Banks betting on Russia are facing a new test of their appetite

Western banks are accustomed to the political turmoil in Russia. The Société Générale, which was first established in the country 150 years ago, was forced to take a 56-year break after the 1917 Bolshevik Revolution.

Upon his return, the French creditor turned to the end of communism, Russia’s sovereign bankruptcy in 1998 and the annexation of the Crimean peninsula in 2014.

Now that Russian troops are gathering at the Ukrainian border, SocGen was one of the banks notified earlier this month by the European Central Bank. The Financial Times revealed this week that the ECB has warned creditors with Russian exposures to prepare for international sanctions against the country if Ukraine is attacked.

Together with SocGen, the Austrian Raiffeisen Bank and UniCredit from Italy are among the European banks with the largest operations. The trio together account for 3.7% of assets in the Russian banking system, according to data collected by JPMorgan.

Their presence contrasts with some of Wall Street’s largest banks, including JPMorgan and Bank of America, which have significantly reduced their exposure to Russia since the Crimean invasion.

As a result, the Kremlin is pursuing the Fortress of Russia strategy to make it less dependent on external funding. Corporate loans from foreign lenders fell from $ 150 billion in March 2014 to $ 80 billion last year, according to Russia’s central bank.

However, cross-border connections remain significant. Data from the Bank for International Settlements show that international banks, including their Russian subsidiaries, owe $ 121 billion to Russian organizations. Creditors in Italy, France and Austria have the most claims.

For the remaining creditors, including Hungary’s OTP Bank, the Russian market still has its attractions. Retail banking margins are attractive, while lucrative fees for trade, financing and consulting can be made, especially from the country’s energy and natural resources sector.

In fact, UniCredit CEO Andrea Orsel said on Friday that the Italian lender was investigating the acquisition of state-owned Russian lender Discovery before political tensions over Ukraine escalated.

UniCredit, Italy’s second-largest bank, entered the Russian market in 2005 through a deal to buy Bank Austria, which already had a Moscow-based subsidiary.

Among the information requested by the ECB was how banks analyze their Russian exposures and the emergency plans they prepare in the event of sanctions.

Several European banks with operations in Russia said they were preparing before the ECB’s warning.

“We don’t need regulators to ask us how to manage risk in order to take action,” a CEO of a European bank told the FT.

“If you follow the news, it is clear that you will review your exhibits. Whenever there is geopolitical tension and economic uncertainty, you are constantly reviewing your portfolio. “

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A CEO of a European bank with a large Russian subsidiary said it had stepped up its training over the past three weeks, significantly raising liquidity levels in anticipation of anxious customers withdrawing money. It has also tripled the currency hedging of its exposure in Russia, they said.

After being severely affected in 2014, when Russia faced sanctions on Crimea, the bank had added clauses to all its lending agreements in the country so that all customers affected by sanctions would no longer be able to take out additional credit and will have to repay existing loans, the CEO said. The bank has also made provisions for potential losses from any sanctions and may retain additional reserves.

Other banks contacted by the FT said they were on hold and pending, while efforts to resolve tensions through diplomacy continued.

One U.S. bank that continued to work with Russia was Citigroup, which had $ 5.5 billion in loans, investment securities and other assets related to Russia at the end of the third quarter of 2021, according to the bank’s latest filing. 10th quarter to securities and Exchange Commission. This represents 0.3% of its total assets.

Last April, Jane Fraser, CEO of Citigroup, said the bank was launching its retail operations in Russia, along with those in a dozen other countries. Citi declined to comment.

Although SocGen said it made its first investment in a Russian company in 1872, the bank’s 2.6 billion-euro exposure to the country is now mainly through its subsidiary Rosbank. It bought 20 percent of Rosbank in 2006, taking majority control two years later during the financial crisis.

The business accounts for 3% of SocGen Group revenue and 4% of pre-tax profit, according to JPMorgan estimates.

“Given SocGen’s exposure to Russia, this has the potential to cause higher volatility than the geopolitical sector in the region,” said Azzurra Guelfi, an analyst at Citi.

SocGen downplayed the risk of exposure in Russia, saying that “Rosbank operates normally under the existing supervisory framework”, that “it has mainly local activities” and that the bank is “confident in our ability to guarantee our customers”. .

In addition to the investment banking services provided at the SocGen Group level, Rosbank operates domestic insurance, car rental, leasing, factoring and receivables.

While Raiffeisen has a similar direct exposure to Russia as SocGen, the country’s importance for the Austrian bank’s overall profits is much greater. Its operations in Russia account for 19% of the group’s revenue and 35% of the group’s pre-tax profits last year.

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In the worst case scenario of sanctions, modeled by JPMorgan analysts, Raiffeisen will be hit hardest by a 99 basis point drop in its total tier 1 capital, a measure of its financial strength. SocGen will be the second most affected foreign bank with 33 bp, according to estimates.

Vienna’s creditors have long played a leading role in banking in Central and Eastern Europe, acting as a conduit between Russia and the West.

But Raiffeisen did not enter the Russian market directly until 2006 with the takeover of Impexbank. The deal was part of Raiffeisen’s extensive expansion into Central and Eastern Europe over the past three decades.

In the last year, it has focused its Russian and Ukrainian subsidiaries on the largest cities, closing branches in rural and less profitable areas.

Raiffeisen declined to comment.

Additional reports by Gary Silverman in New York

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