RPT-EXPLAINER-European banks fear that the payment system will fall victim to the Russian-Ukrainian crisis

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By Tom Sims, Lawrence White and John O’Donnell

FRANKFURT, Feb 9 (Reuters) – Amid fears of a Russian invasion of Ukraine, Italy’s UniCredit has backed out of a possible acquisition in Russia and Austria’s Raiffeisen Bank International has set aside risk provisions in view of possible sanctions against Russia.

What banks in the region now fear most is that Russia will be banned from a widely used payment system, bankers told Reuters, with one describing such a move as a ” atomic bomb” for the industry because it would prevent the repayment of debts.

Here’s what’s at stake for European banks as the crisis shows no signs of easing:

WHICH BANKS IN THE COUNTRIES ARE MOST EXPOSED TO RUSSIA?

Italian, French and Austrian banks are the international lenders most exposed to Russia. Italian and French banks each had outstanding claims of some $25 billion on Russia in the third quarter of 2021, according to figures from the Bank for International Settlements (BIS). Austrian banks had $17.5 billion. This compares to $14.7 billion for the United States.

WHICH BANKS ARE THE MOST EXPOSED?

European banks with subsidiaries in Russia are the most exposed to sanctions, according to a study by JPMorgan. The investment bank’s study said a handful of banks, including UniCredit, RBI, France’s Societe Generale and the Netherlands’ ING, had significant exposure to Russia.

RBI said its exposure was manageable, while ING said it was well prepared. Societe Generale said it was closely monitoring developments and was confident in its business in Russia. UniCredit did not immediately respond to a request for comment.

WHAT SANCTIONS CURRENTLY EXIST?

In response to Russia’s annexation of Crimea in 2014, and in the years since, the United States and the European Union have imposed sanctions that include blacklisting specific individuals, sought to limit the access of Russian public financial institutions to Western capital markets, imposed bans on arms trade and other limits on technology trade, such as that of the oil sector.

During this period, foreign banks’ exposure to Russia has more than halved, according to BIS data.

WHAT NEW SANCTIONS ARE WE TALKING ABOUT?

European banks are closely monitoring US legislation to sanction Russia. A Senate bill would target Russia’s largest banks and Russian sovereign debt.

Meanwhile, in Europe, negotiators say they are ready to impose “massive” economic sanctions on Russia if it invades Ukraine, but officials and diplomats say the threat hinges on complex negotiations involving 27 member states that are far from over. Negotiations take place in secret.

As well as widening the circle of Russian financial institutions that would be affected, the measures will most likely include efforts to prevent Russia’s energy sector from growing, as well as blacklisting people and companies allied with President Vladimir Putin. , according to Paul Feldberg, partner in Jenner & Block’s Investigations, Compliance and Defense Group.

“We will likely see many more named individuals and entities than we have seen before,” Feldberg said.

WHAT IS THE GREATEST CONCERN OF EUROPEAN LEADERS?

A major concern is that Russia is cut off from the global payment system SWIFT, which handles international financial transfers and is used by more than 11,000 financial institutions in more than 200 countries. There is a precedent for such a decision: Iran was banned ten years ago.

Jan Pieter Krahnen, a finance expert at Frankfurt’s Goethe University and an adviser to Germany’s finance ministry, said the short-term consequences of a ban are opaque and could backfire. In the long term, this could lead to the building up of a parallel system which would be “a loss to the world system, and also facilitate later conflicts as the opportunity costs disappear”.

Heinrich Steinhauer, who represents German lender Helaba in Moscow, said such a move would amount to a giant debt cancellation program by banning payments, describing it as a “kind of atomic bomb”. “For many it would be a disaster. For many in the European Union and Russia, and less so for the United States because there are fewer economic ties,” he said.

WHAT ELSE IS POSSIBLE?

Financial institutions involved in swaps, forwards, forwards and other derivatives that trade with Russian counterparties could also be subject to sanctions rules, according to Jonathan Moss, partner at law firm DWF. .

A ban on trading Russian bonds on the secondary market would mean Russian bondholders could be forced to sell, Moss said.

European banks oppose the inclusion of Russian bonds in a sanctions package, said a person with direct knowledge of their position.

WHAT ACTIONS HAVE EUROPEAN BANKS TAKEN SO FAR?

RBI last week said it had earmarked 115 million euros in provisions for possible sanctions against Russia, highlighting the risks for European lenders as tensions erupt.

In late January, UniCredit dropped a potential bid https://www.Reuters.com/world/europe/unicredit-beats-2021-guidance-despite-q4-loss-2022-01-28 for Russian state-owned bank Otkritie to the Ukrainian crisis.

ING of the Netherlands revealed last week that it has 4.7 billion euros of exposure in Russia, but only around 25% of this sum is onshore. Its CEO told https://ing.nepgroup-webinars.com/watch_ondemand/gYrQ_0gr3Sg that the bank plans to stay in Russia and will act accordingly if further sanctions arise.

(Reporting by Tom Sims, Lawrence White and John O’Donnell; Writing by Tom Sims; Editing by Mark Heinrich)