VTB Bank

A strategic analysis of ‘Putin’s piggy bank’

According to Russian political activist Alexei Navalny ‘VTB is a place where all the dark
deeds get done ... that's what the Bank was set up for’ (Seddon, 2016). VTB is also the first
systematically important Russian bank to offer its’ shares to the West via an IPO on the
London Stock Exchange in 2007. The IPO was arguably the main driver of VTB’s growth in
the decade since. This strategic analysis uncovers how a bank created to execute ‘dark deeds’
grew into an international financial services provider despite allegations of systemic
corruption.

Author: Gleb Hermann-Romantchik

Student Number: 15317418

Words: lots
Table of contents

Glossary 2

Introduction 3

The Strategic Event 4

Strategic Position 6
Stakeholders & Governance 6
Culture 8
Macro-environment 9
Political 9
Economic 10
Social 11
Legal 12
Industry Environment 13
Degree of Rivalry 13
Supplier Power 13
Buyer Power 14
Substitute Power and the Threat of New Entrants 14
Strategic Capability 15
Threats 15
Opportunities 16
Weaknesses 16
Strengths 17

Review 18

Bibliography 19

Appendix 24
VTB real estate assets 24
Newcombe’s Power/Interest matrix 25
Geographical distribution of investors 26
Political environment matrix 27
Oil price and USD/RUB exchange rate 28

1
Glossary
CIB - Corporate and Investment Bank

CIS - Commonwealth of Independent States. The association of former states of the

Soviet Union

KGB - state security agency of the Soviet Union. Dissolved in 1991 following a failed
coup

Kostin, Andrei - President and Chairman of VTB Bank Management Board.

Kudrin, Alexei - Former Minister of Finance of Russia and Chairman of the Supervisory
Board of VTB.

Kremlin - formerly the Russian Tsar’s residence. Used to refer to the Russian
government in a similar sense to how the ‘White House’ refers to the office of the
US President.

LSE - London Stock Exchange

M&A - Mergers and Acquisitions

NATO - North Atlantic Treaty Organisation

RCB- Russian Central Bank

Siluanov, Anton - Current Minister of Finance of Russia and Chairman of the

Supervisory Board of VTB.

SWOT Analysis - Strengths, Weaknesses, Opportunities and Threats. The origins of the
SWOT analysis is credited to the Stanford Research Institute.

VEB - VneshEconomBank. Russian: Внешэкономбанк. Translation: Bank for Foreign

Economic Activity. Operates as Russia’s development bank.

VTB - VneshTorgBank. Russian: Внешторгбанк. Translation: Foreign Trade Bank

2
Introduction
When the Communist Party of the Soviet Union (CPSU) entered the world economy by
selling oil in the 1970s, it offset its’ domestic economy’s problems by depositing profits
abroad. These accounts were placed under the control of the KGB to be operated secretly
until its’ economy - plagued by the Cold War’s uncertainties - improved. When newly elected
Russian president Boris Yeltsin banned the CPSU after the failed 1991 coup against USSR
president Gorbachev, the control of these vast foreign accounts fell to KGB agents. Without
the CPSU’s guidance and oversight, these KGB agents did as they pleased with the cash.
Like-minded officials were bribed into key positions to dictate who got to invest in Russia
and who did not. Thus were born Russia’s oligarchs and commercial banks. Banning the
CPSU significantly changed the KGB agents’ strategic position: from government employees
to Russia’s wealthiest men (Dawisha, 2015, pp. 15-19).

Johnson et al.’s (2017) Strategic position describes the impact of five factors on strategy:
stakeholders, culture, strategic capabilities, macro- and industry-environment. Understanding
these factors reveals advantages, disadvantages and risks in evaluating strategy for a country,
a group of Russian spies or a growing bank.

VTB was established in 1990 by the Soviet Union to service the USSR’s foreign trade
operations. In 2002 the Russian government inserted a new team of managers to turn VTB
into Russia’s leading banking institution across all sectors through an aggressive growth
strategy characterised by mergers and acquisitions throughout the CIS. VTB’s aggressive
strategies and ties to the upper echelons of the Russian government have earned it the title of
‘Putin’s piggy bank’ (Armitage, 2018). Despite the allegations VTB has experienced
exponential growth in the last decade to become Russia’s second largest bank by assets.

This analysis will use Johnson et al.’s (2017) five factors of strategic position and other
frameworks and analytical tools to evaluate the impact of VTB’s IPO on its’ strategic position
before and after becoming a publicly traded organisation.

