(Bloomberg) — With the Russian flag flying prominently from its facade, it is hard to miss the British outpost of Russia’s second largest bank.
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VTB Bank PJSC moved into the offices, a stone’s throw from the Bank of England, in 2008 with vaulting ambitions to be a major player in the City of London. This week’s sanctions look like the knockout blow to its plans.
On Friday, London Stock Exchange Group Plc suspended VTB’s membership, meaning it can no longer trade on the market. The bank has also lost access to the London Bullion Market Association, where it traded precious metals, along with Russian peer Sovcombank.
Meanwhile, other lenders are scrambling to cut ties with VTB after the U.K. Treasury froze its assets. On Friday, the U.K. Treasury ordered anyone with positions involving VTB Bank to unwind them in 30 days.
VTB’s decline in London has been underway for years, as the bank shifted more of its operations to Frankfurt and Zug. Accounts filed in the U.K. show that assets in its London-based subsidiary VTB Capital Plc peaked in 2014 at $11.6 billion and shrank to $1.66 billion by 2020, while staff numbers fell from about 400 to about 150. According to the U.K. Financial Conduct Authority’s register, VTB currently has 56 approved employees in Britain.
A spokeswoman for VTB declined to comment on specific questions and instead pointed to the bank’s earlier statement, in which it said it has worked to minimize the effect of sanctions on clients and that “another round of politically motivated anti-Russian sanctions came as no surprise.”
Critical Element
VTB’s operations across Europe rely heavily on its Zug outpost, where staff have been told to keep working as normal for now, according to one person familiar with the matter. Since the U.K. Brexit vote in 2016, the Swiss town has become VTB’s hub for commodities trading.
However, its expansion into physical metals has meant using the U.K. markets — which are in fact dominated by London offshoots of major U.S. banks — to hedge risks.
As early as 2013, VTB was looking at joining the London Metal Exchange, the biggest market of its kind and known for its “open outcry” trading floor. Such a move would have cemented VTB’s position in the capital and put it in competition with the likes of JPMorgan Chase & Co. and Citigroup Inc. Instead, VTB gained access as a client of JPMorgan and other U.S. banks, according to two people familiar with the matter. U.K. accounts show both JPMorgan and Citi have outstanding financial links to VTB Capital Plc.
Spokespeople for Citigroup and JPMorgan declined to comment.
Citigroup had about $5.5 billion worth of loans, investment securities and other assets tied to Russia, just 0.3% of its total, at the end of the third quarter.
The U.S. Treasury said Russian financial institutions carried out daily foreign exchange transactions worth $46 billion, of which 80% are dollar-denominated. Most of this business will now be disrupted, according to the Treasury.
“The City of London is a critical element in the Russian financial system and has been used to integrate it with the West,” said Natalie Jaresko, who was Ukraine’s finance minister amid the annexation of Crimea eight years ago.
Legal Issues
VTB is also tied up with London’s legal industry. Freshfields Bruckhaus Deringer LLP is acting for the bank in its High Court fight against the Mozambican government over the ‘tuna bond’ scandal.
While law firms and other advisers can apply to the U.K. Treasury for a license to continue to work with sanctioned entities, they are prevented from receiving any payment until the license is granted. A spokeswoman for Freshfields declined to comment.
It will highly be challenging for sanctioned banks to keep doing business in the Square Mile, said Paul Feldberg, a partner at law firm Jenner & Block. “If they have pre-existing ongoing contractual obligations, through loans or M&A deals for example, it may that in some circumstances those transactions, with authority from HM Treasury, could go ahead, but it’s going to be very difficult,” he said.
Sanctions also raise questions for European and U.S. nationals employed by Russian financial institutions. Of the seven named officers of VTB Capital in London, five are British citizens and one is French. Only one is Russian. At rival Sberbank PJSC’s U.K. unit, all the directors are British.
Tom Tugendhat, the chairman of the British parliament’s foreign affairs committee, said Britons and other foreigners working for Russian banks should “think very carefully.”
(Updates with U.K. Treasury order to wind down positions in fourth paragraph.)
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