Trapped in Russia, European banks weigh the cost of the breakup

Russian President Vladimir Putin waves to those gathered to attend the concert marking the eighth anniversary of the referendum on Crimea and Sevastopol’s statehood and its reunification with Russia, in Moscow, Russia, Friday, March 18, 2022. ( Ramil Sitdikov/Sputnik Pool Photo via AP)

European banks trying to decide if and how to leave Russia in the wake of Ukraine’s invasion are finding that extraction will be slow, costly and may come at a reputational cost no matter what they do.

For now, lenders are focused on unwinding individual Russia-related deals while considering a fuller exit. More than a dozen major European banks have a significant presence in the country, making them a much stronger force locally than their US peers.

Here are the top issues and questions for banks, based on recent public statements by executives and conversations with bankers, who asked not to be identified given the sensitivity of the issue.

1) Who would buy the Russian unit?

International banks are unlikely to increase their exposure to Russia given the sanctions and their effect on the economy, while Russian lenders are holding on to capital to weather the storm. Even if a sale were possible, it would probably mean a floor price. Russian regulators also have little appetite to approve the sale of banks run by European lenders at the moment, Intesa Sanpaolo chief executive Carlo Messina told a conference hosted by Morgan Stanley on Thursday.

Citigroup’s plans to sell its local consumer unit stalled amid the war, Bloomberg reported.

2) What about nationalization?

In a European bank, nationalization was initially the most pessimistic scenario in internal stress tests. Yet the lender has become so frustrated with the situation that expropriation by the Russian government now seems a relatively easy, if controversial, outcome, according to one executive. Although this would result in high costs for the European parent company, it would relieve the bank and senior management of legal responsibility for the problem and provide a way out for staff and customers in Russia, the executive said.

Other banks want to avoid nationalization at all costs, with one saying bankers fear the exit announcement will make such a scenario more likely by provoking regulators. Moreover, the recovery of lenders could increase the burden on public finances.

3) What is the impact of leaving?

Painful, but manageable, even for the three biggest European lenders in Russia. Societe Generale of France and UniCredit of Italy have published estimates of the consequences of deprivation of property rights to bank assets in Russia or delisting of all activities related to the country. Both banks would still exceed their capital requirements, although this could slow the pace of payouts to potential shareholders. For Austria’s Raiffeisen Bank International AG, the question is more about strategy, given that Russia accounted for around a third of its net income last year.

Another important consideration of leaving is the legal implications, an executive said. It is unclear whether such an action would be considered illegal bankruptcy and whether it would engage the responsibility of the local management team.

4) How to reduce the balance sheet linked to Russia?

Stopping new business is the first response. Commerzbank says counterparties have also been quite willing to unwind, meaning it has so far faced no cost to reduce its exposure by a third. Still, the pace of cuts could slow, says Bettina Orlopp, the German bank’s chief financial officer. Banks are also struggling to terminate a loan to a Russian customer who is not sanctioned and companies with a revolving credit facility can still withdraw them, according to a banker.

5) What will customers think of an outing?

Leaving businesses and consumers behind in a time of heightened concern would leave a mark. Several European banks had their reputations burned when they abandoned customers to focus on their own finances during the 2008 financial crisis. While it may be tempting to say goodbye to Russia, bankers point out that many customers locals are subsidiaries of large international companies with which they wish to continue doing business. Even if these companies don’t need credit, they need banks to pay local staff.

6) What is the cost of the stay?

The hit to the Russian economy could sap the financial reserves of local banks, meaning European lenders may have to inject capital. Additionally, while banks say they follow international sanctions, the rules are constantly changing and failure to comply can result in fines. The fine of 9 billion dollars imposed on BNP Paribas SA in 2014 for violating American sanctions is still fresh in the minds of bankers. Then there is the question of whether investors and customers in other countries will abandon the banks if they hold out.

Marco Giorgino, professor of financial markets and institutions at MIP Politecnico di Milano, explains the trap European lenders now find themselves in, given that leaving Russia means either selling the unit or closing the business.

“In the first instance, you have to take huge losses, and even if you’re prepared to face them, finding a buyer is easier said than done,” he said. “Even more complicated is to flee the business – it could be an impossible mission that would expose the bank to legal and regulatory problems in the country.”

“From a theoretical point of view, exit from Russia for European banks is not impossible, but in most cases it is simply not feasible,” he said.