21 March 2022 14:10:18 IST

Russians lose private banks’ golden goose status

A general view shows trams in front of the headquarters of Swiss bank Credit Suisse and an office building of UBS at the Paradeplatz square in Zurich, Switzerland June 30, 2020. | Photo Credit: Reuters

The golden geese of private banking have lost their glow. Frightened by sanctions, wealth managers are now treating all rich Russian clients with suspicion. That limits their ability to sell them lucrative loans or new investment products. Higher compliance costs will turn these once-profitable customers into financial baggage.

Russian wealth is stashed in many places. But the crackdown is particularly painful for Switzerland, the world’s biggest offshore wealth centre. Russians hold between 150 billion Swiss francs and 200 billion Swiss francs with the country’s financial institutions, the Swiss Bankers Association says. That’s potentially almost half of Russian plutocrats’ global investible wealth, which the Boston Consulting Group puts at $500 billion.

True, the figure is just over 2 per cent of the 8.7 trillion Swiss francs banks oversaw in 2021. But the proportion doubles if domestic assets are excluded. UBS, Credit Suisse, and Julius Baer collectively hold over $100 billion of Russian money around the world, Breakingviews estimates.

Wealth managers used to view high-flying Russian clients as particularly lucrative for their tendency to engage in exotic and expensive transactions. These included using mega-yachts and private jets as collateral for loans, which allow bankers to charge gross margins as high as 700 basis points, compared with less than 100 basis points for so-called Lombard loans or mortgages backed by securities portfolios, according to industry estimates.

Those days are over. The European Union has frozen the assets of billionaires Mikhail Fridman, Petr Aven and nearly 900 other tycoons and politicians, which Bern is also implementing. The fast-changing rules mean wealth managers are treating all Russian clients as potentially subject to restrictions, bankers and industry sources say.

As a result, bankers are reluctant to allow Russian customers to transfer ownership of securities or move money elsewhere. They are also pushing clients to quickly repay outstanding loans, further straining relations. This risks denting wealth managers’ income. Meanwhile, mindful of hefty past U.S. fines for violating sanctions, private banks are incurring extra costs by studying individual accounts to ensure they have no links to blacklisted individuals or companies. “We have people working on this 24/7,” said one banking source.

In time, wealthy Russians who are able to move their money may flee to other centres like the UAE. For now, though, private banks in Switzerland and elsewhere will have to carry excess financial baggage.