3
The Strategic Event
On Friday, May 11th 2007 VTB offered 1.5 trillion shares on Moscow’s and London’s stock
exchanges, raising $8 billion. Shares rose by 11% on the first day of trading. Approximately
40% of the initial public offering went to domestic investors through Moscow and the
remainder to international investors via the LSE. The offered 22.5% stake valued VTB at
$35.5 billion (Norton, 2007).

VTB’s IPO differed greatly from previous offerings by Russian companies by taking an
international approach. Previously, Sberbank, Russia’s largest bank by size and VTB’s main
competitor, raised more money on the Moscow exchange earlier the same year but required
the underwriting of the Russian central bank to succeed. Similarly, in 2006, state-controlled
oil firm Rosneft’s $10.6 billion IPO required oligarchs to underwrite its’ share float. In
contrast, VTB reached out internationally and retained Citigroup, Deutsche Bank,
Renaissance Capital and Goldman Sachs as joint global coordinators for the IPO (Norton,
2007). Today VTB’s shares are an integral part of the FTSE Russia index and the developing
MSCI markets index (VTB, 2018, p.13).

Source: VTB IFRS Financial Statements 2004 - 2010; author

The graph above shows the size of VTB by assets since its inception in 1990. Note the
acceleration of VTB’s growth since the IPO in 2007.

4
The primary objective of the IPO was to raise funds for expanding the retail division of VTB.
Analysing VTB’s financial reports for 2004-2010 reveals where the additional funds were
directed and if this objective was achieved. However, due to the financial crisis of 2008 and
the subsequent bailout by the RCB to the tune of $25 billion (VTB, 2008b, p. 4) it is hard to
follow the path of the IPO’s $8 billion. VTB did not immediately acquire more branches after
the IPO as funds were diverted to prevent financial disaster during the crisis. In 2010 the
value of VTB's real estate assets almost doubled - from $ 1.9 billion to $3.77 billion in 2010
(VTB, 2010b, p. 1).1 Customer deposits increased by almost $40 bln from 2007 to 2010 as
displayed below (VTB, 2008b, p. 1; VTB, 2010b, p. 1).

Source: VTB IFRS Financial Statements 2004 - 2010; author

The increase in real estate assets and customer deposits following the IPO confirm that
VTB’s strategy was ‘realised as intended’ a per Mintzberg and Waters (1985, p 257).
Mintzberg and Waters (1985) also state that 'new industrial states', such as Russia, can wield
enough power to ‘impose their plans on their environments’. Allegations accuse the Kremlin
and VTB of loosely, if ever, implementing ‘formal controls’ against corruption and money
laundering in its’ pursuit of growth (Mintzberg and Waters, 1985, p. 259; Aslund, 2019). As
this analysis will show, the Kremlin’s influence likely lent a helping hand.

1
See Appendix 1 for VTB’s real estate assets 2004 - 2010

5
Strategic Position
Johnson et al (2017) specify that strategic position revolves around two themes, themes
which also become evident in the evaluation of VTB’s growth. This analysis will begin by
describing VTB’s ambitions - what it seeks to do - rumoured to be driven by it’s undeniable
political links, followed by the strategic potential of these links and VTB’s resources using
Johnson et al.’s (2017) five pillars of strategic position.

Stakeholders & Governance

Stakeholders are “the individuals and groups that depend on an organisation to fulfil their
own goals and on whom, in turn, the organisation depends” (Johnson et al, 2017, p. 134).
Prior to VTB’s IPO it’s primary stakeholder, the Kremlin, inserted a new managerial team
into VTB in 2002. This team is headed by CEO and chairman of the board Andrei Kostin - a
prominent figure in Russian finance. Kostin was previously at the helm of the Russian
Imperial bank, National Reserve bank and the Russian Development Bank (VEB) (VTB,
2018, p 122). Kostin’s ties to Russian president Vladimir Putin have been described as ‘very
strong’ and he’s been described as ‘untouchable’ (Seddon, 2018a).
Additionally, the government assures its’ influence over the bank by placing the acting
minister of finance as the bank’s Supervisory Board Chairman. Current Minister of Finance
Anton Siluanov is also the current Deputy Prime Minister to Dmitry Medvedev (VTB, 2018,
p. 119).2 Mehran and Stulz (2007) define a conflict of interest in financial institutions as a
“situation in which a party with a fiduciary duty takes actions that are inconsistent with that
fiduciary duty” (p. 268). The fact that Siluanov is simultaneously responsible for regulating
the Russian financial industry and is a key stakeholder for one of the largest players in the
industry creates a conflict of interest undeniably in VTB’s favour. In the last decade the
Kremlin has supplied VTB with a disproportionately high level of emergency funding. One
would have to conclude that this conflict of interest persists because its’ benefits of conflicts
outweigh its’ costs for VTB’s biggest shareholder: the Kremlin. Siluanov’s position in VTB

