The Brits are fast fading in Russia as PM Cameron arrives

By Andrei Skvarsky.

British banks HSBC and Barclays, along with oil major BP, are fading from Russia just as UK Prime Minister David Cameron arrives in Moscow on Monday to try to reverse a nadir in British-Russian relations.

HSBC, Europe’s largest bank, has shut its modest Russian retail network after committing $200m for building it out just a few years ago, and has recently sold it to Citigroup. Barclays is selling its retail and commercial banking business in Russia to Kazcommertzbank, Kazakhstan’s biggest lender.

BP, whose chief executive Bob Dudley will be among businessmen accompanying Cameron on his visit, was this month frozen out of a big-scale and potentially lucrative project as Russian state-owned oil company Rosneft struck a deal with ExxonMobil to explore the Arctic shelf. A day later BP suffered the indignity of having its Moscow office raided by court officers and special forces.

The raid was part of a legal action brought in by minority shareholders in TNK-BP, the UK oil giant’s Russian joint venture, who are seeking billions of dollars in compensation for profits that they claim the failed BP-Rosneft deal has deprived them of.

BP has “egregiously, repeatedly mismanaged its relations with its Russian partners, AAR, with whom it is now locked in another round of legal wrangling in Russian courts,” Eric Kraus, author of the Truth and Beauty (and Russian Finance), told EmergingMarkets.me.

Anglo-Russian relations had sunk to new lows following the 2006 murder by polonium poisoning of Alexander Litvinenko in London. Russia continues to refuse British requests to extradite the chief suspect in the murder, former KGB agent Andrei Lugovoi, who received parliamentary immunity inside Russia after being elected to an MP post following the attack

Hostilities stirred by the Litvinenko’s murder resulted in tit-for-tat expulsions of Russian and British diplomats and the harassment of former ambassador Tony Brenton by the Nashi youth group.

“In recent years, British foreign policy has been seen in Moscow as overtly hostile, as the UK foreign policy establishment essentially aligned itself with the US neocon faction,” said Kraus, who is independent asset manager.

“The Kremlin has taken badly the hectoring tone, as well as the propensity of the UK to grant asylum to individuals accused in Russia of terrorism or fraud – especially  those wealthy enough to hire PR firms and provide political donations.”

Relations took a nosedive again in November 2009 when Sergei Magnitsky, a lawyer for Hermitage Capital, died in a squalid Moscow prison after being jailed for almost a year without trial for a tax crime he insisted he did not commit.

William Browder, the founder of UK-based Hermitage Capital Management, said the British government had shied away from tackling Russia on human rights and wants Cameron to slap travel bans to the UK on the officials implicated.

While Britain has been entangled in cold war intrigues, Russian business relations with the US, Germany and Italy have warmed up as their companies have increasingly invested in Russia.

Analysts also question how committed British banks remain to building up onshore investment banking operations after the withdrawals from retail lending by Barclays, HSBC and Royal Bank of Scotland. Barclays, under Bob Foresman has failed to build a full brokerage in Moscow as promised two years ago while HSBC has suffered recent departures from its fixed income team.

Leonid Slipchenko, a banking analyst at Russia’s UralSib bank, said HSBC and Barclays pulling the plug on their Russian retailing “primarily reflects the weakness of those banks globally”.

“The market is rapidly changing and looking at other foreign players in Russia such banks as Unicredit, SocGen, Raiffiessen and Nordea do their business quite successfully at the moment with HSBC and Barclays obviously having made several strategic mistakes,” Slipchenko told EmergingMarkets.me.

Cameron’s exercise in damage limitation will be interesting to watch as will the reception afforded to him today by the good cop and bad cop team of President Dmitry Medvedev and prime minister Vladimir Putin .

“While it is clear what he want, what is not entirely clear is what he can now offer the Russian side,’’ suggested Kraus.