Western banks are accustomed to political turmoil in Russia. Société Générale, first established in the country 150 years ago, was forced to take a 56-year break after the 1917 Bolshevik Revolution.
Since his return, the French borrower has been navigating the end of communism, Russia’s sovereign default of 1998 and the annexation of the Crimean peninsula in 2014.
Now, with Russian troops flocking to the Ukrainian border, SocGen was one of the banks notified by the European Central Bank earlier this month. The Financial Times revealed this week that the ECB has warned lenders with Russian exposure to prepare themselves for the imposition of international sanctions against the country should Ukraine be invaded.
Together with SocGen, Austria’s Raiffeisen Bank and UniCredit from Italy are among the European banks with the most significant operations. The trio together account for 3.7 percent of assets in the Russian banking system, according to data compiled by JPMorgan.
Their presence is in contrast to some of the largest Wall Street banks, including JPMorgan and Bank of America, which significantly reduced their exposure to Russia after the invasion of Crimea.
As a result, the Kremlin pursued a “Fortress Russia” strategy to make it less dependent on foreign financing. Corporate lending by foreign lenders fell from $ 150 billion in March 2014 to $ 80 billion last year, according to the Russian central bank.
Cross-border ties, however, remain significant. Data from the Bank for International Settlements show that international banks, including their Russian subsidiaries, owes $ 121 billion by Russian entities. Lenders in Italy, France and Austria have the most claims, respectively.
For the lenders that remained, including Hungary’s OTP Bank, the Russian market still has its attractions. Margins on retail banking are attractive, while lucrative trading, financing and advisory fees can be made, especially from the country’s energy and natural resources sector.
Indeed, UniCredit CEO Andrea Orcel said on Friday that the Italian borrower was investigating an acquisition of the Russian borrower Otkritie in state ownership before political tensions escalated over Ukraine.
UniCredit, Italy’s second largest bank, entered the Russian market in 2005 through a deal to buy Bank Austria, which already had a subsidiary with its headquarters in Moscow.
Among the information requested by the ECB was how banks analyzed their Russian exposure and the contingency plans they had prepared in the event of sanctions.
Several European banks with operations in Russia said they were preparing for the ECB’s warning.
“We do not need regulators to ask us how we are going to manage risk so that we can take action,” the CEO of one European bank told the FT.
“If you follow the news, you will clearly look at your exposure. When there is geopolitical tension and economic uncertainty, you are constantly reviewing your portfolio. ”
One manager at a European bank with a large Russian subsidiary said he had stepped up its preparations over the past three weeks, which had significantly increased its liquidity levels in the expectation that anxious customers would withdraw money. It also tripled the currency hedging on its Russian exposure, they said.
After being hit hard in 2014 when Russia faced fines over Crimea, the bank has inserted clauses in all its lending agreements in the country so that any customers affected by sanctions will no longer be able to draw additional credit and existing loans will have to repay. said the executive. The bank has also made provision for potential losses from any sanctions and may withhold further reserves.
Other banks contacted by the FT have said they are in “wait-and-see” mode as efforts to resolve tensions through diplomacy continue.
One US bank that has persevered with Russia is Citigroup, which at the end of the third quarter of 2021 linked $ 5.5 billion in loans, investment securities and other assets to Russia, according to the bank’s most recent 10-Q filing at the Securities and Exchange Commission. It accounted for 0.3 percent of its total assets.
Last April, Citigroup CEO Jane Fraser said the bank was selling 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 exposure to the country is now mostly through its Rosbank subsidiary. It bought 20 percent of Rosbank in 2006 and took majority control two years later during the financial crisis.
The company accounts for 3 percent of SocGen’s group revenue and 4 percent of its pre-tax profit, according to JPMorgan estimates.
“Given SocGen’s exposure to Russia, it has the potential to cause greater volatility than the sector over geopolitical developments in the region,” said Azzurra Guelfi, an analyst at Citi.
SocGen reduced the risk of its Russian exposure, saying that “Rosbank operates in a normal mode within the existing supervisory framework,” that “it has mainly local activities” and that the bank “is confident in our ability to conduct the activity. assured for our customers ”.
In addition to investment banking services provided at SocGen’s group level, Rosbank operates domestic insurance, car rental, leasing, factorisation and debtor arms.
While Raiffeisen has a similar direct exposure to Russia as SocGen, the importance of the country to the Austrian bank’s overall profits is significantly higher. Its Russian operations last year accounted for 19 percent of revenue and 35 percent of the group’s pre-tax profit.
Under a worst-case sanction scenario modeled by analysts at JPMorgan, Raiffeisen will be hit the hardest with a 99 basis point drop in its general equity level one capital, a measure of its financial strength. SocGen is estimated to be the second most severely affected foreign bank at 33bp.
Vienna’s borrowers have long played a leading role in banking in Central and Eastern Europe, serving as a channel between Russia and the West.
But Raiffeisen only entered the Russian market directly in 2006 with the acquisition of Impexbank. The agreement has been part of Raiffeisen’s wide expansion in Central and Eastern Europe over the past three decades.
Over the past year, it has focused its Russian and Ukrainian subsidiaries on major cities and closed branches in rural and less profitable areas.
Raiffeisen declined to comment.
Additional post by Gary Silverman in New York