2
Previously Alexei Kudrin. Minister of Finance of Russia 2000 - 2011, VTB Supervisory Board President 2002
- 2011 (VTB, 2011a, p. 80; VTB, 2014a, p. 74).

6
as the government’s instrument of influence on the direction and decisions of VTB is an
example of “a flagrant violation of the basic principles of corporate governance and good
public administration” (Dawisha, 2015, p. 287).
The Kremlin therefore places in two zones on Newcombe’s (2003, p. 844) ‘Power/Interest’
matrix. Considering the evidence, the Kremlin wishes to be ‘kept satisfied’, and, once
‘dissatisfied’ it easily increases interest and becomes a ‘key player’ (p. 845) as VTB has been
dependent on it in the last decades for emergency funding (Seddon, 2016).3
Access to the London stock exchange has not only increased accessibility to global investors,
but also subjected VTB to international corporate governance regulations. New audit
standards and control committees were introduced as well as a new voting system to comply
with international compliance laws. Research by Aggarwal et al. (2005) concluded that the
application of more stringent accounting standards and internationally recognized legal
frameworks encourages investment by institutional investors from the United States.4
Another study by Aggarwal et al. (2011) positively correlated increasing institutional
ownership with increasing in firm value. Gompers et al. (2003) correlated stronger
shareholders’ rights to increases in company valuation, profit and sales. Their research
showed that firms with weak shareholder rights were less profitable than other firms in the
industry, growing almost 9% less than organisations led in a more democratic style.
Considering the financial and political influence of the Kremlin, the extent of external
shareholders’ influence on VTB’s growing profits is arguably minimal.
Favourable conflicts of interest and the adaptation of international accounting and
governance standards have not only modernised VTB - its’ corporate governance and
subsidiary structures resembling those of western banks - but also proven key factors in
VTB’s growth in line with Gompers and Aggarwal et al.’s conclusions (2003; 2005; 2011).

3
See Appendix 2 for illustration of Newcombe’s ‘Power/Interest’ matrix.
4
See Appendix 3 for geographical distribution of VTB investors

7
Culture

‘Sometimes an organisation’s cultural heritage can give it a unique advantage...’

(Johnson et al, 2017, pg. 163)

VTB’s heritage connections to the Kremlin undoubtedly gave it a ‘unique advantage’ in

recent financial crises. According to the Financial Times, VTB could not have overcome the
recent Russian financial crises without significant government bailouts (Seddon, 2018b). In
2014 the Kremlin allocated VTB $2.6 billion, equivalent to 30% of the ministry’s
recapitalization program although that year VTB accounted for only 15% of the Russian
banking sector. Since the 2008 financial crisis VTB received 1.2 trillion rubles in state funds -
the most of all Russian banks (Seddon, 2018a).

Also working in stakeholders’ favour was the paradigm shift of VTB’s culture initiated by
VTB adapting stricter compliance laws. Prior to the IPO a culture of government control -
placing finance ministers onto boards of banks - and weak disclosure had been an issue for
foreign investors. Regulations against insider trading and corruption were particularly poor
(Lex, 2005).5 These ‘taken-for-granted assumptions’ of VTB’s management and domestic
stakeholders had to change dramatically to accommodate those of international investors
(Johnson et al, 2017, p. 171). Listing on the London Stock Exchange was the key driver for
Standard and Poor’s to declare VTB one of Russia’s most transparent banks (VTB, 2019).
This signaled a fundamental shift in the organisation’s culture from one that was focused on
‘special projects for the government’ - the area of the highest levels of corruption in Russia -
to one focussed on private and commercial activities (Kalinin, 2013; Belton, 2007). VTB’s
new ‘organisational identity’ - to allow external influence and investment - aligns with and
confirms Gompers and Aggarwal et al.’s (2003; 2005) conclusions: stronger shareholder
rights lead to more shareholders which leads to increased profits and valuation.

