Below is the transcript of an interview with VTB's President, Andrey Kostin, and CNBC's Geoff Cutmore.
GEOFF: Mr. Kostin I'd like to start by asking you about the results. Clearly the first quarter was very strong, given that we've now seen sanctions imposed upon you and fresh sanctions on the economy here, can VTB continue to generate similar earnings for the rest of the year?
KOSTIN: I do believe so because, as you quite correctly pointed out, we had a very strong first quarter with nearly 1 billion dollar net profit, to be precise fifty five point five billion roubles. And I think forecast for the second quarter is also good. So, we believe that we can even exceed our targets for this year which was 150 billion, which is 2.5 billion dollars for a year. The first quarter we showed the return on equity of 16 percent which is I think think quite high for any financial institution. So yes, we're quite comfortable I think with the results and in spite the fact actually that the loan book is growing very slow in all across the banking sector, including VTB, but of course there's a less provisions, there's a more stable financing and more stable lending. So, I think we are quite comfortable, yes.
GEOFF: So will the sanctions that have been imposed have any impact at all across the year as far as you're concerned?
KOSTIN: You know the business with sanctioned, newly sanctioned institutions, represents less than 2 percent of our assets. So, of course it will affect to a certain extent. We still have to see what's going to happen with the sanctions because there is some discussion that they could be lifted for Rusal or and some other companies. So we shall see. But it doesn't at the moment represent a huge problem for us.
GEOFF: What about you personally? Does it now affect the way you're able to run the bank?
KOSTIN: At the moment I haven't seen any specific problems. Some people saying that the reason why I was on the list is because I was giving too many interviews to leading American television channels like yourself. And I think that was of course unfair. For example, I am listed as the senior government official. Which I'm not of course, I'm the chairman of the one of the leading commercial international listed bank and the malign activity which was mentioned and included Ukraine, hacking Syria, or undermining American democracy, which has nothing to do with this of course, and all the banking community all around the world knows me as a banker and I think respect me and I would be working for more than 20 years in this capacity. But, you know what's happened has happened. Maybe not enough time passed since the sanctions, only little bit more than a month to say what effect it will have. Maybe the American bankers or representative will be more restricted in dealing directly with me. But otherwise I think we have business as usual with the rest of the world.
GEOFF: The UK Foreign Affairs Committee in the Houses of Parliament put out a very strong report this week suggesting that there is, quote "dirty Russian money running through the UK economy". Do you get the sense that you and other Russian business leaders are no longer welcome in the UK?
KOSTIN: You know, to a certain extent I might agree with the committee but I think they chose the wrong targets because they mentioned the companies which come to the London Stock Exchange, for example, raising money through IPO or placing Eurobond. And this is probably the cleanest possible money because they are going through the procedure of due diligence and all the necessary disclosures. And that is actually the internationally recognized process. There are dirty money in London and I should say there are some people who actually left Russia with dirty money and enjoy staying in London. And I think from this point of view we would probably more cooperation between London and Moscow on trying to identify this money and we never, Russia never had for example, offshore zones. So you know the money went to the west and that was a problem for the Russian economy. If the British government want to reduce this I think that could be be welcomed but not definitely in the area which the committee I think mentioned. I think again it is unfortunate, a level of misunderstanding, maybe the lack of communication. I think I identified one of the most, the worst problem we have. Lack of communication between MPs, lack of communication between politicians maybe. The only good communication we have between businessmen. That's why we normally have a good context and I think most of the businessmen are against any sanctions.
GEOFF: So if I understand you correctly what you're saying is before the UK government starts pointing a finger in the direction of Moscow it should focus on how it's treated offshore tax havens that have come under the remit of the UK?
KOSTIN: Maybe because, you know the outflow of money, capital, capital flight from from Russia was always the problem for the Russian economy. And I think partly the Western government's responsible for this because they didn't take, undertake enough measures against this. But I think we should cooperate, Russia is ready to cooperate on this area. We, I don't think we have hostility here. That's the task. And it is happening all around the world. Russia is a part of the whole mechanism how to make it more transparent, you know, how to exchange information on taxation. But, in the manner it is now presented to us is some evil country, Russia is trying to do something wrongly in the London Stock Exchange is the wrong approach. I think, I think British government and parliament should be very cautious because if they want to keep London as a major financial centre in Europe, after particular Brexit, I think they should be very cautious in taking political decision on this issue because London I think is still one of the best platform for business to work for, for financial market to work. But I think one should be careful in not trying to use it for political reasons with all the sanctions otherwise, otherwise we'll move to, to Frankfurt.
