Banking With Russians: Change of Paradigm

Credit Suisse, Geneva

Credit Suisse, Geneva

Banking with Russians for more than two decades has been a gold mine. Now, the losses incurred by a Georgian oligarch on his accounts at Credit Suisse have the potential to turn into a scandal that will affect the private banking industry for a long time. 

The storm brewing over the skies of Swiss private banking is gathering in strength: in the case of the money belonging to Bidzina Ivanishvili, a Georgian oligarch, hardly a day passes without new revelations with damaging news about Credit Suisse (CS).

The number of plaintiffs is rising by the hour as is the amount claimed. The business with rich Eastern Europeans, otherwise considered highly lucrative, is quickly turning into a turning point for Swiss private banking. Insiders familiar with «Banking with Russians» are convinced that their business is about to change dramatically.

Change of Paradigm

«We are witnessing a change of paradigm,» a high-ranking private banker based in Zurich says on condition of anonymity. According to the judgment of this banker, it is poignant that the banker, who caused the problem, was a career changer who nevertheless got entrusted with huge amounts of assets.

«We are in the aftermath of the 1990s and the turn of the century, when growth was all that mattered and you got hired as long as you spoke Russian fairly well,» the veteran banker told finews.ch. Those qualifications don't suffice in today's world of banking though as CS got to know to their disadvantage.

Russian Market Is Maturing

Part of the reason is that Russia has matured as a market. New rules of transparency enacted a year ago for Russian citizens are the best example for this seminal change. The Russian tax authorities are hoping to reign in tax evasion and to force Russians to make assets held abroad more transparent.

When the Russian government started working on the new regulation, the country was on the brink of a recession. After the introduction of sanctions by the West and the steep decline of the oil price, Russia had even more reason to try stem the outflow of capital.

Compliance Officers Stretched

The new laws in Russia prompted compliance officers at Swiss banks to take a keener interest in the assets of super rich clients from the East, wealth that had grown unfettered over the years.

And to their dismay they found themselves frequently unable to fully grasp the structures grown. The traditional IT tools didn't help grasp the reality and had to deploy expensive new gear. «The bigger the bank, the more complex the structures,» an expert in compliance said in an interview.

Flying Blindfolded

This conclusion is worrying the banks: Swiss private bankers are flying blindfolded at a time when «Banking with Russians» is turning from a bonanza into a mature business. It wouldn't surprise anybody if further scandals such as the one at CS were to blow up.

Such an event tends to turn into a never ending nightmare for the affected banker and bank. «With their immense assets, these clients can afford to escalate legal tussles over many years,» the veteran banker told finews.ch. «The amounts involved are enormous, even for big institutes.» Not to mention the damage to their reputation.

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