Global heavyweights set sights on Ukraine

For most observers outside Ukraine, the vast country is simply defined. It is a distant exotic place, where the glamorous ex-prime minister Yulia Tymoshenko remains under lock and key for “political” crimes. There are sporadic punch-ups in a faction-ridden raucous parliament, while the country’s real-life tough-guy, world heavyweight boxing champion and political hopeful Vitali Klitschko, looks on with an air of detached bemusement.

In the typically volatile climate of a developing country, fast-changing business alliances interact with clan loyalties, political allegiances and industrial groupings. Wealthy individuals - not to mention the typical struggling family in a 2-room ‘kvartyra’ in the industrial Donbas region - are naturally concerned about the security of their assets.

This heightened sense of risk has led to Ukraine becoming a leading target market for global banks and wealth managers.

This is despite the fact that due to the economic crisis, wealth has actually decreased by 15 per cent from 2011, according to Singapore-based consultancy Wealth-X.

Yet a staggering $55bn (€42bn) of assets is still controlled by a coterie of less than 500 individuals. Global wealth managers, instructed by consultants such as McKinsey and Oliver Wyman, are hoping to plug into this market.

For these banks, the regions where political pressures are highest – the Middle East too - are seen as the richest potential sources of assets. “Russia and Ukraine will be our two largest countries for expansion,” Mike Moodie, head of the London-based wealth operation for Royal Bank of Canada, recently told me in his headquarters overlooking the Thames close to Tower Bridge.

Enquiries from wealthy Ukrainians have increased since the election of the Yanukovych government in 2010: “Wealth classically moves from an area where it is uncertain and scared to an area where it is safe and secure.”

Swiss banks including Credit Suisse, UBS and Pictet have had ambitions in this region for many years. Pressure is now building on their relationship managers to deliver new assets from Ukraine, as the banks - which have been edged out of their existing strongholds - search for “low-hanging fruit”.

Private banks in Switzerland and other traditional markets have had their wings clipped by regulatory pressures. They face the long-arm of the US authorities seeking to reclaim unpaid taxes. And more importantly, they have not done a very good job in managing clients’ money. The global banks – whose services include investment banking and asset management in addition to private banking – have often put their agenda of selling expensive and inappropriate products ahead of their clients’ interests.

Most have also been particularly keen to embrace growth in Asia, but have struggled due to high costs of branch networks and high salaries sought by small numbers of trained bankers.

As a result, they are now scrambling to countries such as Ukraine, where costs are lower and wealth is much more concentrated in a smaller number of cities.

“There is a growing community of self-made high net worth and ultra-wealthy individuals from Ukraine,” confirms Yury Gantman, chief executive of Oracle Capital Group, a private office in London which runs “several billion dollars” for mainly Russian-speaking families.

“They are interested in prime-location London properties, including new and off-plan developments,” he says. Their biggest current concerns are becoming victims of fraud or breaches of confidentiality.

For this reason, only 30 per cent of the new wealthy use private banking, according to ‘The Wealth Management Ukraine’ report published by Ukraine Business Insight (UBI), in association with Coutts Bank.

Figures from Ledbury Research in 2012 put the number of dollar millionaires in Ukraine at 24,000, expected to reach 30,000 in 2015.

The main problem is a lack of confidence in the hryvnia and in local banks, 10 of which were closed or rescued by the government in 2011. “It would also be hard to avoid the consequences of the Cyprus crisis completely,” adds a well-placed banker.

But the situation is slowly changing. “Ukrainian banks face a number of challenges due to operating in an uncertain economic environment,” says Dmitriy Zolotko, Kyiv-based board member of JSC Sberbank of Russia.

“But public trust in the banking system and national currency is improving,” with the volume of UAH-denominated deposits surging 15 per cent in the first half of 2013.

According to UBI, leading brands in private banking now include not only UBS and French-owned Ukrsibbank, but also PrivatBank, owned by Ihor Kolomoyskyi, a Ukrainian billionaire businessman, who is also chairman of the FC Dnipro Dnipropetrovsk football club.

It is these oligarchs, such as Mr Kolomoyskyi, media and steel baron Victor Pinchuk and Ukraine’s richest businessman and metals magnate Rinat Akhmetov who will ultimately determine the future of the wealth industry as well as the country’s ultimate fate.

For private banking to become serious, the wealthiest individuals have a substantial PR job to do, telling the broader population that being rich and making money is acceptable, says Kasia Moreno, editor of Forbes Insights.

They also need to convince their poorer brethren – highly sceptical about the origins of this vast wealth - that they are prepared to spend large chunks of it to make life easier for a struggling nation.

“A lot of people still feel loss after the collapse of the Soviet regime and are struggling to survive in the new economy,” says Ms Moreno. “Entrepreneurs need to co-operate better with the societies in which they operate. Businessmen and philanthropists such as Mr Pinchuk are trying to improve the image of entrepreneurs.”

Presidential hopeful Vitali Klitschko agreed that the nation’s wealthiest have one of the most important roles to play, during our chance encounter in London recently. “Let’s not forget the oligarchs are Ukrainians too,” said the political contender, anti-corruption campaigner and boxing champ. “They are just as worried as the rest of the population about losing everything. We need to sit down with all of them round the table when we discuss the nation’s future.”