5
Independent experts maintain that corruption consumed as much of 25% of Russia’s GDP while a World Bank
report puts this figure at 48% (Kalinina, 2013).

8
Macro-environment

As VTB changed and grew so did its’ macro environment. Changing political and economic
influences shaped VTB’s strategy significantly. The changes to its’ legal structure required
for the London listing transformed the organisation throughout and changed the public’s
perception of VTB in the bank’s favour. Borrowing from the PESTEL framework, this
section will describe the effects of the macro environment on VTB’s strategy.

Political
As a state-owned bank, domestic politics influence and shape VTB’s strategy tremendously -
the bank is highly exposed politically and experiences high state involvement.6 Allegations
accuse VTB of writing loans at the Kremlin’s demand (Armitage, 2018). VTB also acted as a
pseudo saviour of the Russian financial sector pre-IPO - it’s M&A strategy a method of the
Russian government to bail out and conglomerate struggling domestic banks (Aris, 2017).
Today VTB’s global reach means that intercontinental politics affect strategy: NATO
sanctions targeting VTB in 2014 have inhibited VTB’s US business and lead to VTB shifting
focus to the Asian market (European Commission, 2015; Foy, 2018).

6
See Appendix 4 for VTB’s placement on the Johnson et al. (2017) Political Exposure / Involvement matrix.

9
Economic
Before the IPO VTB had limited access to outside funds. The bank was funded virtually
entirely by the Russian government to the tune of billions (Belton, 2007). Becoming public
dramatically increased VTB’s access to capital. The new inflow of funds accelerated VTB’s
growth, allowing the bank to grow its’ branch network and expand into new markets. As
illustrated below, VTB survived unfavourable domestic economic conditions and remained
profitable despite the sanctions and oil price crises 2014-15.7

Source: VTB Annual Reports 2007 - 2017; author

The aforementioned conflicts of interest factored into VTB’s survival during Russia’s crisis
years. VTB was bailed out by the Russian government in 2008, ‘09, ‘14 and ‘15 - all critical
years for VTB’s profitability (Seddon, 2016). Global presence also attracts global risk
exposure. Economic sanctions and recent eurozone disputes have weakened VTB’s european
operation forcing it to shut its’ US and Paris branches (VTB, 2018a, p. 21; Foy, 2018). VTB
can however capitalise on growing Chino-Russian trade: bilateral trade has grown by 37.5%
year-on-year in 2017 (RT.com, 2018).

7
See Appendix 5 for further data on oil prices and Russia’s economy 2014 - 2017.

10
Social
Despite overwhelming wealth inequality, the Russian middle class is growing. Although still
high, income inequality in Russia is declining (Novokmet, Piketty and Zucman, 2017).
Increasing paychecks have led to more Russians depositing more of their earnings. As shown
below, retail deposits have steadily grown. Note the growth spikes occurring in 2007 when
Russia introduced new investment laws and in 2013, a year after Russia joined the WTO
(Naudé, Szirmai and Haraguchi, 2015, pp. 392-437).8

Source: VTB Annual Reports 2004 - 2017; author

Nonetheless, after 25 years of capitalism foreign investors remain wary of Russia. Disputes
can demolish a business, or cost a life, as seen in the case of former RCB deputy chair Andrei
Kozlov (The Economist, 2007). Prior to its’ IPO VTB was considered a bank for the Russian
politicians to hide their wealth in - ‘Putin’s piggy bank’. The international compliance
regulations VTB voluntarily adapted earned it foreign investors’ trust, however, Russia
continues to shoot itself in the foot when it comes to attracting foreign investment. There
exist a well known pattern of targeting business people that don’t toe the government’s line.
A pattern that has continued despite the US enacting the ‘Magnitsky Act’ in 2012 to sanction
Russia’s behaviour (Dyer and Thornhill, 2012). The Kremlin does not seem to care. The
recent arrest of one of Russia’s largest foreign private equity investors, Michael Calvey,
demonstrates that business disputes can still result in questionable fraud charges and jail time
(FT editorial board, 2019).

8
To stimulate FDI the Kremlin passed the law ‘On the Rules of Foreign Investments in Enterprises Having
Strategic Importance for the National Security of the Russian Federation’ in late 2007.

