Andrei Kostin: Russia's most powerful financier and boss of 'Putin's piggy bank' defies the oligarch sterotypes

Last autumn, Kostin shocked investors from the West by addressing guests at a gala dinner of Moscow’s huge international banking conference dressed as Joseph Stalin

Jim Armitage
Saturday 27 January 2018 12:27 GMT
Through its 20,000 branches, VTB has a grip of more than 50 per cent of Russia’s retail deposits
Through its 20,000 branches, VTB has a grip of more than 50 per cent of Russia’s retail deposits (REUTERS)

Conjure up an image of Russia’s most powerful banker, running an organisation subject to western sanctions and accused in some quarters of being Vladmir Putin’s piggy bank.

I imagine you’ll picture a severe looking, wall-shaped politburo bruiser in black suit, black shades and bushy eyebrows flanked by a bodyguard or two. His office would, I suspect, be a vast, oak-panelled job in a grey, Stalinist concrete slab by the Kremlin. A portrait of Putin would beam benignly down from above the wide, mahogany desk.

Far from it.

Andrei Kostin, boss of the state-controlled VTB bank, greets his visitors with a beaming smile, an open-necked shirt and a cheery handshake. He’s mischievous, like many powerful Russians. Last autumn he shocked investors from the West by addressing guests at a gala dinner of Moscow’s huge international banking conference dressed as Joseph Stalin.

His English is good, and his office – on the 58th floor of a glass and steel spike in Moscow’s financial district - is light and airy, featuring modern Russian artworks. Huge windows wrap two sides of the room, apparently looking towards the centre of the city and the monumental Russian White House government building. I say “apparently”, because when I visit, all you can see is thick white snowflakes and fog. It’s like sticking your head in a feather pillow.

VTB hit the headlines here in the UK during Oleg Deripaska’s London flotation of his aluminium and energy behemoth EN+. One of the many criticisms of the float was that finance raised from British pension funds would be paying off loans owed to VTB, a sanctioned entity since Russia’s ‘adventures’ in Ukraine. The criticism was particularly cutting because VTB has been accused by critics of lending money to customers on the orders of the Kremlin.

It is a claim Kostin – who a rival banker describes as “a survivor” having been running the bank for 15 years - vehemently denies. “Never!” he says. “Bullsh*t. That’s bullsh*t, absolutely bullsh*t. There has never been a single case when Mr Putin called me and says ‘give a loan.’ Even if he asked, I could find 100 reasons why it shouldn’t be done.”

In a similar vein, a VTB subsidiary, RCB, was famously accused by journalists investigating the Panama Papers of mysteriously lending hundreds of millions of dollars to a cellist friend of Putin, with reports claiming the cash was funnelled through a $2bn offshore network. Assumptions were made – and denied – that this was Putin’s cash. Again, Kostin says VTB’s hands are clean: “Ha! That was a great story: when the Panama Papers were published the journalists all asked: ‘Ooh, where is Putin’s money, where is it? But in the Panama Papers, whose money was found? [David] Cameron’s and [Ukrainain president Petro] Poroschenko’s. Not a single Russian senior official.”

He jovially warms to his theme: “Then, the Paradise Papers were published: not a single Russian senior official was mentioned. But who was? The Queen of Britain! Sorry to say it, because I love her. Oh, and the minister of commerce from the US [Wilbur Ross]. No Russian senior officials.”

Cynics will point out here that Ross’s starring role in the Paradise Papers was because it showed him investing in a shipping business with links to a Moscow-based company whose shareholders included Putin’s friend and judo partner Gennady Timchenko and son-in-law Kirill Shamalov, but there you go.

In fact, when it comes to controversy over offshore havens, Kostin rails against what he sees as western hypocrisy. “Russia has no offshores. They all exist in America, in Britain, in Europe. So if you want to fight against this, close them!”

Many Russians say Britain is hypocritical on such matters, because of the way they claim it allows alleged Russian fraudsters to stay in London and avoid justice back home.

Kostin is clearly deeply annoyed at one case in particular, that of Andrey Borodin, a banker who fled to the UK from Russia after facing charges of a 12.8 billion ruble (£162m) bank fraud. Successfully claiming political asylum, Borodin bought a Berkshire mansion for a record £140m and has been living here ever since. For Kostin, it’s personal, because the alleged fraud took place at the Bank of Moscow, which VTB took over, only to find what Kostin calls “huge losses”.

“People like Mr Borodin receive political asylum and then he is an untouchable now,” he shrugs.

Borodin claims he was persecuted for political reasons because he was close to Moscow’s ousted mayor Yuri Luzhkov and his billionaire wife. He denies all charges.

Kostin says he asked David Cameron at a previous Davos meeting about such asylum incidents, but the then-Prime Minister apparently responded “everything is decided by our courts.”

Russian businesses often use offshore entities for reasons of tax and security, he says. While criticising companies which do, he adds: “Our government ought not to punish them but should make it more attractive for businesses to return.” He approves of some measures, such as restricting how much banks can offer finance to offshore-based firms. “Things are moving,” he says. “I know a number of our big clients who are now re-registering their company here.”