GEOFF: Roman Abramovich couldn't get home to, or back to the UK to watch the FA Cup. His own team was was playing. He's got visa problems. We've seen Oleg Deripaska, someone that you know very well and have close business contacts with, forced out of his position in his own companies, if I can use that terminology. Do you feel that increasingly Russian business people are unwelcome in the United States, unwelcome in the United Kingdom and ultimately are going to find it harder to do business in the West?
KOSTIN: Probably yes, but I think again, I think Russian businessmen were always like, acted like a bridge between, between Russia and the West for example. And I think they they did a lot of good things, like Mr. Abramovich by buying Chelsea and improving its performance. I think that so many fans in England who who are fans of Chelsea. I don't know what if Mr Abramovich tomorrow come and say look I'm closing Chelsea because I can't get a visa what is going to happen. I mean I think there would be very much disappointment in the British society and I see nothing wrong in this as recently, I mean last weekend the Times, Sunday Times wrote an article that VTB Capital sponsored the Chelsea for a flower show and they said 'oh this is Putin's crony Kostin is trying to do something wrong.' I mean first of all I am not a crony of Mr Putin but secondly, what what's wrong in supporting the Chelsea Flower Show? I've been there many times. I think it's one of the best best flower show in the world. But you know too much politicised the issue. I think Russian businessmen they are not politically involved. They even if they meet President and the prime minister quite often they're doing it for their business purposes both political and that's the practice in Russia. But I think it's the wrong decision. I think if the West will start to create specific problems, an obstacle for Russian business, I think will be no good for for both sides. My personal opinion. But we have what we have, we were that's we should more focus on Russia, I think that's what we did for example in VTB when we found the national environment is not very favourable we started to work more domestically and that's why probably we achieved better results.
GEOFF: Does it concern you that the American treasury has been able to force Oleg Deripaska out of these company positions they might come after you next?
KOSTIN: I'm not an owner, so if they decided to do something similar to, to VTB they'll have to deal with the 40 percent of the foreign investors and 60 percent of the Russian government. I own nothing in VTB, I'm a very, very small part. So that's a different case. Of course, Mr. Deripaska is facing the problem when he has to somehow step down not only as an executive or whatever but as a shareholder, as owner of the company. But I don't think that the end of the world if they find a solution because as far as I understand, Mr. Deripaska agreed not to be the major shareholder for the sake of the company, and I think the company, I mean the American minister of, or treasurer, made a statement that they are not against the company. So hopefully the issue will be resolved and the Rusal is a well-known international company with a substantial share of the aluminium market, will continue to work to the benefit of everybody because as a result of this situation with Rusal you saw how the prices for aluminium grew and that probably still no good for consumers.
GEOFF: Do you feel you need to review the bank's position in his businesses as a consequence of this?
KOSTIN: Of course we are not lending any new money to him, we are not having any operations with him, with Rusal and other. We are waiting for OFAC decisions. That's what we should do. But again we very much hope that the issue will be resolved because we are a big creditor to him so we need to return our money and that we should do somehow.
GEOFF: So ultimately you are going to restrain any further business activity with Mr. Deripaska as a result of what the American Treasury has done?
KOSTIN: Of course, and with the company unless the sanctions are removed.
GEOFF: Do you look around other oligarchs who are subject to sanctions and take the same view that you cannot afford to do business with them because of the potential consequences for VTB?
KOSTIN: You know, potentially. It's a very very difficult to assess because the selection of people like Deripaska and Vekselberg they have not very much logic. I don't know why Vekselberg is on the list but not any other person. I think there are 200 or 300 people which could be on the list instead of Mr Vekselberg or Deripaska. So we can't stop to work with all the large businesses you know in Russia. So we'll continue unless there are certain decisions.
GEOFF: It's extraordinary it seems at times that President Trump says that he wants to improve the relationship with Russia and that he wants to get on a firm footing in discussions with President Putin. And yet at the same time it feels as though the environment is becoming more difficult, more unpleasant and harder for Russians, do you get that sense as well and why do you think that's the case?