11
Legal
Before 2007 Russia’s relatively deregulated financial industry was ripe with corrupt oligarchs
conducting sweetheart deals for their friends in government. The RCB struggled regulating
the over 1,143 registered banks (The Economist, 2007). VTB thrived in this environment,
taking advantage of the government’s political and financial backing to execute favourable
deals. Nonetheless, VTB was one of Russia’s first banks to subject itself to IFRS accounting
regulations. This, and the new FDI regulations introduced in 2007, aided VTB in achieving
the aforementioned legitimacy required to expand internationally. VTB’s self-enforced IFRS
compliance regulations, the credited transparency by Standard and Poor’s and the perceived
legitimacy of working with international leaders for its’ IPO improved VTB’s domestic and
international image. VTB’s subsequent growth conforms to Gompers and Aggarwal et al.’s
(2003; 2005) positive correlations between stricter compliance, improved shareholders’ rights
and company valuation.

12
Industry Environment
The Russian banking industry has changed substantially: from virtually unregulated to
introducing IFRS, WTO rules and international investors all within the last twenty years.
Understanding these aspects, and their effects on VTB, are best described using Porter’s ‘Five
Forces’ framework (Porter, 1979).

Degree of Rivalry
The Russian banking industry was essentially split into two segments by the RCB in 2016: 30
tightly regulated ‘systemically important’ banks, and the rest (Aris, 2017). VTB competes in
the former sector, however, VTB is more than twice the size of Russia’s third largest bank,
Gazprombank. VTB and its’ main competitor, Sberbank, therefore operate in a
state-controlled oligopoly that makes up almost 50% of the Russian banking system by assets
(Gazprombank, 2018, p. 2). Yet VTB’s share of the retail market grew from 6% before the
IPO to 20% as of December 2017 (VTB, 2018a, p. 7). Funds raised as a result of the IPO
were effectively used to finance the expansion of VTB across not only retail banking, but
corporate investment banking also: VTB gained significant market share of the Russian
corporate and investment banking (CIB) sector over Sberbank - 57,3% vs. 25% (VTB, 2018а,
p. 7; Sberbank, 2018, p. 97).

Supplier Power
The systemically important banks’ funds are in-part supplied by the RCB. The RCB therefore
enjoys strong supplier power, a fact accentuated by the government’s direct involvement in
VTB. A history of bailouts reduces VTB’s already relatively low negotiating power with the
RCB. The influx of foreign capital into the Russian banking industry and VTB has earned the
bank some independence from the RCB. Arguably, Siluanov’s direct involvement in VTB
renders this independence purely theoretical.

13
Buyer Power
The industry split gave consumers a choice: to deposit in one of Russia’s many loosely
regulated banks, or within the tightly regulated oligopoly. Sberbank and VTB also possess
vast branch networks across Russia unrivalled by other banks. VTB initiated a branch
expansion in 2016 in partnership with the Russian mail service to reach the dispersed
domestic population (RT International, 2016). Buyers’ efforts to ‘shop around’ are therefore
limited (Johnson et al., 2017, p. 68). The tight grip on this sector enjoyed by Sberbank and
VTB reduces buyer power significantly amidst tightly controlled interest rates.

Substitute Power and the Threat of New Entrants

The Russian banking industry has undergone further transformations led by the RCB to
improve regulation. Since 2013 RCB chief Elvira Nabiullina has shut down over 300 of the
lower-tier, lower-regulated banks (Pismennaya & White, 2017). Tighter regulation has made
an already capital intensive industry all the more difficult to crack for new entrants. Outside
of the banks retail customers have little options for financing and financial services.
Businesses have the opportunity to turn to other businesses and PE firms, however, as
Russia’s economy is still developing these options are not as regulated and safe as the banks.

14
Strategic Capability
Understanding VTB’s resources and capabilities identifies the sources of the bank’s domestic
and international strategic advantages. Prior to the IPO, VTB was a relatively unknown bank
with limited opportunities. The IPO’s funds were used to enter new markets, develop new
products and hire new talent. A SWOT analysis identifies VTB’s macro environment and
how effectively VTB deployed its’ resources and capabilities to react to changing external
forces before and the IPO. The following analysis will run in reverse to tradition to focus on
the external environment first, then will identify emerging strengths and weaknesses. This
emphasises how strategic capabilities differ between local state-owned organisations, and
international public enterprises.

