Shutdown of Morgan Stanley's Banking Unit in Russia Unlikely to Affect Investment Climate
The decision of one of the largest US investment banks, Morgan Stanley, to close down the bulk of its operations in Russia will not have a significant impact on the investment climate in the country as the bank's share on the Russian market has been narrow, the experts told Sputnik
Even though rumors about Morgan Stanley's exit have been around since 2018, the closure of Morgan Stanley's banking, brokerage and depositary services in Russia was confirmed this Tuesday, when the company released its 2018 report.
In the document, the bank said that it plans to "forego banking, brokerage and depository licenses and voluntarily liquidate respective business departments of the company. It is expected that a statement on termination of banking operations will be submitted to the Central Bank of Russia in the first quarter of 2020."
According to the US giant, it took the decision to close down the majority of its business in Russia in 2018 and informed Russia's Central Bank in the same year. However, Morgan Stanley's operations in Russia will be running as usual throughout 2019. It also plans to retain its presence in Russia by providing consulting services.
Morgan Stanley noted in a report that the markets of developing countries, including Russia, are subjected to substantial economic, political, social and legislative risks. According to the bank, Russia's economy is sensitive to fluctuating prices on oil and gas, while Western sanctions hampered the access to global capital market for Russian businesses.
"The influence of changes in economic landscape on future results and financial situation of the Bank might be substantial," the report read.
Morgan Stanley first established its office in Russia in 1994. Slightly over 60 employees have been working at its subsidiary in Russia as of 2018, according to the report.
IMPACT OF MORGAN STANLEY'S DECISION ON RUSSIAN INVESTMENT CLIMATE
As Morgan Stanley is Russia's 203rd bank in terms of net assets, the closure of its banking unit will not significantly affect the market, but has already created a news sensation due to its globally known brand.
"In financial terms, it is clear that it will have no effect on the Russian market as similar services are provided by much bigger Russian companies. It only has an aspect of reputation, a buzz has arisen that Morgan Stanley itself is leaving Russia, but it is worth noting that [the US bank] is not leaving Russia completely," Aleksei Korenev, an analyst with the Finam Holdings, one of the biggest investment companies in Russia, told Sputnik.
Evgeny Kogan, a professor at the Faculty of Economic Sciences of Russian Higher school of Economics (HSE) and the president of the investment company Moscow Partners, in his comments to Sputnik also ruled out any effect of Morgan Stanley's move on the investment climate in Russia.
"One should keep in mind that Morgan Stanley is not leaving the Russian market completely. They only close down the activities that require licensing, meaning banking, brokerage and depository.
At the same time, through a remaining subsidiary that does not require licensing. They will continue to provide consulting services ... which most likely would be provided to foreign investors or Russian companies operating with foreign business," Korenev said.
After the US financial giant announced that it will scale down its business in Russia, many have been left wondering whether such political factors as troubled relations between Moscow and Washington and the US sanctions contributed.
"I think it is purely an economic decision ... Companies operating in Russia such as Morgan Stanley are aimed at providing services to foreign investors. Because for a foreign investor, who has come to Russia, it is more convenient to work through an organization with a globally known brand ... but the client base for Morgan Stanley in Russia has narrowed lately. As for domestic companies, they enjoy working with local banks as for them it is easier and more familiar. As a result, Morgan Stanley has faced a situation when the demand for its services fell," the Finam analyst explained.
At the same time, Kogan believes that Morgan Stanley seeks to avoid potential reputation risks in light of US sanctions and is ready to sacrifice profits in order to save its image.
"Extra million or five or 10 or even $100 million in profits are not an argument for them. A main argument is to reduce reputation risks," the HSE professor noted.
The detention of US investor and founder of Baring Vostok fund Michael Calvey in Russia might have had an indirect influence on Morgan Stanley's decision-making, according to the president of Moscow Partners company.
"I think that it [the Baring Vostok case] has had an indirect influence. But major investment banks like Morgan Stanley do not take emotional decisions. They proceed from a previously approved plan, strategy or the decision of an executive board," Kogan said.
As Morgan Stanley has not completely left the Russian market, there is a chance for its comeback to the country's banking sector in the future.
"They have decided that their presence here currently is not economically viable. But I think that they will come back if their services would be much-needed here," Korenev said.
WILL OTHER MAJOR US BANKS FOLLOW?
Other leading US banks, such as Merrill Lynch and Goldman Sachs, continue to operate in Russia and currently experts find it hard to project whether they will follow in Morgan Stanley's footsteps.
"They might leave, but it does not mean that it will have a domino effect. Each of these companies will individually evaluate prospects of working in Russia and expediency of retaining the business here of transferring business to other regions," the Finam analyst said.
At the same time, major Russian banks, such as VTB and Sberbank, are expected to take over the market share of those foreign counterparts exiting the Russian market, according to Kogan, who also said he expects Merrill Lynch to leave Russia.