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Europe's banks fear payment system could be casualty of Russia-Ukraine crisis

ECB, UniCredit clash over capital plans, Russia presence, FT says
ECB, UniCredit clash over capital plans, Russia presence, FT says   -   Copyright  Thomson Reuters 2022   -  
By Reuters

<div> <p>By Tom Sims, Lawrence White and John O’Donnell</p> <p><span class="caps">FRANKFURT</span> -Amid fears of a Russian invasion of Ukraine, Italy’s UniCredit has backed out of a potential acquisition in Russia and Austria’s Raiffeisen Bank International has set aside risk provisions for possible sanctions on Russia.</p> <p>What the region’s banks now fear most is that Russia gets banned from a widely used payment system, bankers told Reuters, with one describing such a move as an “atomic bomb” for the industry because it would prevent the repayment of debts.</p> <p>Here’s what is at stake for Europe’s banks as the crisis shows no signs of abating:</p> <p><span class="caps">WHICH</span> <span class="caps">COUNTRIES</span>’ <span class="caps">BANKS</span> <span class="caps">ARE</span> <span class="caps">MOST</span> <span class="caps">EXPOSED</span> TO <span class="caps">RUSSIA</span>?</p> <p>Banks in Italy, France and Austria are the world’s most exposed international lenders to Russia. Italian and French banks each had outstanding claims of some $25 billion on Russia in the third quarter of 2021, according to figures from the Bank for International Settlements (<span class="caps">BIS</span>). Austrian banks had $17.5 billion. That compares with $14.7 billion for the United States.</p> <p><span class="caps">WHICH</span> <span class="caps">BANKS</span> <span class="caps">ARE</span> <span class="caps">MOST</span> <span class="caps">EXPOSED</span>?</p> <p>European banks with subsidiaries in Russia are most at risk of sanctions, according to <span class="caps">JPM</span>organ research. The investment bank’s study pointed to a handful of banks, including UniCredit, <span class="caps">RBI</span>, France’s Societe Generale, and <span class="caps">ING</span> of the Netherlands, as having notable exposure to Russia.</p> <p><span class="caps">RBI</span> said its exposure was manageable, while <span class="caps">ING</span> said it was well prepared. Societe Generale said it was closely monitoring developments and confident about its Russia business. UniCredit did not immediately respond to a request for comment.</p> <p><span class="caps">WHAT</span> <span class="caps">SANCTIONS</span> <span class="caps">CURRENTLY</span> <span class="caps">EXIST</span>?</p> <p>In reaction to Russia’s annexation of Crimea in 2014, and in the following years, the United States and European Union imposed sanctions that include blacklisting specific individuals, sought to limit Russia’s state-owned financial institutions’ access to Western capital markets, imposed bans on weapons trade and other limits on the trade of technology, such as that for the oil sector. </p> <p>Over that period, foreign bank exposure to Russia has more than halved, <span class="caps">BIS</span> data show. </p> <p><span class="caps">WHAT</span> <span class="caps">NEW</span> <span class="caps">SANCTIONS</span> <span class="caps">ARE</span> WE <span class="caps">TALKING</span> <span class="caps">ABOUT</span>?</p> <p>European banks are closely watching U.S. legislation to sanction Russia. A Senate bill would target the most significant Russian banks and Russian sovereign debt.</p> <p>Meanwhile, in Europe, negotiators say they are ready to impose “massive” economic sanctions on Russia if it invades Ukraine, but officials and diplomats say the threat depends on complex negotiations involving 27 member states that are far from complete. Negotiations are being held secretly.</p> <p>In addition to widening the circle of Russian financial institutions that would be affected, measures are most likely to include efforts to keep Russia’s energy sector from expanding, as well as blacklisting people and companies allied to President Vladimir Putin, according to Paul Feldberg, partner in the investigations, compliance and defence group at Jenner & Block.</p> <p>“We are likely to see many more individuals and entities designated than we have seen before,” Feldberg said.</p> <p><span class="caps">WHAT</span>’S <span class="caps">THE</span> <span class="caps">BIGGEST</span> <span class="caps">CONCERN</span> <span class="caps">FOR</span> <span class="caps">EUROPEAN</span> <span class="caps">LEADERS</span>?</p> <p>A major worry is that Russia gets cut off from the <span class="caps">SWIFT</span> global payment system, which handles international financial transfers and is used by more than 11,000 financial institutions in over 200 countries. There is a precedence for such a move: Iran was banned a decade ago.</p> <p>Jan Pieter Krahnen, a finance expert at Frankfurt’s Goethe University and adviser to the German finance ministry, said the short-term consequences of a ban are opaque, and might backfire. Long-term, it could lead to the buildup of a parallel system that would be “a loss for the global system, and also facilitate conflicts further down the road as opportunity costs vanish”.</p> <p>Heinrich Steinhauer, who represents the German lender Helaba in Moscow, said such a move would be tantamount to a giant debt forgiveness program by prohibiting payments, describing it as a “sort of atomic bomb”. “For many this would be a catastrophe. For many in the European Union and Russia, and less so for the U.S. because economic ties are fewer,” he said.</p> <p><span class="caps">WHAT</span> <span class="caps">ELSE</span> IS <span class="caps">POSSIBLE</span>?</p> <p>Financial institutions involved in swaps, futures, forwards and other derivatives that trade with Russian counterparties could also become subject to sanctions rules, according to Jonathan Moss, partner at the law firm <span class="caps">DWF</span>. </p> <p>A prohibition of trading of Russian bonds in the secondary market would mean that holders of Russian bonds might be forced to sell, Moss said. </p> <p>European banks oppose including Russian bonds in a sanctions package, said one person with direct knowledge of their stance.</p> <p><span class="caps">WHAT</span> <span class="caps">ACTIONS</span> <span class="caps">HAVE</span> <span class="caps">EUROPEAN</span> <span class="caps">BANKS</span> <span class="caps">TAKEN</span> SO <span class="caps">FAR</span>?</p> <p>Last week, <span class="caps">RBI</span> said it had earmarked 115 million euros in provisions for possible sanctions on Russia, underscoring risks for European lenders as tensions flare. </p> <p>In late January, UniCredit dropped a potential bid for Russian state-owned Otkritie Bank due to the Ukraine crisis.</p> <p><span class="caps">ING</span> of the Netherlands disclosed last week that it has 4.7 billion euros in exposure in Russia, but only around 25% of that is onshore. Its <span class="caps">CEO</span> said the bank plans to remain in Russia and would act accordingly if any new sanctions arose. </p> </div>