Wealth Explosion is a Heyday for Private Bankers
Text Jacob Andrews
Everyone knows and everyone is talking about it: wealth is just exploding in Russia; no denying it! That has recently been re-confirmed by Forbes Magazine in its annual billionaires survey, which estimates that Moscow, with 71 UHNWIs (Ultra High Net Worth Individuals, not to be confused with HNWIs, or High Net Worth Individuals) has again beat New York for the title of city with the most billionaires. Couple that with the fact that Russia is now for the first time home to the second highest population of billionaires after the US, surpassing Germany for the first time. Speaking of “surpassing Germany,” Russia’s retail sector is expected to exceed Germany’s by the end of this year. While Forbes has confirmed everyone’s belief that Russia has no shortage of superwealthy, retail figures confirm that the middle class is burgeoning in step.
So besides investing in cars, yachts, and dachas, Russians are also putting their money aside for their gray years. In that regard, asset management and private banking has been rapidly expanding. In the early part of the decade, asset management and private banking were truly foreign concepts. Up until that point, Russians primarily sent their extra dollars overseas to places like Switzerland and Cyprus. The next stage of the industry saw the emergence of various financial services providers such as Renaissance Capital, Aton, UFG, and Troika, which courted Russian money mostly for investment in overseas equities.
The Icelanders are here!
Times have changed rapidly, and now there are many asset managers and private bankers around. The market is currently moving very fast, and many Western players are barreling into Russia. The Russian market is so attractive for Western financial services firms that it has even caught the attention of little Iceland! Who would have thought? Perhaps it is not that much of a surprise for this island of only 300,000 inhabitants since it is a very banked nation with banking assets over five times the country’s GDP. By comparison, most Western countries have total banking assets about one-tenth of that figure, or about half of the country’s GDP.
Of course, the Icelanders have to compete not only with the local Russian players but also with many large Western banks — Deutsche, Credit Suisse, UBS, HSBC, Societe General, Citibank, Raiffeisen. Some of the reasons for the changing market:
Booming stock market. The Russian equity market has boomed since 2001. The local exchanges have increased in value several fold, far outstripping most Western exchanges (most Western have only marginally increased or even decreased during the same period) and well ahead of inflation. The country’s stock market is the world’s 12th largest by total capitalization at $1.35 trillion. The number of freely floated stocks is small, though this is rapidly changing. In addition, the country is tightening insider-trading laws, which makes investments for corporate outsiders more attractive.
Stable bear. Russia has been very stable both politically and economically.
Offshore products now available at a bank near you. It is now possible to buy offshore products here in Russia without establishing a relationship with a bank or asset manager in the West.
Low taxes: 0%? The tax system is very transparent and in favor among investors. According to tax expert Jon Hellevig of Hellevig, Klein & Usov, “income taxes, which would apply to regular income and financial investments alike are some of the world’s lowest at 13 percent, making Russia a good place to declare income, both financial and otherwise.” In addition, dividend taxes for Russian so-called tax residents are a low 9 percent, Mr. Hellevig said. As for taxes on investments, there have been recent reports of proposed legislation to eliminate taxes on capital gains on financial investments. So, while Moscow may at present be a good jurisdiction in which to establish an asset-management relationship, it may get even better in the near future. And if you are not subject to double taxation by your home country, Russian investment taxes are competitively low.
While there are lots of asset managers in Russia, there are only about 100 serving the UNHWIs and HNWIs, said Claus Korner of Iceland’s Glitnir. It is estimated that Russia is home to more than 250,000 multimillionaires.
The Future for Private Banking
According to Mr. Korner, the trend for financial services is very strong, and it is expected that the industry’s growth should easily exceed 40 percent per year for the next five to eight years. It sounds bullish, but nothing about Russia these days should be surprising, especially since the country’s economy is heavily dependent on commodities and retail, both sectors currently in boom mode.
And let’s not forget the rest of Russia. Experts told Passport that since Moscow is filling up with so many foreign and local financial services players, the focus has shifted to the regions, primarily those cities with upwards of one million inhabitants as well as those with populations of 500,000 and one million.