The hybrid banker

Alexander Knaster, the CEO of Russia's Alfa-Bank, is not waiting to see whether the newly elected Russian president will be a reformist. He's building the most successful bank in Russia.

The election, on Mar. 26, of Vladimir Putin as president of Russia is likely to make the country more stable and enable the economy to grow faster. Both improvements, if they materialise, will help Alexander Knaster, the CEO of the nine-year-old Alfa-Bank, the country's third-largest bank (measured by deposits) and probably its most profitable.

Knaster, 41, has the qualifications and the experience to do well in a frontier post of capitalist banking. Born in Moscow, he left Russia when he was 16 and gained an MBA from Harvard Business School. In 1995 he joined Credit Suisse First Boston in Moscow. He joined Alfa on Aug. 1, 1998, just 16 days before Russia devalued its currency. It was the perfect time to seize the business initiative. Alfa has increased dollar deposits by 116% to $820 million since the end of 1998 and increased the number of corporate clients from 16,000 to 26,000. It's the largest issuer of Visa cards in Russia. Net profits, in accord with American GAAP standards, were approximately $140 million, and Alfa's asset base grew 55%, to $1.2 billion, from 1998 to 1999. That's a very high ratio of profits to assets; Alfa makes a lot of its money from investment banking and corporate advisory work. We caught up with Knaster in New York ten days before the election.

FORBES GLOBAL: How optimistic are you about Russia's economic prospects?
Knaster: Let's see some real structural reforms; if those happen, then I would guess that things will improve quite dramatically. The Russian stock market has moved up in anticipation of these reforms.

Will Putin make the needed reforms?
I don't have an opinion. He's a strong person, but when people get this sort of responsibility and this sort of authority, it changes them and their priorities.

How is Alfa able to expand?

We do so mostly by growing the deposit base. Even in 1999, we paid back most of our debts. We replaced the funding from those debts with the deposits.

How did you tackle the financial crisis of 1998?
We decided early on to honour all our obligations. When there were big lines in front of all the branches to get money, we stayed open for three extra hours a day. After a couple of weeks the run on the bank stopped. Having weathered the crisis, unlike a lot of our competitors, we saw a big opening and started very rapidly to grow our franchise. So we doubled our network from 24 branches to 50. We're opening a new branch every two weeks. We also had better risk management than our competitors. We didn't write insurance policies for hedge funds investing in Russia. The head of the risk management department is an American with 15 years of experience. Our finance director is an Irishman. Our treasurer is Finnish.

How do you attract them?

You have to pay a lot. Several foreigners receive a base salary of $400,000 to $500,000, plus a substantial bonus.

What banking business is there to do in Russia these days?
One function of the banking system is making payments; the volume has gone up over the last couple of years. The second, lending money to industry, has never really flourished in Russia, because collecting on loans and enforcing property rights is pretty hard. We have 38 lawyers to support our lending business, which is approaching $500 million. Many of those loans don't get paid on time, but they all get paid eventually, with interest and penalties, so it's quite profitable. We don't run Alfa like a Western bank but like a hybrid. We borrow the best practices from Western banks for our internal processes, but in dealing with customers and regulators, where politics and business merge, we are very much a Russian bank. For example, we received about 300 audits by various government departments.

How do you keep track of what your branches are doing?

We have 2,500 different procedures described in our operations manual, which is online. We have a large internal control department headed by a very tough guy who was in charge of internal control at the Central Bank. We've got internal security people in every branch who do not report to the local branch to make sure that things are conducted in accordance with regulations. Loan officers in a regional branch need approval from the guy who oversees regional lending in Moscow. It's cumbersome, but it enables us to control what's going on in nine different time zones.