Threats

VTB experienced relatively few threats before the IPO. Being funded and managed directly
by the dominant political, and financial, force of the region virtually eliminated all rivals in
the CIS. Now, as an international organisation, threats are falling outside of the Kremlin’s
control. The most recent example being the economic sanctions placed against VTB in 2014
by NATO states in response to the Kremlin’s ‘adventures’ in Crimea. Consequently, VTB
shut down it’s US branch in late 2018 (Foy, 2018).
External investors can also pose a threat. Becoming public subjects VTB to extra scrutiny and
the whim of short sellers. Previously VTB did not face this issue, but recently had to,
allegedly, deploy illegal tactics to short squeeze short sellers of it’s stock, resulting in the
collapse of Russia’s former largest private bank, “Otkritie” (Seddon, 2018c).9

9
Otkritie was accused of creating demand for VTB’s shares by secretly buying up 20% of VTB’s free float,
making it the largest shareholder after the Kremlin. VTB claims it did not know who - for three years - its’
second largest shareholder was (Seddon, 2018c).

15
Opportunities

Before it’s IPO VTB had opportunities aplenty in the former Soviet Union. The regional
banks VTB was acquiring could not turn down the offers VTB was making them financially,
nor politically. As a public enterprise VTB has far greater access to capital and management
talent. VTB’s recent expansion into China demonstrates the three aspects of ‘dynamic
capabilities’ described by Schoemaker, Heaton and Teece (2018, pp. 19-22). VTB sensed
opportunities in the Chinese market amidst 37.5% growth in Chinese-Russian trade in 2017
(RT.com, 2018). This opportunity was seized in 2017 by establishing a commodity trading
team in Hong Kong (Tudor-Ackroyd, 2017). VTB did not need to reconfigure substantially as
it already had a branch in Shanghai allowing it to conduct transactions in yuan. The Shanghai
operation allows VTB to onshore its’ trades and can therefore act independently of Moscow
headquarters. VTB deployed its’ ‘dynamic capabilities’ to contribute to the growing number
of Russia-China transactions.

Weaknesses

Before the IPO opportunities outside of the CIS market were limited. VTB did not have the
West’s trust earned as it was not yet following internationally recognised corporate
governance standards. The Russian government’s influence over VTB was also an
intimidating factor for Western investors. Most notably were the 2005 events involving Bill
Browder’s Hermitage Capital, which became victim of 'corporate raiding': seizing companies
and other assets with the aid of corrupt law enforcement officials and judges (Levy, 2008).10
The core of VTB’s business before going public lay in government contracts - the primary
domain of Russian corruption (Kalinina, 2013). VTB’s reputation has declined since the
introduction of the 2014 US sanctions. When borrowing funds in euros and dollars VTB is
limited to maturities of maximum ninety and thirty days respectively (European Commission,
2015). As mentioned before, these limitations have resulted in VTB retreating from the US
market and streamline its’ European operation (VTB, 2018a, p. 21).

10
Three Hermitage holding companies were seized on what Hermitage's lawyers insist were bogus charges.
These companies were then used by alleged corrupt officials to extract $230 million from the Moscow tax office
(Levy, 2008).

16
Strengths

Before its’ IPO VTB enjoyed financial and political support of the dominant political force of
the CIS. VTB also had a management team that was well connected in Eastern European
business and political spheres. VTB used these ties and favorable conflicts of interest to
successfully conduct its’ aggressive M&A strategy of Eastern European banks in the early
2000s. Now as a public company VTB has greater access to international capital than its’
domestic competitors. VTB operates in over twenty countries across four continents (VTB,
2019). An intangible asset obtained as a result of the IPO is VTB’s improved reputation.
VTB’s IPO was one of the largest in London in 2007. This publicity achieved international
recognition and legitimacy which VTB leveraged to aggressively pursue retail and corporate
market share in Russia and abroad. Its’ CIB branch, VTB Capital, grew its’ domestic market
share to double that of Sberbank’s (VTB, 2018а, p. 7; Sberbank, 2018, p. 97).
International investors’ access to VTB sharply increased its’ financial capability and reduced
financing costs. This new access to financing also reduced VTB’s financial dependence on
the Kremlin, allowing VTB at least theoretically, to take risks and make decisions with less
government control. Opening VTB to not just the Russian public but also the Western world
through the LSE afforded VTB credibility and access to funds unrivalled by other Russian
banks.