KOSTIN: Yeah, but you know what concerns me, I don't know it's all the domestic policy of course, politics in America. You know, the fighting between Trump. Trump is under great pressure himself. You know the day after day where there's a new discovered new problems. Maybe, I mean, Mueller promised by the first of September he will close this so-called Russian investigation. Maybe it will help Trump to feel stronger and maybe to conduct certain policy more constructive towards Russia, maybe not. We don't know. We don't know what is on his mind because I can't [inaudible] to agree with you that one thing that Trump was saying and the American ambassador in Moscow was saying that Trump is interested in more constructive relations, on the other hand we have not only on economic sanctions we call on disarmament and other issues that the conflict is growing. One thing I should say, what concerns me more than any economic sanctions that for the first time maybe since, since [inaudible] crisis, people, at least in Russia probably in America also, started to feel that there is more danger of World War Three and there is a recent public opinion poll in Russia showed that 55 percent of Russians now believe or think that World War Three is possible because of the aggressive policy of the United States. It never was for the last two decades, you know it's very, very serious and very and I think to a certain extent reflecting what's happening in the national affairs. The world is becoming much more dangerous place to live. And that's that's a great concern. On the other hand sanctions maybe weakens our economy but it definitely strengthens the unity and the spirit of Russian people, and unfortunately they strengthen the the anti-American feelings inside the Russian society. The Russians strongly believe that a truth with us and they think truth even more powerful than dollar.
GEOFF: Having said that we did see a very positive meeting it appears between President Putin and Chancellor Merkel. The French leader will be here, Mr. Macron at the St. Petersburg International Economic Forum. Is there a sense here that maybe relations between Russia and Western Europe can improve because of the difference they have with President Trump over Iran and the nuclear issue in Iran?
KOSTIN: I think it would be silly to believe that the relationship with America and Europe is so easy, for example, to spoil because there's a long term relationship, there is NATO, many other things which which brings them, United States maybe and Europe together for many, many years. But I think we want to improve our relationship with Europe. And I think it's we have more reason to believe that it's possible because Europe is very close to Russia because Europeans might feel much better that the deterioration of political relationship or relation between Russia and the West is more dangerous for Europe than America. America is too far away, a thousand miles away from European continent and I think we have much more in common here in Europe and you know more common problems and other things. And I think we should work together persistently on trying to improve it. I think there is, the very disappointing thing that we don't have any specific reason to be in conflict either with both from Europe or America. We don't want to conquer anybody, we don't want to undermine any democracy and that's unfortunately a very high level of misunderstanding, problem both sides, and which led to such a grave situation.
GEOFF: Let me bring you back to Russia and the outlook for the economy here. Politically nothing seems to have changed with the new government. Most of the ministers have been reconfirmed in the positions that they had before the last presidential election. Does that ultimately mean nothing changes here with the economy, you're still very reliant on the high energy price and ultimately the reforms that keep being talked about are just not going to happen. New government but same old government.
KOSTIN: I don't believe actually that you can conduct certain policy and all the sudden started to do new reforms which is quite different to what you were doing before. Particularly we have the same president, we have the same prime minister and as you correctly pointed out we have more or less, no I mean there was a change of by 50 percent approximately the change of members of the government…
GEOFF: Although the key ministers remain in place…
KOSTIN: Key ministers, and they're they're quite efficient. I think if you look at the people like minister of economy, minister of finance, I think quite liberal minded actually people. And I think that the government did a very good job over the last years. You cannot maybe not saying that something which is very impressive was striking but everyday activity and everyday activity on improving legislations on improving standards on, even even putting the focusing on new technologies, that's what the government was doing and I think despite the fact that the growth we don't expect a very high growth this year probably a one and a half, two percent, but the inflation, our forecast for this year inflation will be between three and three and a half percent. Russia you correctly pointed because of the high oil prices, which is supported by the situation around Iran and maybe very poor performance of Venezuela. The we might expect may on average about 70 dollar per barrel. We, we expect that there will be surplus budget in Russia. So macroeconomic stability and the reasonable growth I think will allow us to to have quite a stable economic forecast, though we have some problems. One of the major problems is a lack of workforce. You know, we have a low inflation, low unemployment rate and we don't have any potential for growing, for growing a number of people in the workforce. And one of the answers for this in my opinion would be to liberalize the immigration regime and citizen, citizenship status for Russians living abroad, maybe in Ukraine and other ex-Soviet Union republics. I think we can bring more Russian people, train people even with higher education into a Russian economy that would be…There are some other reasons I agree with you. Maybe not enough. We still have a very big dependence on imports. That of course affects our trade balance and a low level of loans over the growth of loan book of Russian banks. Maybe partly the high interest rate is responsible for this.
GEOFF: When you think about the current price for oil, it's obviously been beneficial for the economy here, but is it your working assumption for the year ahead that we will continue to see oil in the 70 to 80 dollars a barrel area?