In our opinion Mr Trump doesn’t want sanctions because he understands the negative effect on the whole range of the relationship between America and Russia

VTB did have a sizeable European investment bank in the City of London, but pulled about 100 staff in a move reported at the time to be due to Brexit. In fact, sanctions, and the longer term fallout of the financial crisis had more to do with it, he says. Tough new financial regulations on Russian banks were also a factor, he adds.

If the Kremlin had a hand in the Brexit result, as some claim, Kostin seems to have known nothing of it. He lost $1m of his own money investing in sterling before the referendum, so convinced he was that the Remainers would prevail.

Now with only around 250 staff in London, he has also consolidated his European operations, closing his French business and making Frankfurt the head office with a subsidiary in Austria.

The biggest pain for VTB – both in terms of finances and reputation, remains the issue of international sanctions. Next month will see Russia getting hit with another flurry of curbs from the US, on top of the already damaging rules that prevent it borrowing money for more than two weeks on the international markets, or selling any more of the government’s 60.9 per cent shareholding to western investors.

Kostin says the impact of the latest laws is difficult to predict because they have been drafted loosely. “They are, shall we say, more a political manifesto than a legal document,” he says.

But he adds deliberately: “Any further actions against Russian leading financial institutions for me looks like a declaration of war. Because it would mean the American government has crossed the red line, I think.”

He goes on to attack the way “Putin’s friends” have been sanctioned (he himself has not). He points at me: “You are from Britain, the country of law: just imagine the category ‘friend of the Russian president’! The president himself is not an outlaw, he is meeting Madam May, President Trump. He is the leader of a country. And these people have never been accused of any wrongdoing. Nobody brought charges for moneylaundering, for corruption or anything. They are considered to be friends of the Russian president so let’s freeze their money? It’s nonsense.”

He adds: “In our opinion Mr Trump doesn’t want sanctions because he understands the negative effect on the whole range of the relationship between America and Russia.”

Sucking on a chocolate he plucks from a china box shaped like the Kremlin, he warms to his theme: “Sanctions or no sanctions, most important is that our world has become a much more dangerous place to live since the relationship between Russia and the West started to worsen. Since the Berlin Wall fell, the Soviet Union collapsed and communism died, Russia never threatened anybody [in the West]. And now what are we doing? We have to spend more money on arms on both sides? We are putting more troops in Europe? What for? There is no reason for this nonsense.”

Er, well, from the West’s point of view, there is, actually. Putin’s aggression in Ukraine and elsewhere in the former Soviet union. The killings of hundreds of civilians by Russia’s indiscriminate bombing in Syria. The alleged interference in the US elections.

“Listen,” Kostin says. “We have huge support from the business world in the West. They say: ‘We might disagree on Ukraine, we might disagree on Syria. We might disagree on 100 other things, but business is business. The financial sector is the financial sector. Don’t touch it. Let the politicians decide. Let them sit in New York, Geneva or whatever. Let them discuss it. But business should be continued, separate. It should not suffer. And that is what we stand for. We truly believe in this.”

That Russia is suffering badly from the impact of sanctions is a given. However, since the initial shock – which coincided with the collapse in the price of the key Russian export of oil – its economy has somewhat stabilised. The Russian state is still allowed to borrow on the international markets even if banks like VTB aren’t.

Having contracted in 2016, Kostin reckons Russia’s economy grew at around 1.8 per cent in 2017 – far better than the 0.4 per cent or 0.5 per cent he expected at the start of the year. Next year will be broadly similar, he predicts: “That’s not enough, not very very impressive. As an emerging economy we want at least 4 per cent. But we have returned to growth and can expect stability in the future.”

Inflation, he adds, is running at 2.5 per cent, which attracts investors. A rising oil price, strong agriculture sector and expansion in European economies help, too.

VTB is Russia’s second-biggest bank behind the market leader, the giant, majority state-owned Sberbank, which has far higher returns on equity.

Unlike VTB, which was only set up in 1990 to handle Russian foreign trade, Sberbank is a behemoth made up of scores of former savings banks across the country, some going back to the 19th century.

When Kostin became chairman in 2002, VTB’s balance sheet was a tenth of its rival’s size. Now it is 50 per cent.

Kostin acknowledges the successes of his rival Herman Gref but says Sberbank has the advantages of its legacy as the local bank for the vast mass of the Russian populace.

Through its 20,000 branches, it has a grip of more than 50 per cent of Russia’s retail deposits, which are the cheapest way for banks to fund their lending. VTB only started in retail banking a decade ago but is starting to push harder into the towns and villages outside Moscow.

He is also seeking more small and medium sized enterprises to lend to, he adds, again hunting for cheaper access to funds. In 2016, VTB made profits of 50 billion, last year will be around 100 billion, next year will be 150 billion with 2019 hitting 200 billion, he predicts.

If all goes to plan, that should see his return on equity rise from the current 8 per cent to 14 per cent, catching up with Sberbank’s goal of 20 per cent.

“We have a strong capital base, everything is fine, but we should be more efficient and earn more money, and we will. That’s my forecast,” he says.

Funnily enough, the previous day, I’d had a similar meeting in London at the top of a skyscraper with the multimillionaire chief executive of one our biggest banks. And you know what? he said almost exactly the same.

These Russian oligarchs, they aren’t that different from ours, you know.

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