Wall Street scrambles for exits in Moscow – and billions are at stake

For decades, global financial firms have eagerly welcomed Russian companies, billionaires and the government. Then the tanks began to arrive in Ukraine.

Citigroup Inc., which has thousands of employees and billions of dollars in assets in Russia, said it would cut much of its business in the country. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Deutsche Bank AG are also heading for the exit, with some financiers relocating to other hubs such as Dubai. They are followed by lawyers and other professionals.

It is perhaps the hardest and fastest exclusion in living memory from a major industrialized economy. The past few weeks have been a frantic race to understand and implement sanctions that are continuously updated by jurisdictions such as the United States, United Kingdom, Japan and the European Union.

The result is that the once bustling offices have come to a halt, and not just in Moscow. Traders found themselves stuck with Russian stocks and bonds they couldn’t transfer, while derivatives tied to them were left in limbo. The private bankers of the now toxic Russian billionaires are drumming their fingers as their clients struggle to pay the cleaners at their London mansions. For the financial industry, billions of dollars are at stake. A dozen lenders, including Raiffeisen Bank International AG, Citigroup and Deutsche Bank, have about $100 billion in combined exposure to Russia, according to data compiled by Bloomberg. . The companies, however, stressed that their balance sheets could easily absorb any hit to their Russian business.

Cut communications to Russia

Within hours of Russian troops entering Ukraine, Moscow financiers have witnessed the effective collapse of businesses that until last month appeared to be in poor health. A local investment manager, who asked not to be named, said he was woken by colleagues and rushed to the office that morning. His company used to manage $6 billion for pension funds, but now he thinks his clients’ assets are probably worth a fraction of that and possibly nothing at all.

Another official from a group of Moscow-based traders, who also spoke on condition of anonymity, said activity levels on his desk had fallen by three-quarters as foreign brokers stopped dealing with his company. He said he hoped to pick up the cases others left behind when they left Russia.

Staff at VTB Bank PJSC, which has been sanctioned by the US and whose UK unit has been frozen, find it virtually impossible to get many Western businesses to return their calls and emails, according to someone familiar with the situation. This left investment bankers struggling to close deals with counterparties.

Bill Browder, once one of Russia’s biggest foreign investors and now a prominent critic of President Vladimir Putin, said investment banks had played a vital role in opening up Russia and channeling its money to the rest of the world. | BLOOMBERG

Some companies have stayed in contact with VTB, Russia’s second-largest bank, and have been largely successful in sorting out their ongoing transactions, the person said, asking not to be identified discussing private matters. Many others severed ties once the sanctions were announced and could take much longer to unravel cases, the person said. VTB declined to comment.

Leave Russia for money and morals

Bill Browder, once one of Russia’s biggest foreign investors and now a prominent critic of President Vladimir Putin, said investment banks had played a vital role in opening up Russia and channeling its money to the rest of the world.

“They made the oligarchs all look legitimate enough for Western investors to throw billions of dollars at these companies and their owners,” Browder said.

An example of the complex network of relations between Russia and global banks is LetterOne Holdings, the investment company founded by Russians, including sanctioned billionaires Mikhail Fridman and Petr Aven. A hedge fund HSBC Holdings PLC had $547 million in LetterOne money at the end of 2020, and a Blackstone Inc. vehicle had $435 million, Bloomberg reported. Pamplona Capital Management, which manages nearly $3 billion of LetterOne’s money, has already begun returning its funds.

And there are corporate clients. JPMorgan has been a major player in issuing debt for Russian companies, competing with local giants VTB and Sberbank PJSC as well as Citigroup, Societe Generale SA and UBS Group AG.

JPMorgan said it was “actively unwinding” its Russian business, and it excluded Herman Gref, Sberbank boss and former Russian minister, from its star-studded international board.

“Banks should stop their business with Russia because it’s the right thing to do commercially, but yes, it’s also a moral point,” said Natalie Jaresko, who served as Russia’s finance minister. Ukraine after the annexation of Crimea eight years ago.

Drawing the line against Putin’s regime

Former Goldman Sachs banker Georgy Egorov feels uneasy about Wall Street’s ties to Russia. He called on the bank to pull out in a LinkedIn post, which was published before the company announced it would leave the country on March 10.

Mikhail Fridman, billionaire and co-founder of LetterOne Holdings SA, (centre) arrives for a hearing in Madrid in October 2019. |  BLOOMBERG
Mikhail Fridman, billionaire and co-founder of LetterOne Holdings SA, (centre) arrives for a hearing in Madrid in October 2019. | BLOOMBERG

Speaking to Bloomberg after the bank’s announcement, Egorov said exiting Goldman was tough, but the right thing to do. “All the big investment banks had significant operations in Russia, and to collect fees you had to work with a government entity or work for oligarchs,” said Egorov, who has been involved in some of Russia’s biggest deals. business in Russia, including VTB’s IPO. He moved to the UK years ago and now works outside of banking.

“For me, personally, it is very difficult because I feel complicit. I am Russian and it is black and white: if you defend strong corporate governance, all you have to do is condemn the war against Ukraine and the Putin regime.

Why leaving Russia is so difficult

Consultants, lawyers and auditors are also separating from Russia, although it is a delicate process. The big four accounting firms – Deloitte, KPMG, PwC and Ernst & Young – will have to cut ties with their Russian and Belarusian member firms, which are owned by local partners. These Russian entities can continue to work with their customers but no longer have access to the company’s global network.

The secondment process won’t be quick, says Ashish Nanda, a senior lecturer at Harvard Business School, and is likely to get complicated. What if a Russian customer, now subject to sanctions, has a subsidiary in Mexico, which does not impose sanctions? What if Russian accountants took care of the work in neighboring Kazakhstan?

Management consultants and law firms cannot so easily abandon their Russian operations. Companies ranging from McKinsey & Co. and Bain & Co. to Linklaters, Freshfields Bruckhaus Deringer and DLA Piper have to juggle the support of their Russian partners and staff, the obligations of existing customers and their relationships with the state.

“It’s a terribly complex math,” said Nick Lovegrove, a management professor at the McDonough School of Business in Georgetown, who spent 30 years at McKinsey.

In the days following the invasion, McKinsey initially said only work for Russian government entities would cease. Four days later, the company went further, saying it would “immediately cease existing work with public entities” and not undertake any new client work there, although its Moscow office would remain open. Rivals like Bain and Boston Consulting Group have taken similar positions.

Professional services firms that remain in Russia have essentially two choices, according to legal industry consultant Tony Williams, who once ran the Moscow office of London law firm Clifford Chance. “Close the whole thing or transfer this business to the partners in the field. I haven’t seen any company being specific about it,” he said. “You can say you’re temporarily closing, but unless there’s a regime change, you’re not coming back.”

As the war enters its second month, there are few signs of an imminent change in the situation. For those who specialize in serving Russian customers, it might be time for a career change.

A broker to some of Russia’s wealthiest businessmen is now looking to become a classic car dealer, an executive familiar with the matter said. A British recruiter, who asked not to be named, said he had received an influx of calls, including from a Russian private banker whose livelihood disappeared overnight.

He asked the recruiter if he could move on to UK-focused Wealth. The answer: It won’t be easy.

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