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Categorized | Banks

Herman Gref, Sberbank’s survivor chief


Posted on January 31, 2016

Herman Gref and Vladimir Putin: the Sberbank CEO is one of the remaining liberals in the president’s ruling circle©Reuters

Herman Gref (right) is one of the remaining liberals in Russian President Vladimir Putin’s ruling circle

In December 2014, as Russia’s rouble plunged amid sliding oil prices and western sanctions over Ukraine, Sberbank, the country’s biggest lender, suffered what its chief executive Herman Gref described as a “co-ordinated attack”.

A million customers received anonymous text messages claiming that the bank, already restricted from raising western financing by sanctions, was about to be cut off from international fin­ancial networks and that deposits would be blocked.

    Queues formed at Sberbank ATMs as depositors withdrew Rbs1.3tn (more than $20bn) in a week and IT systems went into overload. Management kept silent, having concluded that reassuring messages might only inflame the panic. “It was a very dangerous mom­ent,” says Mr Gref. “Our systems, our liquidity management, our customer service, were all put to the test.”

    The scare abated and Mr Gref says he is proud Sberbank got through without external help. Russian authorities are still investigating the attack.

    But the crisis was a rude shock. Since 2007, Mr Gref had transformed Sberbank from a holdover of the Soviet bureaucracy into a modern financial in­stitution. Barely a year earlier, it had an­nounced bold plans to double profits and assets by 2018.

    Then, Mr Gref says, three “black swans” hit Russia. The most damaging, in his view — though he concedes it stretches the “black swan” definition of unexpected events that wreck previous assumptions — was not oil prices or sanctions, but Russia’s long failure to modernise its economy reaching a crunch point.

    “Basically the key problem now is the dire need of structural re­forms,” he says. “Because even if the oil price increases and sanctions are lifted, if reforms are not implemented there will never be high growth.”

    An irony of the sanctions is that Sberbank, as one of their biggest corporate targets, is run by a pro-western reform­er who for 15 years has been one of the leading liberals in president Vladimir Putin’s ruling circle. As economy minister, he led efforts to bring Russia into the World Trade Organisation.

    That he still feels able to criticise the government’s record reflects, perhaps, his reputation as one of the few senior Russians able to stand up to Mr Putin.

    A long-time friend, who asks not to be named, says the Sberbank chief executive re­mains someone the president listens to on economic matters. Steering the lender through the crisis without needing a state bailout has enhanced his standing. Sberbank’s net profit fell 24 per cent last year, but it accounted for the bulk of the entire Russian banking sector’s profits.

    CV

    Herman Gref

    Born

    February 8, 1964, Pavlodar region, Kazakhstan, USSR

    Education
    Omsk State University, St Petersburg State University law school

    Career

    1991: Joins St Petersburg City administration

    1998 -2000: First deputy minister of state property of the Russian Federation

    2000 -2007: Minister of economic development and trade

    2007 – present: Chief executive, Sberbank

    Interests
    Self-improvement and education, running and reading

    With a softly-spoken manner that be­lies his sometimes outspoken public comments, the 51-year-old has known Mr Putin, like many in today’s Russian elite, since the 1990s when they worked in the St Petersburg city administration.

    In 1999, Mr Putin chose Mr Gref to head a think-tank preparing his presidential economic policy. Then, as economy minister, Mr Gref implemented parts of his bold “Gref plan” before the Kremlin’s reform enthusiasm waned as energy prices soared.

    In 2007, he moved to the corporate world, although Sberbank was still 57 per cent state-owned, and pledged to “teach an elephant to dance” by re­vamping the company, its 20,000 branches and 250,000 employees.

    The task was byzantine. Sberbank, Mr Gref notes, was “basically 17 different banks” — regional divisions with different systems. He set about hiring young managers who centralised operations, cut bureaucracy and improved service.

    In 2011, Sberbank acquired Russian investment bank Troika Dialog, then the eastern European operation of Austria’s Volksbank, and in 2012 Turkey’s DenizBank. Sberbank’s countries of operation went from two, when Mr Gref joined, to 22. It raised $5.2bn in London’s biggest stock market listing of 2012, as Russia’s central bank reduced its stake in the lender to 50 per cent plus one share.

    Then the black swans arrived. Protests in Kiev led to revolution, Russia’s annexation of Crimea, war in east Ukraine and sanctions. Oil prices fell and Russia slid into recession. On sanctions, Mr Gref notes only that they constitute a “strange situation” when “over 30 per cent of our free float is held by American investors, and over 20 per cent is British investors”.

    After the bank was largely barred from raising western financing, it went through “quite a difficult period” of compliance, stopping all sanctioned operations, when it was unable to pay out for several days. “But we survived through that, and the situation has stabilised now,” he says.

    The former director

    Three things are proof of Herman Gref’s transformation of Sberbank, says Sergei Guriev, a leading Russian economist now at France’s Sciences Po, who sat on the bank’s board from 2008 to 2014. Service “dramatically” improved; financial results, until last year, were “spectacular”; and he equipped it to withstand crisis — thereby helping stabilise Russia’s financial system and economy.

    “He’s happy to bring in independent talent and recognise his own mistakes. He’s always learning, he reads a lot and he listens to Russian and (even more uncommon) non-Russian innovators, researchers and entrepreneurs.”

    Sberbank was also forced to find new sources of financing. “If before, we hard­­­ly ever used to attract loans from China, now we have to do it,” he says. “But it’s not the same scale” as its previous western financing. Yet Sberbank still had obligations to investors, to whom it had pledged in 2013 to double profits in five years. Mr Gref smiles as he recalls that even the “negative” scenario in its strategy as­sumed oil prices over that period of $95, about three times today’s price.

    Mr Gref warns that big global banks are being challenged by “fast, flexible” Silicon Valley financial technology companies. So the bank presented a radically revised strategy late last year. Surprisingly, it still envisages increasing profits and assets in 2013–2018 by 1.8 times. Though oil prices have fallen again recently, the bank told investors in January that it was not altering the strategy.

    If the previous plan was ambitious, says Mr Gref, “we’d call the new one hyper-ambitious”. But the path this time is different. Corporate lending targets have been revised down, with Sberbank aiming instead to lift its already large share of Russian retail lending by more cross-selling of financial services. International expansion is out.

    The strategy demands even more cost-cuts and organisational change. Af­ter shifting from a top-down divisional structure to a “matrix” model, borrowing methods from Boeing, the next goal is a “3D matrix”, where teams co-operate across boundaries throughout the organisation. To illustrate the need to break down barriers, Mr Gref picks up three glass water bottles and, momentarily alarming those around the table in his London hotel, clinks them heavily together — they do not smash.

    In IT, after shrinking 30 data centres to one, the next goal is a single, open-source platform built around “in-memory processing”, which speeds up customer data analysis, to help Sberbank confront the fintech upstarts.

    Despite Mr Gref’s enthusiasm for tackling challenges, the long-time friend says sanctions have come as a personal blow. Given Russia’s lengthening downturn and the Sberbank boss’s record as moderniser and crisis manager, this person speculates the Kremlin could recall him to a top economic role. Mr Gref has said he has little desire to be a minister again.

    But after Russia’s long inertia fostered by economic good times, could adversity finally prove the spur for reforms? “It’s true that human nature is quite resistant to change, and changes start when the money runs out,” he says. But reforms also require money to be spent.

    “The times when we were rolling in fat, literally, we had more possibilities for reform. But we had less need.”