17
Review
Before the IPO VTB was the Soviet, then Russian state-owned foreign trade bank. Therefore,
its’ growth was directly tied to the growth of Russia’s economy - VTB’s growth was
essentially inevitable. However, this essay demonstrates that the IPO accelerated VTB’s
growth. VTB’ strategic position before and after becoming public demonstrates how access
to public capital can change an organisation. VTB’s IPO not only moved the organisation into
a more profitable strategic position, but also signalled that Russia was opening up to foreign
investment. VTB’s international exposure also negatively impacted the bank - sanctions and
short sellers have negatively affected VTB’s reputation and ultimately, profits. Despite these
setbacks this analysis evaluates VTB’s strategic decision to go public as positive.

It is important to note that VTB’s growth following its’ IPO follows the theories of Gompers
et al. and Aggarwal et al. (2003; 2005; 2011): organisations who accept stricter compliance
standards and external influence enable profit and company valuation growth. Their research,
as well as the frameworks of Porter, Mintzberg and Schoemaker et al. (1979; 1985; 2018)
confirm and legitimize the conclusions of this analysis and support the evaluation of
strategically significant events, such as an IPO.

There are countless allegations of corruption against VTB. This analysis is limited in its’
depth of research and can only explain these charges and objectively associate them with the
activities of VTB. Nonetheless, the publically known conflicts of interest existing between
VTB and the Russian government evidently continue to benefit VTB at the expense of other
banks. Depending on the reader's point of view, to quote the leading political scientist on
Russian corruption, late Karen Dawisha, these conflicts of interest are the symptoms of:

"...a democracy in the process of failure or an authoritarian project in the process of

success.”

(Dawisha, 2015, pg. 7)

18
19
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Appendix
1. VTB real estate assets

Source: VTB IFRS Financial Statements 2004 - 2010; author

The value of VTB's real estate assets grew steadily until 2007. After the IPO assets declined
for a short time due to financial crisis of 2008. After 2008 the growth rate of real estate assets
accelerated, as indicated on the graph above from the years 2009 - 2010. VTB clearly
achieved its’ primary goal of the IPO: to provide financing to expand its’ branch network.

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 2. Newcombe’s Power/Interest matrix

Source: Newcombe, 2003; author

Newcombe’s matrix classifies stakeholders in relation to the power that they hold and their
level of interest in the project. The type of relationship is shown for each of the four zones.
The Kremlin moves from Zone C to Zone D everytime it becomes ‘dissatisfied’ with VTB’s
strategic decisions. An example of this shift is when the Kremlin provides emergency funding
for VTB in crises (see section Macro-environment, Economic).

● Zone A: little interest and little influence.

● Zone B: high level of interest but little influence. Need to be kept fully informed of
the major decisions which have been made.
● Zone C: low initial interest in an organisation’s strategies will remain low as long as
they feel satisfied with the policies adopted and executed.
● Zone D: stakeholders with a large financial or managerial stake in an organisation.

In designing strategy it is important to understand which stakeholders are most powerful and
which will steer strategy the most. VTB’s majority shareholder - and thereby also most
important stakeholder power and influence-wise - the Kremlin, exerts so much power that
other stakeholders have almost no voice in VTB’s strategy creation and execution.

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 3. Geographical distribution of VTB’s investors

Source: VTB Annual Report 2017; author

The graph illustrates the high degree of Russian shareholders’ influence on VTB's activities.
It is interesting to note the high share of American and British shareholders, despite their
governments’ sanctions against Russia.

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 4. Political environment matrix

Source: Johnson et al., 2017, pg 37

The Kremlin’s high level of involvement in VTB through ownership and strategy
development results in high political exposure for VTB amidst money laundering and
corruption allegations (Aslund, 2019). The Kremlin’s involvement is so deep that not only is
VTB as a whole sanctioned, but individuals within VTB are targeted personally. Andrei
Kostin, VTB’s President and Chairman of the board was barred from attending the 2018
World Economic Forum in Davos due to sanctions being imposed on him personally
(Seddon, 2018a).

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 5. Oil price and USD/RUB exchange rate

Source: VTB Annual Report 2017; author

The 2014 economic sanctions hampered Russia’s economy and devalued the ruble.
Coincidentally oil prices dropped significantly at the same time. Oil and gas constitute more
than 60% of Russian exports (Sanghi et al., 2018, p. 20) and provide more than 30% of
Russia’s GDP (Candau, 2018). The divergence of oil prices and USD/RUB rate displayed
above spelled disaster for the Russian economy. From June to December 2014, the ruble
depreciated against the dollar by 59%.

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