Ukraine sanctions

The Russian Bear Market

Andrey Kostin is unfazed by sanctions.
  • Why it matters

    Why it matters

    Russia’s banking sector, and its economy, are highly dependent on E.U. and U.S. markets, but sanctions could force it into closer ties with China.

  • Facts


    • The VTB Group’s profits plunged by 98 percent in the last quarter.
    • Russia’s gross domestic product is expected to fall by 0.5 percent this year.
    • Sanctions over Russia’s support of separatists in Ukraine have targeted individuals, trade and banks.
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Andrey Kostin is the boss of VTB Bank, one of Russia’s leading financial houses. On a visit to Stuttgart, Germany, with Russia’s economy minister this week, he told Handelsblatt that he sees no end to the E.U. and U.S. sanctions imposed on his bank and country as a result of Russian involvement in the Ukraine crisis.

Mr. Kostin, are savings accounts held by Germans at VTB’s German subsidiary VTB Direct secure?

Absolutely. It’s my personal guarantee.

But VTB is affected by the sanctions against Russia?

The E.U. sanctions do not apply to our European subsidiary banks, including our bank in Germany. And even if you have your money in an account with our Moscow bank, the sanctions are not a problem for savings deposits. The bank is working. The sanctions only affect international refinancing, although their negative consequences are more far-reaching.

In what sense?

Because of the aggressive approach taken by the U.S. government with their sanctions, and because of the substantial fines banks such as BNP Paribas had to pay in the United States when they violated sanctions against Iran, banks around the world – From China to Brazil to Europe – are being very careful.

The VTB Group’s profits plunged by 98 percent in the last quarter. Will you end the year with no profits at all?

Yes, we believe the VTB Group will earn almost no profits. But there will definitely be no losses, either. This isn’t the end of the world for us, because we’ve created substantial reserves for loans to Ukrainian and Russian businesses, and we feel well-prepared.

Is your business in Ukraine a major burden this year?

We will probably have to write off about $1.3 billion this year, because the Ukrainian economy is on the brink of collapse. But we want to stay there, and we are not cutting back our loan portfolio. The sanctions and the economic problems will end sooner or later.

The Ukrainian economy is not expected to recover anytime soon.

We have about $5 billion tied up there. Russian banks have lent a total of $25 billion to Ukrainian people and businesses. No one can replace that. It’s more than the International Monetary Fund plans to give. I think we could end up losing half of our loans.

The Russian economy is also on the verge of a recession. Bad loans are on the increase. Are you worried?

Of course the sanctions create problems. The investment climate is worsening. On the other hand, many of our customers feel better than in 2008, because the rest of the world isn’t in crisis at the same time. And the devaluation of the ruble greatly benefits export companies. Russia lost almost 9 percent of its gross domestic product in 2009, while we expect it to decline by 0.5 percent this year.

Assuming that the sanctions remain at the current level, do you believe that the Russian economy and VTB could persevere for another two years?

Of course we can. But what can the sanctions achieve? The sanctions will never lead to Russia changing its policy in Ukraine. That’s for sure.




You were a diplomat before you became a banker. How do you explain Russia’s actions in Ukraine to the West?

We see Crimea, in particular, as something different. The people there are happy to be part of Russia now. And it would be a national humiliation for us to see the American fleet in Sevastopol, a city that embodies Russian glory. No president could afford to see that happen. But we don’t want Donetsk or Luhansk, or eastern Ukraine. That was never our intention.

And the International Monetary Fund knows perfectly well that Ukraine cannot be rescued from its severe financial crisis without Russia. We don’t want to kill Ukraine.

What should the Russian government do to stimulate the economy?

The government can spend more money on infrastructure. The central bank can lend money at favorable rates to mid-sized companies and make investment projects available. And as part of a broader approach, the government should promote more competition in Russia.

A few large companies – such as VTB – are too dominant. We need de-monopolization and a better environment for foreign investors. And the government should create more security for the economy.

Getting back to sanctions: There were discussions over excluding Russian banks from the SWIFT international payment system. If that happens, do you have a plan B?

We do. But as a bank, you are very limited if you cannot use dollar transactions, euro transactions or SWIFT. In my opinion, introducing these types of sanctions would mean war. Diplomatic relations should be suspended. But so far the sanctions against Russia have been effective, albeit selective.

Because the banking system is dependent on SWIFT?

Banking is the most vulnerable part of the economy, because the system depends very strongly on two currencies, the US dollar and the euro. I think it’s very dangerous when a country such as the United States can use its currency to effectively kill the financial institutions of other countries for political reasons.

Are China and the yuan the alternative for Russian banks?

We aren’t playing off China against the West. But the relationship with China will develop, of course. New trade agreements are being signed in yuan, and perhaps a few in rubles – even if the ruble, because of its weakness, unfortunately cannot be a reserve currency for the foreseeable future. These measures are another step to become more independent of the dollar.

What will you change at VTB in Russia?

In Russia, we will merge our three banks – VTB, VTB24 and Bank of Moscow – into one bank called VTB in the next three or four years. That reduces costs. We want get back to a 15-percent return on equity, a net income of 220 billion rubles in 2018 and an annual growth rate of 12 percent.

The Russian Forbes magazine writes that you are the top-paid manager of a Russian state-owned company, with an income of $37 million in 2014. Is that true?

That number is complete nonsense. I received 200 million rubles ($3.8 million) in 2013 and will have received 240 million rubles in 2014. That includes all bonuses. I was a private banker before I came to VTB, and invested my own money.


The authors are Handelsblatt’s foreign affairs editors. To contact the authors:,

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