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Analysis & opinionMarch 25 2022

International banks feel the pain from Russian sanctions

How can banks learn from this experience to be better prepared for future geopolitical conflicts?
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International banks feel the pain from Russian sanctions

The international sanctions imposed on Russia since its invasion of Ukraine are making it increasingly difficult for foreign banks to operate in the country, leaving them with the tricky decision whether to maintain their Russian operations.

Of course, the primary targets of the sanctions are to impede Russian companies and oligarchs, not international banks operating in Russia. Undoubtedly, local Russian banks have been most affected by the sanctions, evident by the number of Russian lenders that have been downgraded to the lowest rungs of junk status by the major credit rating agencies. But as Russian companies and oligarchs also do business with foreign banks and their Russian subsidiaries, it is impossible not to also penalise major international lenders.

In response to the continued difficulty of operating in a heavily sanctioned country — officially now the most sanctioned country in the world — large international banks have already begun exiting Russia. After Goldman Sachs and JPMorgan became the first major US banks to announce the unwinding of their Russian businesses on March 10, Deutsche Bank followed a day later with a similar announcement after previously being in favour of supporting businesses in Russia.

In response to the continued difficulty of operating in a heavily sanctioned country — officially now the most sanctioned country in the world — large international banks have already begun exiting Russia

Meanwhile, Citi — the US bank most exposed to Russia — said on March 14 that it had decided to expand the scope of its exit process in Russia and that it had stopped soliciting any new business from the country.

The pressure is on for other banks to follow, not just from a political and ethical standpoint, but from a risk and profitability perspective too. Restrictions on Russian companies will lead to rising defaults and a deterioration in loan and debt quality on banks’ corporate, retail and investment banking books, resulting in weakened asset quality of lenders. The depreciation of the rouble will also likely lead to capital erosion. In addition, there are operational and logistical challenges of being based in Russia, with physical offices and staff located on the ground amidst rising geopolitical tensions.

There is a question about banks following environmental, social and governance (ESG) principles too. Banks are not shy about flaunting their ESG credentials, but doing business with Russia after its invasion of Ukraine is unequivocally a violation of these principles.

Italian and French banks are those most exposed to Russia, together accounting for $50.5bn, or just under a half of the total exposure of foreign banks operating in Russia ($121.5bn), according to statistics from the Bank for International Settlements. The large exposures of Italian and French banks are due to UniCredit and Société Générale, the two foreign banks with the biggest exposures to Russia, who continue to do business in the country, albeit with caution and compliance with the sanctions. But they too will face the dilemma of whether to stay or go — and sooner rather than later.

As The Banker was going to press, UniCredit’s CEO Andrea Orcel expressed his desire to pull the bank out of Russia. Speaking at a conference on March 15, Mr Orcel said he was “completing an urgent review” of how the bank could exit the country.

Whether banks do decide to stay or leave Russia, they will be faced with big challenges such as how they mitigate the risks of their exposures and the impact on their balance sheets. Banks may not even have the choice; with restrictions on capital flow, as well as political and stakeholder pressure, they may be forced to write down their investments, pack up and leave.

Russia’s invasion of Ukraine brings to light the risk of doing business in Russia. Geopolitical tensions and sanctions in Russia are nothing new, which is why banks in the West have been reducing their exposure to the country in recent years. But given the scale and severity of the current situation, perhaps this will lead to banks reassessing their exposures to Russia and other high-risk countries. Thorough and frequent stress tests will prove effective resources in this respect. This is a lesson that banks must learn from, so that they can be prepared for the worst.

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