE INTERVIEW: Coutts Sees Russia/East Europe As Key Parts Of International Strategy

Tom Burroughes

11 February 2013

Russia and Eastern Europe may not generate quite the same buzz in wealth management as the Asia-Pacific region does but the sheer wealth of some inhabitants means it is a strategically important zone for wealth managers.

A firm with a very “British” brand that is also expanding its footprint into these markets, where the UK connection has a pulling power, is Coutts. This blue-blooded bank is moving from a position where around 40 per cent of its business – based on various metrics – is international to one where 60 per cent of it will fall into this category.

An issue is how does a bank, refreshing its brand and looking to give itself a more international profile, cope in a market that has at times suffered from adverse publicity about the behaviour of energy-rich oligarchs and the hard-line policies of Vladmir Putin in Russia? On the other hand, some of the numbers are alluring. There were 159,000 high net worth individuals in Russia in 2011, according to latest industry figures, with combined wealth of $941 billion. About a third of this HNW wealth is held offshore.

The former CIS/East Europe region is not an easy market to crack but Coutts is confident it is making the right choice to give it close attention, as Michael Vlahovic, head of private banking for Central and Eastern Europe, told this publication in a recent interview. The main areas in his business are Russia, Ukraine, and Khazahkstan. Other, “satellites” of interest are Georgia, Armenia and Azerbaijan.

The Coutts brand is gaining strength across Russia/CIS , he said, particularly because, “the number of Russians who have moved to or simply bought property in London means that the name has become a lot more visible to them”, he said. “That proximity to the brand is a big driver for us.”

“The Russia/CIS market started to really evolve in the early 1990s; through to the Millennium, the biggest challenge was understanding what was going on in terms of the provenance of the new wealth being created,” Vlahovic said.

“Transparency has greatly improved from where it was 15 years ago or even 5 years ago. I n many ways getting the requisite amount of information in Russia is as straightforward as in other geographies," he continued.

Vlahovic has been in his current post since April 2010 and has been instructed to grow the bank’s presence in selected Eastern European markets. Before joining Coutts, Vlahovic was at Credit Suisse, where he developed its private banking operations in Russia, the Ukraine, Kazakstan, Poland and Greece. Prior to joining Credit Suisse in 1995 he worked for Nomura, the Japanese brokerage and investment banking giant.

Focusing on the big ones

He explained that over recent years, Coutts has decided to focus on those markets where it has the most chance of winning and retaining business without the distractions of widely diverging local regimes. The bank, for example, does not focus on “Central Europe” or what might be loosely termed the old Warsaw Pact nations, such as Poland and Hungary. There are too many differences and local features requiring considerable investment of time and money to achieve returns. In contrast, a market such as Russia is much more scalable and thus strategically important for investment, he said.

The decision to focus on this and other select ed markets across our International Franchise was taken after a review of Coutts’ business, which started around two-and-a-half years ago, was reconfirmed last year.

The background environment is broadly benign, albeit with some caveats and stock market performance has been volatile in Russia, for example, in recent years. As reported in the RBC Wealth Management/Capgemini survey of trends last year, gross domestic product expanded by 3.8 per cent in Eastern Europe in 2011, from the year before, mainly due to growth in the emerging economies of this region despite the eurozone crisis.

In Russia, in the period between 1995 and 2012, annualised real returns on equities were 5 per cent; on bonds, 6.1 per cent . Russia still is very heavily tilted towards energy and natural resources. At the start of this year, 55 per cent of the Russian stock market comprised oil and gas firms. In the decade after the 1998 crisis, Russia chalked up an annual average growth rate of 7 per cent – so no wonder the place has generated a large cohort of high net worth individuals.

Finding talent

People with specific talents – such as language skills and knowledge of the local scene – are needed to make these market segments work. The pool of private bankers with a good knowledge of the Russia/CIS market is relatively small, both inside and outside the region, he said. In London, for example, there are probably no more than around 30 such people; when people from other European centres are added, such as Zurich and Geneva, the figure will still probably not exceed 150.

“We have a mix of people who speak Russian and those who don’t,” he said.

He said that as many Russian clients are living outside the country and used to speaking English or languages such as French, the ability to speak Russian is not always crucial. In fact, Russian clients, given the diaspora around the world, are on some measures the most cosmopolitan and international type of clients of all.

“They really operate on a global basis,” he said. “Of all high net worth groups in the world, the Russians are more cosmopolitan in terms of where and how they made and now invest their money.”

“I am on the look-out at all times for bankers with the skills to make an impact among Russian clients. I want those with a good track record of operating in this space,” he added.

Vlahovic and colleagues will hope that by the time Russia plays host to the World Cup soccer tournament in 2018, that the feel-good factor that is associated with such jamborees is not just felt by players or fans, but by Coutts’ clients and advisors.