KOSTIN: You know there's a certain factors which affect this. On the one hand there's OPEC, the OPEC agreement which helps to stabilize the prices. On the other side there is a very fast growth of the production of oil in America which compensated probably this agreement, then we have two factors: one is Iran, and of course the withdrawal of United States from Iranian deal and the , I think, inevitable new sanctions on Iran, including the oil industry, and secondly a very bad state of affairs in Venezuela in the very inefficient production in Venezuela of oil. These two factors very much depend on political situation. If, so, in the short term or medium term I think the answer is yes we can expect higher oil prices but if for one another reason there will be no effect of Iran restrictions and Venezuela for no reason I don't know will start to produce more, we might have a different situation the prices can go back to 50 or even lower.
GEOFF: You are involved in a bid in India for Essar steel. How does that bid fit in with your broad approach towards the Indian market and the Indian economy at the moment?
KOSTIN: You know we had a quite successful transaction of supporting companies including the Rosneft for acquisition or [inaudible] Essar Oil, a substantial 49 percent stake there and we develop relationships with the Essar group. So, we agreed to support the contenders for Essar Steel. It's quite complicated issue, still not clear who will be the winner but of course the Indian market for us is a big market, you can't ignore it. There is more than a billion people. Very protective, protective market of course, in Beijing particularly, we we effectively had to close our bank there for this reason. We used to have big institutions but now we only rep office. But it's interesting market and there is a very good political relations. Maybe not so much a big trade but definitely we can expect the growing relationship between India and Russia. And you know just Mr. Modi spend the whole day with Mr. Putin in Sochi recently I think you just showed the level of atmosphere of trust and cooperation between the two countries.
GEOFF: Are you looking at buying any other distressed assets in the Indian economy?
KOSTIN: Well not buying anything, we're just financing. We help the companies to buy it. If we buy a small stake we would normally then we'll be selling it. That's not our business to produce steel or oil. It's a nightmare for us.
GEOFF: Indeed, are you interested…
KOSTIN: Even oil...
GEOFF: Are you interested in owning or having stakes in other businesses in India at the moment? Are there any other targets for you?
KOSTIN: Only for a short period of time. You know I, for example, we might have, we will look for the stock market particular because some companies are very fast growing but it's mainly that speculative, you know, transactions or for a short or mid-term period of time like a private equity. You know in in Russia the largest bank is quite active in private equity but we don't have any private equity funds effectively so that's why the bank is sometime filling in this niche like we were the major shareholder in Pulkovo airport until we sold the majority stake and then some other transaction like this.
GEOFF: And you're also I believe talking to the Qatari's about extending some financing to them, is this part of a growing strategy to focus on the Middle East and Asia and other markets away from the U.S. and UK?
KOSTIN: You know we have a very long term relationship with Qatar, very close, because in 2013 they bought stake in our bank. They invested half a billion dollars in our bank, stocks, so they're one of our largest shareholder. Maybe after the, maybe third or fourth largest shareholder so we have a good relationship, we help them with certain acquisitions in Russia, we sold them 25 percent of Pulkovo. We sometimes finance their operations in Russia. So we'll continue to do that they're a big investors.
GEOFF: I just want to circle back if I might to the personal sanctions on you. In what way has it changed how you're leading your life since the sanctions on you were imposed a month or so ago?
KOSTIN: Well I like to ski in Colorado. I will not be able to do it. Which is very unfortunate in the best snow in Colorado, a very good mountain, a very good people very friendly people you know. But I won't be able probably to attend, not this year because this year in Bali the IMF meetings, I've been attending the IMF meetings for more than 20 years. Of course that's a good platform for relationship with all world bankers from all around the world. Otherwise I don't know I haven't I haven't felt yet but maybe in the future I'll feel more consequences of these. I'll definitely be missing New York because I love the city. But I hope one day will come back.
GEOFF: Are you actively lobbying, lobbying at the moment to get the sanctions removed?
KOSTIN: I'm not at the moment. Not at the moment. I think...how is it told?...I let the dust fall down. I'm not sure whether I should but I think situation is now very acute. Let's wait and see what's going to happen with the sanctions. I think we should stop the sanctions. I think we we should we should reverse the process. That's why I'm not I don't have any revenge. I'm not I'm telling my government, actually advising my government not to take any tit for tat actions frankly speaking because I think somewhere we should stop this tit for tat. You know that that's no good. But I can't of course guarantee the development in such a positive way. But one day we believe that the American elite or American establishment understand that Russia is not an enemy to America at all and only with cooperation we can become, we can provide a better world for our peoples. So I hope for this.
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