Western banks are counting the cost of a worsening crisis in Ukraine and potential sanctions against Russia, countries where their exposure ranges from physical branches to pending transactions that could be blocked and once promising – now potentially embarrassing – work advising the Kremlin.
The most exposed to Russia is Austria’s Raiffeisen, which had more than half its pre-tax profits coming from the country last year, according to analysts at Berenberg. The bank’s shares bounced back 5.8 per cent to close at €24.16 on Tuesday after a 10 per cent fall on Monday. The latest unrest has already stalled the sale of its Aval subsidiary, which has 818 branches in Ukraine and assets worth €4.5bn. Raiffeisen said on Monday it had put the sale on hold.
Société Générale is the second most exposed foreign bank to Russia, which accounts for about 4 per cent of its total revenues. SocGen’s Russian unit, which has 620 branches and 5m clients, suffered a €250m goodwill writedown in 2012. But it returned to profit last year with a €165m contribution to the French bank’s bottom line. Shares in SocGen fell 5.4 per cent on Monday but rose 3.4 per cent to close at €47.3.
Shares in Russia’s two big banks, Sberbank and VTB, both suffered their heaviest falls for almost six years on Monday, dropping 15 per cent and 18 per cent respectively – more than the 11 per cent fall in the benchmark Micex index. Both banks recovered on Tuesday as the Micex gained 5.3 per cent as the Russian authorities announced the withdrawal of some troops.
Other banks played down their direct exposure. “I think it’s going to be contained,” said a senior US executive. But the chief executive of a large western bank noted that – as with the 2008 financial crisis – the second-order effects were potentially as problematic and his staff were trying to determine which of the bank’s counterparties were at risk from a worsening financial situation in Russia.
US banks including JPMorgan Chase and Citigroup were already warning about a weak quarter for trading revenue even before the crisis in Europe. One executive said the most immediate and inescapable effect was a worsening of investor sentiment.
The US Treasury’s Financial Crimes Enforcement Network advised US banks last week to take “reasonable” steps regarding the potential suspicious movement of assets related to Viktor Yanukovich, the former Ukrainian president, departing Kiev, raising the prospect of asset freezes. But a bigger threat to US banks would be an order to freeze Russian assets.
Business has not been easy for western banks operating in Russia, with the 1998 financial crisis in the country lingering long in bankers’ memories and political risk balanced against increasing opportunities. Some have tapped into big investment banking deals while others have expanded with retail branches through acquisitions.
Last year, SocGen fired Vladimir Golubkov, chief executive of the Russian unit it bought in 2008, after Russian police stormed the bank’s headquarters in Moscow and arrested him over corruption allegations.
A person familiar with SocGen said the bank still viewed Russia as an important source of future growth and was “not in panic mode”. The person said: “It is not the first time we have confronted political instability and we aren’t reassessing anything.”
Wall Street banks have appeared on some of the country’s large investment banking deals. Goldman Sachs signed a three-year consulting agreement with the Russian government a year ago, drawing condemnation from local opposition groups.
As part of the agreement, Goldman was hired to spur inward investment and improve relations with foreign investors and rating agencies.
At the time, Goldman said: “We believe it is in the long-term interest of Russia and its people to attract foreign investments; we are pleased to play a role to facilitate this process in making Russia more open to foreign investors.”
Morgan Stanley also has a lot to lose from a deteriorating US-Russian relationship. The bank has agreed to sell an oil trading operation to Rosneft, the Russian state-controlled energy group.
It took more than two years for the deal to be struck, after protracted attempts by Morgan Stanley to sell a bigger swath of its physical commodity business in the wake of new regulations that make the trading less profitable.
The sale is being reviewed by the US Committee on Foreign Investment, a government body that reviews transactions with national security implications. Morgan Stanley’s assets with the most serious strategic US implications, such as TransMontaigne, with oil storage facilities on the east coast, were held back from the sale to Rosneft but the deal still has to clear a big hurdle.
Citigroup, the US bank with the largest footprint in Russia, operates as ZAO Citibank, a fully owned subsidiary that boasts more than 3,000 institutional clients, over 1m retail customers and 50 branches across 12 Russian cities.
As HSBC wound down its Russian retail operations in 2011 Citi worked to transfer the banks’ Russian customers to Citi accounts. Citi is a major cash management provider for Russia’s biggest companies and advises on mergers and acquisitions.
In February Citi launched a new securities lending business in Russia, adding that the rollout of its OpenLend platform was “a key development in a large market with tremendous potential”.
On Monday Citi said: “Citi continues to closely monitor the political, economic and military situation in Ukraine, and will continue to take actions to mitigate its exposures to potential risk events.”
Reporting by Camilla Hall, Tom Braithwaite, Martin Arnold, James Shotter and Rachel Sanderson