Wall Street ties to Putin threatened as sanctions ratchet higher

Wall Street leaders including Lloyd Blankfein and James Gorman are facing a dilemma as tensions over Ukraine escalate.

Mar 21, 2014 @ 9:56 am

Wall Street leaders including Lloyd Blankfein and James Gorman, who have courted business in Vladimir Putin's Russia, are facing a dilemma as tensions over Ukraine escalate.

Their scheduled attendance at Mr. Putin's annual investor showcase in St. Petersburg in May is in doubt as sanctions imposed by the U.S. in response to Russia's annexation of Crimea — and retaliatory moves by Mr. Putin — threaten the ties between Russia's leader and businesses including the Goldman Sachs Group Inc. and Morgan Stanley. Spokesmen for the banks declined to comment on whether the executives will attend.

(See also: Investors not buying gold bounce despite Ukraine tension)

Wall Street firms that have pursued deals in Russia for years are being forced by the dispute over Ukraine to re-examine their bet on friendlier relations between Putin and the West. President Barack Obama on Thursday added to the list of Russians targeted by financial sanctions and a June Group of Eight meeting in Russia was scrapped. Russia banned entry by U.S. leaders including House Speaker John Boehner.

“If you're a head of a major U.S. financial institution, you say, 'President Obama's not going to the G-8 meeting, should I go to St. Petersburg?'” said Edwin Truman, a senior fellow with the Peterson Institute for International Economics who was an assistant Treasury secretary for international affairs in the Clinton administration. “If they don't ask themselves that question, they're not doing their job.”

'DANGEROUS RISKS'

On Thursday, President Obama ordered financial sanctions on OAO Bank Rossiya, a St. Petersburg-based lender owned by Putin associates, and on an increasing number of Russian officials, saying the incursion into Ukraine and continuing military movements carry “dangerous risks of escalation” and must be met by unified global opposition. Russia responded by barring entry by nine U.S. officials, including Mr. Boehner.

(Don't forget: Ukraine likely to present buying opportunities, strategists say)

At stake are investments made over years and sometimes decades by global companies in Russia, where economic growth had until recently outstripped the U.S.

Goldman Sachs has made at least $1 billion in investments in Russian companies and won a three-year contract last year to advise the Kremlin on improving the nation's image overseas and to help the country attract more investors. Morgan Stanley plans to sell its oil-sales unit to OAO Rosneft, run by Putin ally Igor Sechin. Citigroup Inc. has a more than 50-branch retail network on the ground.

This year's three-day St. Petersburg International Economic Forum in Putin's hometown runs from May 22 to May 24. The March 14 list of participants featured Deutsche Bank AG co-chief executive Juergen Fitschen and UBS AG's investment-bank chief Andrea Orcel, as well as the heads of companies such as PepsiCo Inc., ConocoPhillips, Alcoa Inc., Total SA and Glencore Xstrata Plc.

A UBS spokesman and Deutsche Bank spokeswoman declined to comment on their executives' plans for the forum.

COURTING KREMLIN

Mr. Blankfein has been courting the Kremlin since at least April 2007, when he wrote to Mr. Putin seeking a meeting to discuss expanding operations. The bank's board of directors traveled to Russia in June 2008 for a four-day gathering split between St. Petersburg and Moscow. The trip included a tour of the State Hermitage Museum, a private session with Mr. Putin and a speech by former Russian leader Mikhail Gorbachev, according to an account in Andrew Ross Sorkin's book “Too Big to Fail” about the 2008 global financial crisis.

Mr. Blankfein, along with JPMorgan Chase & Co. CEO Jamie Dimon, is also a member of Prime Minister Dmitry Medvedev's advisory committee for turning Moscow into a financial center.

Citigroup returned to Russia in 1992 following the collapse of the Soviet Union, ending a 72-year hiatus. Vikram Pandit, who led Citigroup from 2007 to 2012, was a regular speaker at Mr. Putin's economic forum and also advised Mr. Medvedev on turning Moscow into a financial center.

The bank ranks fourth among foreign retail banks in Russia, with more than 1 million clients. The top three foreign lenders, France's Société Genéralé SA, Austria's Raiffeisen Bank International AG and Italy's UniCredit SpA, have expanded by making acquisitions.

While financial firms will want to assess the risk of being in the midst of the conflict, they won't face any resistance to doing business in Russia, said Stephen Myrow, a former Treasury Department official who is now managing partner of Beacon Policy Advisors.

“The tit-for-tat between the U.S., the EU and Russia is much more rhetoric than impact at this point,” he said. That would change if the U.S. targets large, state-owned Russian banks or major energy companies with sanctions, a prospect he said he views as unlikely.

'DAMAGING BLOWS'

What may matter more than sanctions to some Western executives is the reduced profit opportunity in Russia combined with the reputational risk of an alliance with Mr. Putin, said Bernie Sucher, a board member of Aton Capital and the former country head of Bank of America Merrill Lynch in Russia.

“The official sanctions are not as important as the sanctions on the marketplace,” Mr. Sucher said earlier this month. “It's more the damaging blows to the markets and the prospect of the reversal of Russia's decade-long commitment to joining the world.”

HSBC Holdings PLC, Barclays PLC, Morgan Stanley and Banco Santander are among international lenders that have abandoned consumer banking in Russia in recent years in the face of dominant local banks like OAO Sberbank and VTB Group, the two largest Russian lenders.

VTB Capital on March 17 cut its 2014 Russian growth forecast to zero from 1.3% as “domestic demand is set to halt on the uncertainty shock and tighter financial conditions.”

If Russia's economy stagnates, banks would face increasing bad debts and delinquencies, Natalia Berezina, a banking analyst at UralSib Financial Corp., said: “Foreign banks may reassess their presence in Russia if it's no longer profitable here anymore,” she said.

“At this stage only Putin's very loyal friends will show up at the forum,” said Ovanes Oganisian, a strategist at Midlincoln Research in Moscow. “They will put on a show to try to put Ukraine behind them, but the truth is Russia is a much less important part in global emerging markets than it used to be.”

(Bloomberg News)

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